Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Sonoco Products Co. (NYSE:SON)

Q2 2012 Earnings Call

July 19, 2012 11:00 am ET

Executives

Roger Schrum - VP, IR

Barry Saunders - VP and CFO

Jack Sanders - President and CEO

Analysts

Scott Gaffner - Barclays

George Staphos - Bank of America/Merrill Lynch

Phil Gresh - JPMorgan

Chip Dillon - Vertical Research Partners

Philip Ng - Jefferies

Ghansham Panjabi - Robert W. Baird

Alex Ovshey - Goldman Sachs

Adam Josephson - KeyBanc

Mark Wilde - Deutsche Bank

Chris Manuel - Wells Fargo Securities

Steve Chercover - D. A. Davidson

Albert Kabili - Credit Suisse

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Sonoco Earnings Conference Call. My name is Tahesha, and I will be your operator for today. At this time, all participants are in a 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. Please proceed, sir.

Roger Schrum

Thank you, Tahesha. Good morning and welcome to Sonoco’s 2012 second quarter earnings investor call. This call is being conducted on July 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 website at sonoco.com. In addition, we will be referring to a presentation that was also posted on the investor relations 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 our company’s website.

With that, I’ll turn it over to Barry Saunders.

Barry Saunders

Thank you, Roger. I will begin on Slide 3 where you see that this morning we reported second quarter earnings per diluted share on a GAAP basis of $0.50 and base EPS of $0.58, which compares to base EPS of $0.60 for the same quarter last year.

Given the relative softness in economic activity globally and the headwinds we were facing in terms of higher pension cost, a higher effective tax rate, and a negative impact of foreign currency translation we considered this to be a reasonably good quarter and are pleased that our results are within our previously issued guidance of $0.55 to $0.60 per share.

Before reviewing the base P&L for the quarter, I will mention that a reconciliation of GAAP to base earnings is in today's press release and on our website. The $0.08 difference between GAAP and base is due to restructuring charges with most charges related to previously announced closures including a paper mill in Germany, a tube and core plant in France, a thermoforming facility in Canada, and other smaller cost reduction initiatives.

Turning to Slide 4, you'll find our base P&L where you see that sales were $1.202 billion, which were 6.6% higher than last year. As you'll see in the sales bridge the favorable variance to last year was driven entirely by Tegrant, the Tegrant acquisition, partially offset by slightly lower volume and lower sales dollars due to the translation of sales in foreign currency due to the notable appreciation of the dollar against most global currencies.

Gross profit of $216 million was 13% better than last year, with our gross profit percent at 18%, which was improved over 16.9% for the same quarter last year, with the improvement driven by Tegrant, which has an overall higher gross profit percent but also notably improved by favorable price cost relationships in many businesses and improved manufacturing productivity, partially offset by negative mix and higher fixed costs.

Selling and administrative expenses and other net charges were $118.5 million, which were up $20 million year-over-year with most of the increase due to the Tegrant acquisition. Thus, EBIT was $98 million, which was 5.7% higher than last year and you'll see the drivers of the change in the EBIT bridge in just a moment.

Interest expense of $15.2 million was higher than last year due to the impact of the financing for the Tegrant acquisition. Thus, income before income taxes was $82.8 million. Taxes were $27.1 million, which were higher than last year due to a higher effective tax rate as expected, which was 32.8% on base earnings this year versus 31.9% last year.

Equity and affiliates and minority interest was slightly improved from last year. Thus base net income was $59.7 million or $0.58 per share compared to $0.60 last year.

Before moving onto the specifics where you will see that there are many moving pieces, the lower year-over-year earnings can really be attributed to $0.02 due to higher pension expense, $0.01 due to a higher effective tax rate, $0.02 due to foreign currency translation, $0.02 due to the loss of a contract packaging account and packaging services mid-year last year, partially offset by $0.02 in earnings accretion from the Tegrant acquisition and $0.03 improvement in all other businesses.

But turning to specifics on the sales bridge on Slide 5, which reconciles the year-over-year change in sales you see that volume was slightly negative for the company as a whole impacting sales negatively by $12 million. In the consumer businesses, volume was down 3% for the segment as a whole. Unit volume in composite cans in North America was down 1.6%, and the associated closures business intercompany units were down 4% but trade units were down 12%. Flexibles volume improved by 1.3% versus the same quarter last year while blow molded plastics was up 3%. Thermoforming was down 4% and injection and extrusion molding down 4%.

In the industrial converting and paper businesses, trade volume actually was up slightly due to an increase in recycling and in paper sales in the US and Canada. However, tube and core volume in the US and Canada was down 2.8%. Total volume in paper North America was up 2% but again this was driven by trade volume being up 5%. Recycling trade sales were up 16% driven by growth initiatives in this business.

Outside the US, tube and core volume in Europe was down 4%. Tube and core volume was up right at 2% in South America but off 11% in Asia. Reels continue to have very favorable volume as it was up 15% year-over-year due to continued strong demand for steel reels for the utility industry.

In packaging and services, a continued increase in fulfillment activity globally was more than offset by lower year-over-year sales in tax centers associated with last year's mid-year loss of a contract packaging account. And finally, in protective packaging, volume in our legacy business was down 5% due to last year's decision to exit some business in China and some shifts in packaging now being picked up by Tegrant.

