Sonoco Products Company (SON) Q2 2008 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, and welcome to Sonoco Products Company Second Quarter 2008 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder this conference is being recorded. It is now my pleasure to introduce your host Mr. Roger Schrum, Vice President of Investor Relation. Thank you, Mr. Schrum you may now begin.

Thank you, Lusania. Good morning everyone and welcome to Sonoco 2008 second quarter earnings investor call. Joining me today are Harris DeLoach, Chairman, President and Chief Executive Officer; and Charlie Hupfer, Senior Vice President and Chief Financial Officer. Our financial results for the second quarter were released before the market opened today and are available at our website at sonoco.com. Let me begin by stating that today's investor call may contain a number of forward-looking statements that are based on current expectations, estimates and projections. These statements are not guarantees of future performance, and are subject to certain risks and uncertainties. Therefore, actual results may differ materially. Additional information about factors that could cause different results and about the use by the company of non-GAAP financial measures is available on Forms 10-K, 10-Q and 8-K, filed with the SEC. With that introduction, I'll now turn it over to Charlie Hupfer.

Thank you, Roger. Today Sonoco reported second quarter sales of $1.0866 billion and net income of $58 million or $0.57 a share. Actual GAAP results include restructuring in both years, plus last year we took a $20 million environmental charge. I'll reconcile GAAP today's earnings for both years. Base earnings were $62.6 million or $0.62 a share, compared with base earnings last year $0.56 a share for an increase of 11.4%. The quarter played out pretty much as we expected. Year-over-year volumes were weak in our industrial tube and core and paper businesses especially in North America. The cost of materials as well as both freight and energy have driven significantly and gotten a little ahead of our pricing initiatives. On the other hand you will see that our consumer related businesses were exceptionally strong in the second quarter and our European tube, core and paper businesses reported an all time record in terms of quarterly profit. All of which speaks is a diversification we have in terms of products and geographies. The quarter benefited from a lower than expected effective tax rate. If you recall our guidance of $0.58 to $0.61 assumed a 32% effective tax rate. In fact, our basic effective tax rate before giving effect to a tax law change in Italy came in a little bit higher around 33%. After giving effect to the Italian change, the effect of effective tax rate came in at 28%. In Italy we were able to take advantage of a law that allows us to write-off our assets for tax purposes. In the second quarter we made a tax selection that will provide a $4 million tax savings over the next few years. The $4 million was reported as a reduction in tax revenue or tax reserve and a corresponding reduction in tax expense. Now let me reconcile actual to base earnings for the current quarter. During the quarter we took a $10.8 million restructuring charge, about one-third of that relates to solid continuation and loss on the sale of assets at our Shanghai paper mill that's the paper mill that we closed last November. Roughly, another one-third relates to asset impairment at the recently announced closure of our Montreal paper mill. The tax benefit related to these restructuring charges was $4.4 million and the minority interest benefit was $1.8 million. So as a result the bottom-line impact of restructuring was $4.6 million or $0.05 a share as we arrive at that, we start with the $10.8 million less the tax benefit of 4.4% and the minority interest benefit of 1.8% to arrive at the 4.6 % and again that $0.05 a share. The net $0.05 a share restructuring charge added to our GAAP EPS of $0.57 gives us base EPS of $0.62 per share. During the second quarter last year we had a restructuring charge of $3.3 million and then an environmental charge related to the Fox River clean up of $20 million. After tax restructuring was $0.03 per share and environmental after tax was $0.12 per share. So to start with GAAP EPS last year's second quarter of $0.41 and add back to $0.03 and add back to $0.12 you arrive at base EPS of $0.56 a share. So we think the correct comparison is $0.62 this quarter versus $0.56 per share in last year's second quarter. Now that is background, let me read out the full base income statement then again this is on a based earnings basis. Starting with sales. Sales were $1.0866 billion that's up 9.3% from last year's $994.4 million. EBIT; earnings before interest and tax was $93.8 million up 3.9% from last year's $90.3 million. Interest was $12.1 million versus last year's $12.8 million and that decline is due both the lower commercial paper rate and reduced debt balances. Profit before tax then is $81.7 million, that's up 5.4% from last year's $77.5 million. Taxes were $22.8 million versus $23.6 million last year which is I said earlier is an effective tax rate of 28% in the quarter and again that's principally due to the Italian tax planning initiative that I talked about. Now that leaves us with profit after tax at $58.9 million up 9.3% from last year's $53.9 million. Then we have equity in affiliates which is $3.7 million in this year's quarter versus $3.1 million last year and that gets us to the bottom-line, the base net income of $62.6 million which is up 9.8% from last year's $57 million. Base EPS at $0.62 per share is up 11.4% from last year's $0.56 per share. Again we were pleased with the quarter, depending upon how you consider the Italian tax credit, we were either inside our guidance of $0.58 to $0.61 or we were nicely above it. Now let me turn to the segment reporting. The consumer packaging segment recorded sales up 14.2% an operating profit that's earnings before interest and tax up 