Further down on the sales bridge, you see that acquisitions added $124 million to sales, $118 million of which was related to Tegrant. Tegrant had a really strong quarter from a top line perspective, driven by continued growth in protective and thermo safe businesses, which were up 21% and 12% respectively year-over-year. Only partially offset by lower volume in alloys.

Sales prices were essentially flat for the company as a whole as you see on the price line where it only impacted sales for the quarter by $2.7 million. Sales prices were higher year-over-year in most all consumer businesses associated with higher input cost as resins, films, and other materials were rising through much of last year. In the industrial businesses in North America, pricing was not notably different on contract businesses since many contracts in the US had selling prices in the first quarter of 2012 based on an OCC price of $135 per ton while the price resets for the first quarter in 2011 were at $140.

But average OCC prices for the quarter based on the southeast yellow sheet were about $15 lower, which did negatively impact selling prices in recycling. Selling prices were higher in Europe as well year-over-year where increases have been implemented to recover higher material costs. Translation of sales in foreign currency and other changes did reduce reported sales by $39 million due to the strengthening of the dollar.

Turning to the EBIT bridge from last year on Slide 6 you see the lower year-over-year sales volume combined with mix reduced year-over-year EBIT by $13 million as we did have a notable impact from mix both between and within the businesses. Most of the negative mix was in the consumer segment driven by lower composite can sales and even within composite cans sales where there was a change in mix of business.

Mix was also negative just due to the lower sales of some of the higher value metal ends. Mix was also somewhat negative in flexibles due to some lower sales of some of the higher margin products. The EBIT impact in packaging services of volume was due to the loss the contract packaging account, which was again only partially offset by increased volume in other fulfillment activities. And as expected price cost was favorable year-over-year by $16 million.

In the consumer segment this year-over-year change in selling price more than offset the material cost changes as we were chasing rising prices through 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 right at 1%. Films are up roughly 1% to 4% and resins down roughly 7% but depending on the type of resin.

Although selling prices were lower in tubes and cores and paper due to the lower OCC prices material costs were also lower. We are pleased to report that again this quarter we saw a significant improvement in productivity where manufacturing productivity was almost $10 million compared to productivity of only $5 million in the second quarter last year. Productivity remained somewhat light on the industrial side of the business particularly in Europe due to the soft volumes but was particularly strong in our consumer businesses where cost reduction initiatives were implemented and plants performed better.

Acquisitions added $9.4 million in EBIT due to Tegrant, which more than offset interest expense associated with the acquisition and thus was accretive by almost $0.02. We still expect to see incremental operational improvement and the benefit of additional synergies in the third quarter. Other is our catchall category and was negative by $12.6 million, which includes wage and other non-material inflation of roughly $10 million and $3 million from the translation of EBIT in foreign currencies.

And finally, pension expense is higher year-over-year by $4 million driven most notably by the decline in the discount rate at the end of last year.

Looking briefly at results by segment on Slide 7, for the consumer businesses sales were down almost 3% due to the lower volumes as previously described but margins improved to 9%, up from 8.2% for the same quarter last year driven by improved price cost and strong productivity.

For the paper and industrial converted businesses sales were down 2% primarily due to translation but margins were largely unchanged for the quarter at 8.3%. The change in packaging services was really covered in the bridge comment and protective packaging obviously was most notably impacted by the Tegrant acquisition but I will point out that we did see notable improvement sequentially from the first quarter where the EBIT margin improved from 5.8% to 8.2% this quarter and we're confident that we can get this to a 10%-plus EBIT business over several quarters.

And now looking forward on Slide 8, we are projecting that base EPS will be between $0.62 and $0.66 per share in the third quarter. We are keeping the low end of our full year estimate at $2.34 but given the relative softness that we are seeing we are bringing the top end of our guidance down to $2.39 from $2.44, with the top end still being a challenge in this environment.

This guidance assumes no notable change in the level of economic activity but it does reflect the normal pick up that we would expect to see due to seasonality in some of the consumer businesses and in Tegrant in the third quarter. And then again those businesses slowing as they natural would somewhat again in the fourth. In terms of the industrial volume we are assuming that tube and core volume in North America will be essentially flat with the run rate that we've experienced over the last couple months and Europe down slightly from the second quarter just due simply to the impact of holidays during the summer months.

Price cost will be somewhat favorable in the third from softening resin prices and slightly lower OCC cost, which then we've assumed to be relatively neutral after contracts reset in the fourth. We expect continued improvement in Tegrant just due to the additional synergies as well. We haven't assumed an effective tax rate of 33% for the second half both really in the third and the fourth quarters.

I will point out that last year in the third quarter we had earnings of $0.66 per share where we benefited from a particularly lower S&A cost during the quarter, which were only 7.8% of sales driven by lower management incentives and some company-owned life insurance proceeds. And an effective tax rate of only 29% again due primarily to the life insurance proceeds as well.

Gross profit last year was only 16.6% in the third quarter and we are projecting based on our forecast that this will improve to almost 19% in the third quarter but again S&A will be closer to our normal levels of almost 10%.

Our cash flow summary is found on Slide 9 where you see that we had cash from operations for the quarter of $42 million, which was down only slightly from last year. I will mention that our second quarter is normally light in terms of cash from operations because we do make two federal tax payments and have our annual/semi-annual bond interest payments due in the second and fourth quarters as well.