44.3%. All of our divisions in this segment performed well. We had a significant turnaround in our flexible business. If you recall we ran into some operating problems in last year's second quarter that's all behind us now. Volume was up year-over-year and productivity was good. Our metal end business was strong. That was aided in part by the closure of last year of our Brazilian metal end plant, and our composite cans volume was positive. The Tube, core and paper segment reported sales up 6.1% but profits dropped to 6.8% it is no surprise here. We had weak volume in North America and material costs were up. Also energy and freight costs were up year-over-year. As I mentioned earlier, we did have an all time record in profitability in Europe in this particular segment. Packaging services segment showed sales up 13.6% so profits were down 22.4%. We've talked before on these calls about the competitive we see with a major customer that negatively affected price and volume starting in the third quarter of last year. And then the all other category, sales were flat and profits were down 7.3%. On our reels and protective packaging businesses are in this category and those business have been negatively affected by the housing market. Let me turn now, having talked about the segments, turning to the sales bridge, and what I'm doing here is reconciling the $92.2 million increase in sales year-over-year. The starting point is volume. Volume was negative overall $4.2 million. Price, these are price increases were positive $24.7 million and acquisitions and this number is net of divestitures were positive $26.6 million, and then foreign exchange was positive $45.1 million. So again, a volume negative $4.2 million, price positive $24.7 million, acquisitions positive $26.6 million and foreign exchange $45.1 million. And that should yield the $92 million year-over-year increase. We talk about each of those categories, so starting with volume. The volume shortfall is primarily in our tube, core and paper operations in North America and our Baker Reels operations in U.S. Tube and core volume in the U.S. and Canada was down about 5% year-over-year in almost all categories. Our tracking, we keep these statistics shows that a modest net... that we had a modest net share gain. So, the negatives are mill closures, in fact, our paper mill core business volume was down 4% year-over-year. So, with mill closures and this generally is slow economy. In Europe, our tube and core volume was down 1.5% overall. We were down 3% in legacy Europe, and that's principally due to the closure of a plant in Spain. And then on the other hand, our frontier Europe businesses were up 9%. Russia, for example, was up 40%. And we're in the process of expanding that operation, Turkey was up 10%. But, again, overall, European volume, mostly because of the same closure was down 1.5%. Both the U.S. and Europe paper mill volume was up around 3%. Our U.S. operations reported machine utilization rate of around 98.8%, although frankly some of that were with some low margin business. Overall, consumer volume was positive. Composite can volume was up around 2% with all categories up, except for coke. And coke is sold into the housing industry. So, we thought snacks up 6%, dough up 2%, powdered beverage up 4%, miscellaneous food up 8%. So, a very good volume in this quarter in our composite can businesses. Vegetables volume was up around 3%. Now, that was led by the re-closure package that we sold to Craft. Packaging services segment volume was positive. But a lot of that volume is a result of pass through sales at our pack centers, and that volume doesn't have a very big bottom-line impact. And then lastly, in the other categories, our real volume, out of our baker business is down 15% and that's due just simply the weakness in the construction industry. Now, price as I said added $24.7 million to sales. Food and core prices in the U.S. were up, and we're continuing to implement an 8% increase that we announced earlier in the year. Prices in Europe for tube and core and paper were up around 4% to 5% as we implement an April increase there. Pricing in the consumer segment was positive as well, and that's due to earlier in the year contractual reset and negotiated reset. Pricing increases in metal ends were put in place earlier in the year to cover steel and aluminum increases. In fact, pricing was positive in all of the segments that we report in, except for packaging services, and that again is bid related. So the next category is acquisitions, acquisitions added $26.6 million that's principally the Matrix acquisition where we had one month of sales last year versus three months of sales this year. And then foreign exchange, foreign exchange added $45.1 million. That's a result of the weak dollar versus the euro and the Canadian dollar. Since, this foreign exchange is all translations, it really doesn't affect the bottom-line, probably added somewhere between $0.01 to $0.02 per share on EPS. Now, let me turn to the EBIT bridge, and here I'm reconciling the $3.5 million year-over-year increase. Starting with volume, volume is negative $4.8 million. Priced cost, and this would be price increases last material cost. And if you recall in the last quarter, we also added energy and freight into this category. So price cost is a negative $8.7 million; productivity a positive $12.6 million and the all other category a positive $4.4 million. We start at volume, as I said volumes a negative $4.8 million, and that represents the profit impact of the volume shortfalls that I talked about when I was talking about sales. All of the shortfall is in the tube, core and paper segment and in the all other segments. But you might wonder why with the... we have a $4.8 million profit impact on a $4.2 million sales shortfall. And the answer is that mix played a role in that, we tap our paper machines relatively full but some of that is low margin chip and tissue board. And also, a lot of the packaging services volume as I mentioned we've