Net capital spending of $55 million was higher than last year due to the fact that last year we did also have $8 million of proceeds of asset sales in the quarter netted against the spend but we also did experience higher spending this quarter associated with the biomass boiler project and spending for the new blow molded plastics plant in Columbus, Ohio.

In terms of our expectations for the full year, we are still projecting cash from operations to be roughly $385 million, which is unchanged from our estimate at the end of the prior quarter. We are now expecting that capital spending for the full year will be in the $200 million range and after dividends we'll have free cash flow of roughly $70 million.

CapEx is up about $10 million or so from our first quarter projection just due to the timing of spending on the biomass project with more of our spending shifted into 2012 from 2013 certainly not a change in the total expected project spending.

There are a few extra pages of material in the Appendix for your convenience but that really completes my overview of the results for the quarter and we will now open the line up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your next question comes from the line of Scott Gaffner from Barclays. Please proceed.

Scott Gaffner - Barclays

Good morning.

Jack Sanders

Morning, Scott.

Scott Gaffner - Barclays

I just wanted to dig a little bit deeper into the protective packaging, especially the margin commentary. You obviously put up a strong quarter there but can you talk a little bit more about the variance between the first and the second quarter how you were able to really improve the margins so much sequentially.

Jack Sanders

Yes, Scott. Two things really drove it. Obviously during the first quarter we had a lot of cost going into that business to bring it up to our safety standards and some of the other things that we try to do as well as the business was just operationally a little weak. In the second quarter the synergies began to start kicking in now. We're beginning to see the benefit of all those. The business is running much better and volume is also much improved. You heard the year-over-year improvement in volume. So all three of those things really are driving the margin closer to where we see it should be and it'll continue to drive and so up as we get more synergies and we continue to run the business better.

Scott Gaffner - Barclays

Okay. And looking at productivity you had the guidance out there for $50 million in productivity. You've gotten about $20 million so far in the first half. Do you still feel comfortable even with European weakness that you can get to the $50 million of productivity for the year?

Jack Sanders

Yes, Scott. I believe we're about $22 million right now in productivity. I think that we would normally expect to be somewhere around $25 million. We expect somewhere between $45 million and $50 million. We're going to push for that number and we'll be pretty close to that.

Scott Gaffner - Barclays

Okay. And just lastly if I look at the mid point of the guidance for the full year and I look at the mid point of the guidance for the third quarter, it implies that fourth quarter EPS is somewhere around $0.63, which would be up 35% year-over-year. Obviously you've got the easy comparison in the tubes and cores business just from the lower production levels in 4Q 2011. Is there anything else that's a big variance year-over-year that gets you that type of earnings growth in the fourth quarter?

Jack Sanders

Well certainly Tegrant and the synergies in Tegrant would help drive that number as well.

Scott Gaffner - Barclays

Okay.

Barry Saunders

Scott, this is Barry. I'd also add if you remember last year we had a very high effective tax rate in the fourth quarter as well.

Scott Gaffner - Barclays

Okay. Thank you.

Operator

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

George Staphos - Bank of America/Merrill Lynch

Thanks, everyone. Good morning. I just wanted to follow-on that question from Scott. So should we expect that third quarter we may still be seeing an industrial segment that is down year-on-year in EBIT but by the fourth quarter it should be up? Would that be the right way to think about the segment directionally in the quarters?

Jack Sanders

I would think that basically that's accurate.

George Staphos - Bank of America/Merrill Lynch

Okay. Second question kind of taking a step back. Over the last couple of years there seemed to be maybe a bit more inroad to being attempted by competing companies with competing packages relative to the composite can market, the traditional market that you've had even to some degree you're doing it with your own plastic package within nuts. Has that had an appreciable effect on volume and/or mix and is that one of the things that maybe was affecting the business in the second quarter? And I guess a related question was the second quarter more impacted just by what we've seen out of the scanner data that retailers are not shipping a lot or not selling a lot of out of the center of the store and dry goods and that's really what's really more affecting your composite volumes?

Jack Sanders

Well certainly I would tell you that the scan data, the volume is the primary impact. As far as competing formats, George, yes but there have always been competing formats and there are always going to be competing formats. Did we lose volume to some competing formats? Yes but not anything of significance. It comes and it goes. We win some and we lose some.

George Staphos - Bank of America/Merrill Lynch

So, Jack, would it be fair then that that’s not had a mix affect in composites then or has it?

Jack Sanders

Yes. Yes, it did have an impact on the mix affects for composites, yes.

George Staphos - Bank of America/Merrill Lynch

Okay. How do you in an environment where there's going to be this on again off again competition, how do you regain that mix? Are there any markets that you're particularly happy about or optimistic about maybe to say it better for composites that should be able to claw back that margin that you might have lost to a competing (inaudible) or package?

Jack Sanders

Well, the one thing I want to make sure of is I'm not implying that the entire mix issue was driven by that one event or a loss of some business. There was some mix shifts among the different end use segments in general that had a negative impact to the overall margin. I would tell you that how you get that back is that we've talked about it for some time, there's a global opportunity for composite cans in powdered infant formula and we are very – we’re in discussions right now and have some positive outlook for that opportunity.

George Staphos - Bank of America/Merrill Lynch

Okay. Jack, two last ones, and they're quick. On the mix side again in composites can you talk about what some of the end market changes were that shifted mix? And then more in the core board business are you seeing any impact from your customers perhaps looking to over time get out of cores within the towel and tissue market. I know you don't necessarily make a lot of those cores but you do sell some of the core board. Is that having any kind of ripple effect through your core board and industrial markets overall. Thanks, guys.