just passed through the material costs that really didn't carry with it much profitability. So, again, volume was a negative $4.8 million in terms it's impact on EBIT. Price cost was a negative $8.7 million. This number is the net of the $24.7 million of price increase that I just discussed, less $33.4 million of cost increases. We did see our average late [ph] paper prices go up year-over-year, around 19%. Most of the other raw materials have seen significant increases as well, for example, resins, depending upon the type it's up anywhere from 12% to 25%. Included in the $8.7 million is our best guess as the year-over-year increase in energy and freight, which we think is about $6.1 million. So absent the $6.1 million, representing energy and freight, we would have been slightly behind in terms of price compared with the material part. Our U.S. tube and core and paper businesses have recently initiated a surcharge expressly to recover freight and energy. Those announcements came out on June 27th and June 30th. Now, the productivity, productivity added $12.6 million to profits. The only comment here is that it is much better than our first quarter productivity, which was $8.7 million. Productivity was strong across all of our divisions, in all of our segments. And then lastly, the other category added $4.4 million. This is the category that includes wages and fringe increases. But it's also net of fixed cost productivity and net of acquisition profits. I would like to say here that we've maintained very tight controls over S&A expanding and that will fall mostly into this category. As we calculated that selling and administrative spending is about 9% of sales, just to give you a comparison, last year, the same number was 9.7% of sales. So, again, good control over discretionary spending. Now, the cash flow statement, we'll note that we've put a cash flow statement in the press release for the first time. Operating cash flow was $79.8 million. This does include a $10 million in cash that we received from insurance companies as we negotiate to settle the Fox River claim. So absent this insurance settlement, operating cash was about the same as it was last year. There are three differences in terms of cash flow that are worth noting. One is that net income is up $15.6 million. The other is that net working capital consumes and this would be just receivables, inventory and payables. But net working capital consumes an incremental $14.4 million. This year, working capital was negative $22.2 million in the second quarter. Last year, it was negative $7.9 million. So that's why I say it's an incremental $14.4 million. But I wanted to assure you that our working capital program is very much on track. We calculated cash gap days every month. We report on them monthly. In fact, our three month moving average of cash gap days was 42 days at the end of December. At the end of March it was 38.2. At the end of June it was 38.3. So, obviously no improvement from March to June, but no real slippage either. The third point with regard to the cash flow statement is that capital spending was $28.8 million in the second quarter, versus $49 million in last year's second quarter. Last year, we had some unusually high spending. This year's quarter doesn't include any big project and is running at a more normalized run-rate. Now to the balance sheet, really not much to comment here other than we paid down $24 million worth of debt. As a result of that, our debt total capital has been reduced to the way we calculate it 34.2%, that's down from 35.8% at year-end and 35.2% at the end of the last quarter. Now let me turn to the reforecast. Reforecast for the third quarter is $0.63 to $0.65, not a real big range. We have elected to keep the forecast for the full year flat at $2.44 to $2.47, which means that given the $0.62 in the second quarter we were reflecting a little bit of weakness from our earlier projections. Obviously, there are lot variables in a forecast like this. We are assuming that volumes stay relatively consistent with existing levels and that volume shows a normal third quarter and fourth quarter patents. Besides volume, the big variables are a couple of things. One is the implementation of the price increases in the market for tube, core and paper that I said that we initiated toward the end of June. The second thing is the movement of material cost especially OCC, we've assumed in our forecast that OCC will average $110 a ton, that will be the Southeast yellow sheet price in the third quarter and it will drop to $100 a ton in the fourth quarter. And we further assume that the effective tax rate for the second half will be around 31%. Now because we always report on it and we mention new products. New products totaled $34.3 million in the second quarter. New products were up year-over-year by $13.2 million. That $13.2 million we were actually up $12.7 million on the consumer side and that's led by the re-closed package, we call it SmartSeal and also by new bottle sales at our Matrix operation. And they were up $0.5 million on the industrial side. For the full year new products totaled $62.2 million that's up $20.9 million almost $21 million over last year's $41 million. Now let me make one other comment and that deals with the Fox River, just to make it clear what we did in this second quarter. The company subsidiary U.S. paper mills reported a $25.8 million income in the second quarter related to agreements we reached with several insurance carriers to settle claims related to the Fox River. Now consistent with our prior practice, the Board of U.S. paper mills then agreed to increase its reserve for a settlement by a like amount. So the income item and the expense item offset in the quarter, I will point out that all of our insurance claims have now been settled or agreed to and that U.S. paper mills have or will receive a total of approximately $40 million in insurance. So with those comments I think we are prepared to turn it over for questions. Question And Answer