Jack Sanders

Let me answer the core board first and I'll turn it over to Barry to tell a little bit about the mix on composites. We really don't see a big impact on that. As you said we don't make the tubes in cores for tissue and towel other than in the jumbo rolls and of course those are still on large cores. Is that market moving in that direction? Some of it has but some of it hasn't been that successful either so we've not seen any impact from that yet. And have no signal that we will in the near future. And, Barry, as far as the composite cans?

Barry Saunders

Sure. In terms of the particular market segments we saw that in the quarter snacks were up 10% year-over-year. Fiber caulk was up 5% driven by more activity in housing. Powder beverage was up 6% and then this was more than offset by nuts being down about 9%, concentrate down 9%, and then the powdered infant formula segment was down 30%.

George Staphos - Bank of America/Merrill Lynch

Okay. I'll turn it over. Thanks, guys.

Operator

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

Phil Gresh - JPMorgan

Hey, good morning. First question just on currency. You said there was a $3 million headwind in the quarter about $0.02. Just trying to get a little bit appreciation for the sensitivity you guys have. What are you guys assuming for the back half?

Barry Saunders

We've assumed that the rates don’t move significantly from where they're at right now. So we've factored that in. So with the euro one of the primary currencies around the 125 level.

Phil Gresh - JPMorgan

Okay. So would that be $0.02 again in the third and in the fourth basically?

Barry Saunders

Some place directionally in that area. It's been factored into our guidance but if you're looking at a year-over-year comparison.

Phil Gresh - JPMorgan

Right. Yes. Okay. And consumer, you said the volumes were down 3% in the quarter year-over-year, looking at the back half you said you expect it to pick up seasonally. But I'm just curious what you're kind of assuming on a year-over-year basis there? Does it pick up on that basis as well or is it really just the seasonal?

Jack Sanders

Well it's basically what we've taken is our current run rates and information from our customers and adjusted them to the seasonal change that we would normally expect.

Phil Gresh - JPMorgan

Okay. So it's still kind of on a year-over-year basis still kind of trending in that down low single? You don't expect it to turn positive I guess is what I'm asking.

Jack Sanders

I would say more flattish.

Phil Gresh - JPMorgan

Okay. And then just on the CapEx with the pull forward do you have any sense at this stage of what 2013 CapEx might look like?

Barry Saunders

Really nothing very specific at this point. But again the increase that we've talked about earlier in terms of that $10 million over our previous expectations is really just pulling some back from 2013 not an implied pick up in our overall run rate going forward.

Phil Gresh - JPMorgan

So because of the biomass would 2013 be up over 2012?

Barry Saunders

No. No it should be down because about two-thirds of the biomass spending will actually take place in 2012. We're very much interested in spending as we can to ensure that the project is completed by the end of 2013 to be able to get the credits that would come back to us in 2014.

Phil Gresh - JPMorgan

Got it. Okay. And then my last question just on the OCC you talked about it trending lower in the third quarter. I've heard out there that we might actually have incremental downside from what we even saw in July over the next couple of months. I'm curious if that's what you're seeing out there and how you're thinking about it in terms of the third quarter.

Jack Sanders

Well certainly we've heard that same information. There is no upward momentum for price in OCC right now and we believe it could trend down slightly as the third quarter goes on. That would have some positive impact to us overall of course. Depending on timing. It all depends on when it happens. I also want to, Phil, if you don't mind I want to comment and say one other thing on consumer volumes. Our plan at Beauty Park is starting up right now so that will have a positive impact on our volumes in the third quarter on the blow molding side for certain as that facility comes up to full speed.

Phil Gresh - JPMorgan

Got it. Okay. Thanks a lot. I'll turn it over.

Operator

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

Chip Dillon - Vertical Research Partners

Yes, and good morning. It looks like the Tegrant deal is doing quite well and I guess two questions. One, did you have sort of a guesstimate as to how much it was accretive in the quarter and maybe you mentioned a number and I missed it? And secondly, given the success of Tegrant are there likely to be more not that you can promise anything of course but more sizable acquisitions in the next year or so?

Jack Sanders

Well we are certainly very pleased with Tegrant. It is doing what we thought it would do and it's continuing to escalate. It was accretive in the quarter about $0.02 and when we looked at that industry there are certainly opportunities to continue to roll up and consolidate that industry. So we're going to continue to take a look at those opportunities and see how they play out.

Chip Dillon - Vertical Research Partners

And on the accretion?

Jack Sanders

$0.02 in the quarter.

Chip Dillon - Vertical Research Partners

$0.02 got you. Thank you. And then as you look at the – you mentioned that that protective packaging business you think you could get to like a 10% margin in several quarters. Could you just sort of give us again if you didn't specifically how you expect to get there? Like volume, price, cost control.

Jack Sanders

Well right now the synergies in that business as I said, we really didn't get much synergies in the first quarter. They started to build in the second quarter and they'll continue to build throughout the year. We originally said we expect it to be at a run rate of about $12 million by the end of the year. I think we're actually going to beat that run rate year-over-year. That business is continuing to grow as you saw the sales were up significantly. There are significant opportunities on the molding side of the that business as well as the cool chain shipping side of that business.