Thank you. [Operator Instructions]. Our first question comes from Claudia Hueston from J.P. Morgan. Please proceed with your question.

Thanks very much. Good morning.

Good morning, how are you.

How are you?

I was just hoping if you talk for a minute about the tubes and cores business and just the volume situation there. You have volume trend deteriorated at all since last quarter, are you seeing any difference in trends? It seems like your presence is quite strong in Europe but how are volumes looking if there's sense of an increased concern around the European economy recently?

Claudia as I hear what you say, you really raised two questions and we have not seen any deterioration in the tube and core volume over the last quarter in general and then as there's specifically North America. The European economy we've probably have seen no deterioration there either we have seen as we said in the second quarter some softening down around Italy and Spain and that continues but we haven't seen much change in volumes in the tube and core quarter-over-quarter.

Okay, thanks. And then in terms of the pricing in that business or the margin improvement in that business. Is it mostly pricing in Europe that's driving it higher or are there still cost reduction efforts that are going on?

Well, I would say in Europe it's primarily the pricing that is driven it higher. There are certain productivity gains that we're having in Europe as a result of the carbon consolidation efforts that we made a couple of years ago. The plants, the operations still continue to improve, and I expect that to continue. And North American, I'll go back to that for a second; she didn't answer it, we... Charlie said we have pricing in the market that we continue to grow and to recover. The big issue in that North American integrated system in the quarter, if you really boil down, it was the recovery of energy cost. And that was really the genesis of the aggressive or the announcement we made in late June to recover all the energy surcharge that we put in place in that business.