The flu season is upon us for that cold chain shipper right now. So that business is growing. It's going to continue to grow. We're going to get synergies. So it's going to be a leverage play as well. And then there's also a synergy between our core flex business and their alloy business that's going to have a positive impact probably for both businesses.

Chip Dillon - Vertical Research Partners

Okay. And then last real quickly you mentioned tubes and core volumes were down 11% in Asia in the quarter and how much of that do you think is actual slowdown in the business versus maybe an inventory correction taking place over there?

Jack Sanders

Well overall Asia was impacted by two issues. One is that we had a flood in Thailand and so that facility came off line. It's only partially back on line. So that's impacting it. But volumes were down about 10% in China and I'm not sure how much of that is actual inventory but volumes are slower in China without a doubt.

Chip Dillon - Vertical Research Partners

Okay. Thank you.

Operator

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

Philip Ng - Jefferies

Morning, guys. Your consumer business from a volume standpoint was a little lighter than I would have expected. Just want to get a sense what your customers are saying and how they've been reacting in terms of managing inventory.

Jack Sanders

Well I think that you read what we read. Consumer spending is projected to be down slightly so that's kind of factored into our forward look. And quite honestly that’s the reason we took the top down a little bit because we don’t see the momentum to get to the top side of the guidance. If we're wrong we'll be back – we'll add the top side back if that happens. But we just don't see that right now.

Philip Ng - Jefferies

Okay. So I guess relative to your guidance the weakness in the volume is more so coming from consumer rather than industrial relative to what you were expecting heading into the year?

Jack Sanders

I would say yes. Industrial slightly, but it's more around the consumer. When I say the top side I meant the top side of 244.

Philip Ng - Jefferies

I got you. Any concerns about food inflation going forward just because corn prices obviously moving higher with this Midwest flood.

Jack Sanders

Certainly that's out there but other things are moving in the opposite direction. So hopefully that’s an offset.

Philip Ng - Jefferies

And then when you look at your pack services business obviously sales were down with that contract loss. Would you be able to parse that out. I just want to get a sense of how the base business is doing without that.

Jack Sanders

Yes. If we took that out sales and EBIT would be up on a year-over-year basis. And I also want to point out that the comparison is difficult because in that particular account that we lost we had an incentive to make a very effective transition and it actually occurred over the first half of the year. We did an outstanding job of transferring it and got 100% of the incentive. So it artificially inflated what that business would have earned otherwise had we just kept that business going forward through that first half of last year. So there's two things there. That extra incentive and of course then losing the volume all together.

Barry Saunders

I will also add that when you're just looking at the top line for that business alone you really need to realize that there was a significant impact of translation of about 60% of that business for the segment as a whole is outside of the US now, in both Mexico and Poland. And those currencies depreciated significantly against the dollar, almost 20% year-over-year.

Philip Ng - Jefferies

Okay. And then just focusing on the display business, not a big competitor but I believe they have a small display business. They've kind of mentioned how they've seen a pick up with their customers looking to be a little creative to drive growth. Have you seen that type of pick up on that business as well?

Jack Sanders

Yes.

Philip Ng - Jefferies

Okay. And then just one last question for Barry. Any thoughts on this new highway bill in terms of how it's going to impact your pension contribution next year?

Barry Saunders

Yes. We would expect that it would impact our previous estimate of kind of what pension contributions would be next year, not this year, and it would essentially based on some preliminary analysis that we've seen it would allow us not to make a contribution to our domestic qualified plan next year.

Philip Ng - Jefferies

Okay. Perfect. Thanks, guys.

Operator

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

Ghansham Panjabi - Robert W. Baird

Good morning. So you guys have talked about the run rate in terms of volume and I was just wondering if the volume trajectory has been consistent month to month in 2Q? Or did you see significant weakness in June?

Jack Sanders

No. I would tell you that April is the first month of the quarter so it's a five-week quarter so it may have been a little bit stronger on a run rate basis and we actually took the May and June average and that's the number we use forward.

Ghansham Panjabi - Robert W. Baird

Okay. Understood. And then as far as free cash flow allocation, I think you mentioned about $70 million in after dividend free cash flow. Have you guys given any thought on share repurchases in the back half of the year?

Jack Sanders

No. We're going to pay down debt.

Ghansham Panjabi - Robert W. Baird

Okay. Great. Thank you.

Operator

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

Alex Ovshey - Goldman Sachs

Good morning, guys. I think in the past you talked about in your tubes and cores business there was some exposure to the US housing market. Can you talk about how we should be thinking about that exposure if my premise here is correct and again if my premise is correct what are you seeing in that part of the business right now housing appearing to be bottoming and ticking up from very low levels?

Jack Sanders

I want to be clear. That was a theory I had. And the theory is simply based upon that there is a lot of wound goods that wind up in construction from upholstery, carpet, house wrap film that’s used to package most of those products sent to market. And the concept is, is that as housing picks up I believe that our tube and core volume will move along with it. It's very difficult for us to quantify that because we'd have to get into the sub-segments of our customers. If you think they're packaging paper and that paper could go into wallboard, that’s very difficult for us to draw a connection between housing and tubes and cores directly. It's just a conceptual idea that there's wound goods that wind up in construction.