Okay. Thanks so much.

Thank you.

And then I guess just, on those energy surcharges, household recession then this far like the mix, success I guess in this past quarter [ph]?

Well, it's still a little early to see. But I would say that we've got a very good industry support. And most of our customers frankly understand the kind of energy cost that we're receiving. And then for the most part it's been very well replaced. And we see it as well as those we'll announce the salaries lead.

Okay. Thanks a lot.

Thank you.

Our next question comes from Mark Wilde from Deutsche Bank. Please proceed with your question.

Good morning.

Good morning, Mark. How are you?

Good. Any color in the point of purchase business? There is always kind of debate in that business of not whether we see prudent consumer goods companies, actually use more point of purchase in a slowdown like this?

Mark, I don't know that I have any color at this point. When I talk to people that who have been in the business for sometime, I get... the feedback I get is that in fact we do see more spending. I think we will have a lot more color on that in the next 30 to 60 days because this is truly the time when they are ramping up to buy a back-to-school and the holiday season. And I'm sure in the third quarter conference call I'll give you a lot more color than we have today. But I haven't been associated with that business long enough other than just give you what I have been told.

Okay. And just to come back to that question Claudia asked about the actual success on those energy surcharges.

Yes.

There is always a lot of debate in the trade about whether you can actually get customers to pay them. How long will it take you suppose to be able to get a real read on whether you are able to make that stake versus just having to put in a more general pricing for each stake there to group these costs?

You know Mark; our history has been... we've got a pretty record recovery of energy surcharges. and I go back I guess most recently to 2005 when we implemented such a surcharge right after Hurricane Katrina. And we had very good recovery, of I don't whether it's apparent of what percentage it was but it was quite good. And, I would anticipate the same sort of thing. Now, we actually rolled those surcharges into increases about six to eight months later. But, I would expect good recovery of it.

Okay. All right, fair enough.

Thank you.

Last question I had, you mentioned that pricing in tube and core had been better over in Europe. I know that there have been some kind of consolidation and rationalization moves in Europe. Is that then part of the equation you think?

Absolutely. The acquisition that we made of the Alstrom business we have the joint venture in, when we put the joint venture together with Alstrom in 2004 and the amount of capacity that was taken out by us and others, I think clearly changed the industry dynamics by then and certainly gave us a much better system. And so the combination of those two, I think has made pricing somewhat easier than it was particularly in 2000 - 2001 timeframe when we were seeing more of a recessionary environment in Europe.

All right. And we really, have seen a tremendous amount of news here in the North American business just in the last three or four weeks. So perhaps some thought there?

We've seen new capacity coming out.

Yes. Yes. Yes. We have a number of capacity closure announcements, [indiscernible].

Yes. I would agree with that. And I would... I think that is very much a positive sign.

Okay. And finally did you say how much your OCC was down right now versus kind of your second quarter average?

I don't think we said that.

We get some kind... that seems to me its been coming down for about three or four months but I think more recently it looked like it's stabilized a bit?

Yes, it was out at to 135 at the beginning of the year and down to 125 and its 110 now.

And it averaged I think in the second quarter around 118 to 120

Okay.

So of course it would be down little bit, but then that's a blended number but it will still be down.

Okay, all right I guess kind of hard for you all who are out there really all that market very far ahead?

I think that's right.

Yes, I know its right from my side.

Well then I'll have is far to you.

All right thanks very much.

Thank you, Mark.

Our next question comes from George Staphos from Banc of America Securities. Please proceed with your question.

Thanks. Hi, everyone, good morning.

Hello, George, good morning.

How are you?... I guess the first question is just for the details and I might have missed it. The way you are treating you're operating numbers for the quarter it was $0.62 in terms of base numbers and in turn that included $4 million of a tax benefit that you got from Italy. Is that the way to think about it?

That is correct.

Okay. Now second thing in terms of the reforecast, you like to keep full year flat even though you had some positive variance in second quarter and that was to reflect a little bit of weakness you said. However, and I might have missed all of this, some of this. You stated that you are seeing, you are expecting normal volume patterns you have price increases being implemented. OCC looks like it's declining in your assumption though I am just curious where is the slippage to identify the numerated everything correctly you put out there. Such that the reforecast is keeping some gun powder if you will for the back half of the year for some weakness.

George I think you obviously see... exactly what we have said I mean we have not seen volume... for the volume slippage and we've got price increases in the marketplace and we have been probably conservative about the recovery of those, the timing of those and the economy for the balance of the year. Everything almost on the side of conservatives and we have obviously said that we are holding the guidance way it is. OCC are false probably if we get price increases more rapidly, if we see any volume movement and then obviously there's a positive effect to that.

What was the first quarter average for OCC, wasn't it something like 125?

I don't have the average; Charlie may have it, George.

Okay. I get

We'll come back to you in a second he is still looking at that.

Okay, well again just looking at material cost for the quarter as we recall and maybe you were missing something here, your hedge the current amount of your energy so if that is true that shouldn't have been that much of a source of negative variance in the quarter? OCC was coming down. You have some positives in terms of your overall consumer business as well as some of the other raw materials and I am just curious where else you might have seen some negative variance on the material side that we're not thinking about?

I don't think George it was so much on the material side in the quarter. It was primarily, if you really drove down on it, we do hedge natural gas. We hedge about 75% of it.

All right.

We've got 25% of it, it's exposed. But it was the freight and then the electric side of it that the synergy surcharge is driving to recover. That's basically where the negative was in the quarter.

Okay. Fair enough. That's all.

That 25% on the natural gas plus the freight.

I understand, got it.

Okay.

And last question before I turn it over, can you give us a sense at this juncture what the productivity funnel looks like for '09 I know you are only probably, early stages right now I'm talking about the businesses. I know you will ultimately budget it later on in the year but any color that you have for what you might be able to get out, what might be a reasonable objective for 2009?

George you really are testing my crystal ball but I'll try as I look out at our productivity programs which has been very, very strong, we are tracking slightly below plan right now I think about 93% of plan but our overall total productivity as I look at it including supply management was around a $100 million for the year. I wouldn't anticipate that, that would change very much at all in '09.

Okay, thanks Harris I'll turn it over.

Thank you, George.

Our next question comes from Chris Manuel with KeyBanc Capital Markets. Please proceed with your questions.

Good afternoon, gentlemen or good morning I guess.

Hello, Chris. How are you?

I'm terrific. Thank you. Couple of questions for you. First, if we start with the, you've talked about some of the surcharges you had going in. Would you assume then that if you get reasonable traction on the surcharges that price costs should, at least, balance out over the back half of the year?

Yes, I would certainly think so. I think we were positive about $2 million in the first quarter and we were negative about $8 million in this one which includes freight and other things. And I would anticipate, that if we get debt recovery of those and the other price increases, I mean there is a lot of inflation going on in raw materials as well. And we have a lot of price increases in the market in addition to the tube and core piece, and probably most all of the businesses. So, but I wouldn't anticipate that as we've traditionally done that we will have breakeven or positive price cost.

Okay. And when we think about your positions in the market, you are in sort of a unique position that you make quite a few different products see a broad cut of what's happening on the consumer market. At this juncture with, for example, your composite cans or some of your paper based products, OCC being relatively stable while resins have shot-up a lot, metal shot-up a lot. Have you begun to see any or can you talk a little bit about any conversion opportunities or changes in packaging placards that you're seeing?

Chris, with the anticipated... announced, anticipated steel increases; we are getting numerous opportunities and numerous telephone calls from around the globe. From people of conversion, from steel cans to composite cans, we've had as we've talked good conversion over the last 12 to 18 months of powdered infant formula. And there's still a fair amount out there in metal in Europe and Asia and other places... and North America. And we have more conversions to come in the second half of the year. And we're talking to folks about conversions into '09. We have some coffee conversions that we recently made and I would... and we have some more to come. And, so I do anticipate this raw material run up will be very helpful to us.