Alex Ovshey - Goldman Sachs

Okay. That's helpful, Jack. And then shifting gears on the consumer side, based on your conversations with the customer base is there any sense that maybe we'll be seeing some promotional activity picking up in the back half as it does seem like you should still see a little bit of deflation (inaudible) prices are spiking but like you said earlier some of the other inputs are going down. So at least in the back half of this year they should have a little bit of relief and any sense that there may be some promotional activity happening in the back half on the consumer side?

Jack Sanders

Well I would certainly tell you in the conversations we have we certainly see a lot of pressure from the customer to help them be innovative. To help them create ideas that will actually improve their volume. I agree with you that the deflation in some commodities could potentially create some upside for them as well. And we are seeing activities around promotion as far as display and those type of things.

Alex Ovshey - Goldman Sachs

Thank you very much.

Operator

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

Adam Josephson - KeyBanc

First question on composite cans, do you view the decline to not secular at this point similar to frozen juice concentrate and secondly regarding composite cans, do you expect continued declines in PIF owing to product substitution?

Jack Sanders

I am sorry I didn't hear the second part.

Adam Josephson - KeyBanc

The declines in powdered infant formula owing to product substitution, package substitution?

Jack Sanders

Well, the secular decline that's occurring in composite can, we've talked about in the past certainly on frozen concentrated orange juice. I don't really see it in another markets. As I said earlier to George, we compete with different formats and sometimes we get a conversion and occasionally you lose a conversion, but nothing secular going on there, I don't think relative to the composite cans.

Adam Josephson - KeyBanc

And the negative mix in flexibles that you referred to Jack, can you help me understand it?

Jack Sanders

Yeah, that was very minor. It was just a matter of some shift away from hard-baked goods and confection where we tend to have a bit higher margin, an increase in pet food, and frozen foods, but it wasn’t major.

Adam Josephson - KeyBanc

And lastly in protective packaging Protexic volume is up significantly if I heard correctly, but the legacy business was down a bit volume wise, can you help me understand the discrepancy?

Jack Sanders

Yeah, part of it actually was a shift from the products that we were making to the products that Tegrant were making when we redesigned the package for our customers and China, we also had a facility in China that we decided to close and exit on protective packaging.

Operator

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

Mark Wilde - Deutsche Bank

Barry, just a question for you first, on that EBIT bridge you showed, just going back to that other category which was pretty large this quarter, you said a lot of that was just increase in wage and other, but it’s so much larger than the first quarter, can you help us understand what went on between the first quarter and the second quarter?

Barry Saunders

I will mention again that, that also was where we should show the impact of translation on EBIT and from EBIT being translated from foreign currencies into the US dollar negatively impacted it by --

Mark Wilde - Deutsche Bank

3 million did you say?

Barry Saunders

That’s correct.

Mark Wilde - Deutsche Bank

So it just seems like it was not a very big number in first quarter and then all of a sudden, it exploded in the second quarter and only about three of that was FX?

Barry Saunders

It’s just a lot of other moving pieces, but certainly nothing of any significance in that change outside of translation?

Mark Wilde - Deutsche Bank

And then the second question I had, the SG&A as you pointed out in release, up about a 110 bips year-over-year. I think probably up about a third of that is the increase in pension and some of it is also probably higher SG&A at Tegrant. Are there other things in there as well and where might we expect that SG&A to kind of settle out as a percent of sales overtime?

Barry Saunders

You have mentioned certainly that the two key drives of that and then again just normal inflation on S&A, but the 10% range would be kind of what our average long-term target would be.

Mark Wilde - Deutsche Bank

Another question it seems like your European industrial business, while it was off, it actually held up a little better than what we were hearing from some other industrial packaging companies. You have any thoughts on that? I think you said you were down in the Tubes and Core business than you were up about 4.5%?

Jack Sanders

Well, I think that we are actually, the Tube and Core were actually down 4%, but I would tell you that we've had share gain in Europe as of late and during the course of last year, that team did a really good job of taking cost out of that business and get it prepared. We shut down the Nordhorn Mill, and so we improved operating efficiency. Even in that quarter, it was at 96% for the mill system of the utilization rate. So they’ve done a good job of getting ready and we continue to gain share. So I think that’s why we continue to bear well in Europe.

Mark Wilde - Deutsche Bank

Okay, and just a couple of last ones. As you build more and more of these MRFs, I assume that you're going to have some more movements vis-à-vis commodity price is just because you sell aluminum, you sell sort of scrap plastic and you've got the recycle paper coming out of those. Can you just give us a order of magnitude about how big the swings are that we might expect out of that business?

Jack Sanders

Well, in totality, the MRFs as a total percentage of our collections is fairly small. Of course, we still are primarily a paper collector, even in the MRFs. But I will say that those prices, those commodity prices are certainly swinging like you see in OCC. They are true commodities and they go up and they go down. But when you aggregate it all, we’re still heavy, heavy weighted to paper, all types of paper.

Mark Wilde - Deutsche Bank

Okay, alright and then the last one I had. There have been some announcements out in containerboard. Have you guys announced anything?

Jack Sanders

Well, we’re kind of a small player in containerboard and we don’t announce in containerboard, but we, if the market increases and we see the need to increase, we will follow.

Operator

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

Chris Manuel - Wells Fargo Securities

Most of my questions have been answered but just a few follow-ups. When you look within the trajectory of business in Europe, if I remember last quarter, you talked about as you moved month-to-month-to-month January, February and March; the things had continued to get a little bit better each month. As you move through this quarter, have you continued to see any further progress forward or things kind of stalled and recognizing, and you also have to make adjustment for seasonality but I think in your prepared remarks you mentioned that your assumption for the balance of the year was off half a percent. So that seemingly would be a little bit better than where things were certainly this quarter of 4%. So can you maybe talk about the path and what you’re seeing there?

Jack Sanders

Our actual volumes were up slightly in the quarter, quarter-over-quarter sequentially in the second quarter as we would expect due to seasonality. What we simply did was to take, again we looked at those May and June run rates kind of average them together and then adjusted that for volume, adjusted that for the period, that’s the holiday period going in the third quarter. So we see that trending down slightly, and then probably holding maybe up a little bit in the fourth quarter. So that’s kind of how we came up with that number.

Chris Manuel - Wells Fargo Securities

Is that more when you're getting to, is that the comps that are getting not much easier when you get to the back half of the year or are you seeing any changes in the climate or the environment over there?

Jack Sanders

No, not any change in the environment. The comps will get better to the fourth quarter.

Chris Manuel - Wells Fargo Securities

And North America continues to be off a bit and I think it has been off a bit for the last couple of quarters but is there a point at which I know you did some restructuring over in Europe well this is a question you get each quarter but is there are point at which you go back and may be reassess and look to do a little bit more restructuring either in Europe or potential little bit of restructuring here with your capacity rationalization and moving around footprint to get utilization levels where you want them?

Jack Sanders

Yeah Chris, I would say based that we look at that all the time we would necessarily use a downturn as a time to do that we are constantly trying to match our footprint to the demand and so it is always there.

Chris Manuel - Wells Fargo Securities

Last question is if I go back to some of the elements or two questions also on the consumer side you specifically mentioned I think three enclosures of 12%, I think that sounds like really, really large number is there anything reminds us may be what categories or what nature your are presently serving there and why in such a large number just as it would normally be?

Jack Sanders

Well I think there is some high enclosure sales that drove some of that and then we also had sales in the South America as well were down from that business.

Chris Manuel - Wells Fargo Securities

Okay, so that is something that you anticipate persisting at that sort of a level is it…

Jack Sanders

Just timing.

Chris Manuel - Wells Fargo Securities

Destocking or?

Jack Sanders

I will tell you just timing, order timing.

Chris Manuel - Wells Fargo Securities

And last question is you usually give us an update on the new products followed or are any new interesting things in the quarter that you have developed etcetera?

Jack Sanders

Well I would say we had about $40 million in new product sales in the quarter. So we are well on path to at least be a $150 million well I think we will be over that. And I will tell you that include nothing from Tegrant we are involved, we are not putting their new product sales in yet. I didn’t mention that beauty park opens up.

We've already won some new volume there. We have a new shampoo bottle that we recently won as well from another filler. And I would tell you at Tegrant we have some really, really strong opportunities in automotive section to continue to replace metal and other components using expanded polypropylene foam so still strong on the funnel and a lot more to come.

Operator

Your next question comes from the line of Steve Chercover from D. A. Davidson. Please proceed.

Steve Chercover - D. A. Davidson

I just had one at this stage in the call. When Tegrant is finally integrated and the Columbus plant is complete is there going to be a step function increase in your free cash flow.

Jack Sanders

Well, I think if there would be an increase in free cash flows because of the added sales and revenues that come from those businesses. But that changed and that would be hard to meet the financed.

Barry Saunders

Or spending would be.

Jack Sanders

Yeah, they are going to have some spending associated with them as well, but they got to generate EBIT.

Steve Chercover - D. A. Davidson

But we won't see CapEx decline dramatically, I mean alternatively when you paid down EDIT you said there were some other kind of roll up opportunities in that line of business, I mean are they much smaller than Tegrant was?

Jack Sanders

Yes, yes, they are what we call tuck in type acquisitions where you leverage volume over your footprint more or less and as far as capital spending of course as they come online there would be less capital spending for example in beauty park, once its in, its in and that will be that facility. But the opportunities for us going forward to continue to grow the business are there and so we are going to continue obviously spending capital to grow the business going forward.

Steve Chercover - D. A. Davidson

Sure, I am just trying to quantify how much cash is going to be available you know someone asked about share repurchases but to me it seems more like debt repayment or growth are the initiatives that you will pursue?

Jack Sanders

That's correct. And I wouldn't say that spending $200 million in capital isn't, that's not something we normally do. We are normally are in that $160 million to $180 million and would expect that to come back around once biomass is beyond us etcetera.

Operator

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

Albert Kabili - Credit Suisse

Just a question on, I guess the volume mix on EBIT bridge. How much of that if you have that could you help us with how much the composite can component of that I know you called out a lot but composite can so much of that 13.6 million on the EBIT bridge would have been composite cans roughly?

Jack Sanders

It’s a part of that but we wouldn't be in a position of providing the exact amount for any of our product launch.

Albert Kabili - Credit Suisse

Okay. And I guess along those lines on the negative mix is that something that you see near term progressing at about the same kind of rate or is there anything that appreciably would change the recent trends that we've been seeing along these lines?

Jack Sanders

That's random, sometimes mix works for us, and sometimes it works against us.