Okay. With respect to and you said your free cash over the balance of the year, how do you feeling today about the acquisition market, balance in your acquisition market versus paying down debt versus share repurchase?

Well, we... debt total capital as Charlie mentioned is now in the 34% range, which is probably the lower it has been in 15 years or so. And our preference would be to use... I don't know that we will pay down a lot more debt, if we had any other options. But my bias would be to try to use it to take advantage of opportunities to grow the company. And as of that, in the third or fourth quarter, we have to look at what else, what other options we might have debt or share repurchases.

Are there any big legs of the business or areas we would like to add? If you look at product hold per se and the broad look at the one face, the customer look, are there any big areas?

Chris, I wouldn't say there are big areas. I would say that there are opportunities to add on several places in different geographies. And, I'll look at the services business, and there are certain pieces of that that we could use in Europe. There are certain opportunities on the West Coast of the United States. I'll look at the tube and core business, the tube and core business you didn't ask for that. Consolidation opportunities could present themselves around the world and we would expect to be a player in that. So, yes, there are things that we are looking at and in different spaces and in different geographies.

Okay. Then the last question I have is, in your tax services business, I realized that a pricing environment have got material anymore difficult in the third quarter, so the comp should begin to get at least, I believe the back half the year? If you can confirm that it is not at number one and in number two I think its an offset to that you talked about looking to win some more businesses that it may free you off to go, take some other customers and that hasn't at least by looking at some of the numbers there doesn't appear to be a lot of flow through from anything along those lines yet? Can you comment as to the pipelines for new business in the pack service space?

I can, Chris thank you. You talked about the grant following if you will the mega bid pricing which was last July and that does occur in the fourth or third quarter of this year and I guess you can look at Charlie's bridge that he gave you year-over-year from a high level, you look at the negative price cost and take freight out of it most of that does come from the mega bid which was July of last year. So it does grant following and the comps gets easier. You look at the sales in the packaging services and Charlie mentioned a good debt of that has come from... tax centers [ph] where its somewhat passed through pricing but we've seen the CorrFlex volume actually nicely up year-over-year, so we have picked some of that new business and we'll continue to do so.

Okay, thank you.

Thank you, Chris.

Our next question comes from [indiscernible] from PNC Capital Advisers. Please proceed with your question.

Hi, yes, [indiscernible] thanks very much. Great quarter guys, a couple of quick questions on George's question about productivity improvement I'm just wondering maybe you are playing your cards pretty close to the best and maybe holding back a little bit for what you might be accomplishing in the next year out pretty nice new product sales in the first half. I am just wondering maybe from these new developments that you are talking about that you are looking ahead at maybe we could see some upside surprises there?

Well you really mentioned two things Jean [ph]. You talked about the productivity that George mentioned and what we traditionally do we have a history over the last four or five, six years. So pretty strong productivity have been year-over-year which is driven by our six segment all lean efforts and I would anticipate and we generally start putting that together about this time of the year. Our businesses start laying out their projects for the next year and I would anticipate that number being the equivalent of what has been for the last couple of years. And so I don't expect any downturn in productivity and volume of the extract. But I would expect you to be closing the sign. I think our new product efforts are going quite well I guess basically John you may help me here. Our first quarter new product introductions is probably a record for the company in terms of new product sales. We've got things going on it's way and I mentioned the conversions next year I'll lay all over that I must admit some caution about this economy that we're sailing in and that we're in and there is some anticipation at least on my part that this is not going to improve in the short-term. So those are the mixes that I'll look at Jean [ph] when I think about this year and next year.

Thanks very much.

Thank you.

Our next question comes from Ghansham Panjabi from Wachovia Securities. Please proceed with your question.

Hi, guys good morning.

Good morning, Ghansham.

Harris, back to the consumer packaging business, the margins declined 2Q '08 versus the first quarter which is very, very strong I understand some of that might be cost related but was there any sort of negative mix shift as well that effected that business because all our volume seemed buying price actually.

I don't