Albert Kabili - Credit Suisse

Okay. I guess what I am getting at is composite cans; we have seen kind of negative volumes here for a while now and I know certainly we have talked about the headwinds on the packaged food side. So assuming that that trend stays the same is there anything ramping up that would offset some of that maybe some of the new blow molding business that you talked about that’s ramping up in the second half; how should we be thinking about that?

Barry Saunders

Certainly, inside consumer flexibles and our blow molding business are up year-over-year and we expect them to continue to grow. Again, but I will also say on the composite can side we are in the final stages of an opportunity for the global expansion of composite cans, so we expect that to continue to grow as well.

Albert Kabili - Credit Suisse

Okay, we will stay tune there. And on the new capacity you called out with the blow molding can you maybe help us with how the new products that you’ve got in the back half how appreciable would that be to your overall consumer segment volumes; is it as much 1% lift or how should we be thinking about the contribution there?

Barry Saunders

Well, the easiest way for me to talk to that is what we expect the new product sales for the year and I would tell you that year-to-date we are at $77 million for the year; we talk about being at least $150 million, so that’s my expectation is that we will be at least $150 million for the year.

Albert Kabili - Credit Suisse

Okay, that’s helpful. And then the last question, tubes and cores and just looking at the end markets whether it be textile or paper or specialty films; were there any thing that stood out to you that were meaningfully different and noticeably changed up or down versus sort of the average sort of volume run rates you have been seeing?

Barry Saunders

Not really. I think that what I am most pleased with was the share gain that we see in Europe and the opportunities to continue to gain share to help offset the total requirements occurring in Europe. We continue to look for opportunities both domestically and in Europe to pick up share.

Operator

And your last question is a follow-up from the line of George Staphos from Bank of America/Merrill Lynch. Please proceed.

George Staphos - Bank of America/Merrill Lynch

Just a couple of last ones; if you mentioned, I missed it, did you call out why powdered infant formula was down fairly sharp in the quarter guys and if not, what was the backing behind that?

Jack Sanders

No, we didn’t called out because we don’t know; it’s random; sometimes it’s up and sometimes it’s down as far as just the general demand for powdered infant formula. It goes with their inventory. I don’t know how they do it.

George Staphos - Bank of America/Merrill Lynch

Okay. I guess the second question, you’ve talked about the 10% margin goal for Tegrant, I think last quarter, maybe the prior quarter, you had maybe pushed out the timing, I think, at one point of time you’d expected when you first announced the deal to be a 10% by 2013. Should we now, given the progress that you’ve seen in Tegrant in the last quarter expect that you can hit a 10% run rate at some point in 2013?

Jack Sanders

When I said that George, what I was talking about was consistent run rate above double-digit. Is it possible that we will hit double-digit prior to that? Yes; but I want to make sure by giving a timing that we’re having consistent rate of hitting double-digit returns across that business. So that’s really what I am saying.

We do expect continued acceleration in that business and if we step back and I look at the quarter in general, it was a darn good quarter, given all the macroeconomic conditions that we’re facing for the industrial businesses as well as our consumers businesses they were well run, productivity was solid, price cost was good.

So we feel good about the quarter, feel very good about Tegrant, the run rate on Tegrant, the integration that we are getting. So you know all-in-all looking forward not only for Tegrant, we think that those margins are going to continue to improve as we try to drive all our business back to that double digit rate and our cash flow across the business.

George Staphos - Bank of America/Merrill Lynch

Jack, two last questions related to the two points you just made; one, from an end market standpoint for Tegrant obviously there are several business within Tegrant as a whole, from an end market standpoint what was most positive or positive versus your expectation was it auto, was it light good or was it something totally different?

And then on cash flow, on returns, something that we’ve talked about in the past you know the free cash flow for the company over a decade plus has, it’s been up, it’s been down but it’s trended relatively flat; EBITDA has compounded maybe at 2% annually over the last decade or so; I guess maybe sort of touching on what Al’s question was getting at; do you think getting to a point where you’re going to see material improvement in return, in free cash flow, in growth rates beginning in ’13? Thanks very much and good luck in the quarter.

Jack Sanders

Thank you. As far as first part of your question about Tegrant and what was the surprise; certainly, automotive is up strong in Tegrant and that’s a specialty product and very much a niche product, as well as the thermo safe business was up strong and moving into the third quarter this is what’s you call flu season; all the vaccines are now being prepared and shipped so we expect a strong third quarter going forward. And if you didn’t get a flu shot last year, please get one, go ahead and get two, it’d probably be better for you, that would be a good for you to do. As far as….

George Staphos - Bank of America/Merrill Lynch

I don't know what you are suggesting here Jack, but anyway.

Jack Sanders

As far as obviously we want to grow the business, we want to grow the bottomline faster than we've grown it and we've made expansions into protective packaging and these other businesses to continue to drive improvement in our growth rate as well as cash flow. In plastics, as well as now flexibles coming in as well, so absolutely that's what we are focused on and what we are trying to, that's what we are focused on and what we are trying to do.

Operator

And gentlemen, we have no more questions in queue at this time.

Roger Schrum

Thank you, Tahesha. As a reminder, Sonoco’s third quarter 2012 earnings conference call will be conducted at 11 AM on Thursday October 18, 2012. Let me again thank you all for joining us today. We appreciate your interest in the company and as always if you have any further question, please don't hesitate to contact us. Thank you for participating.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Sonoco's CEO Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts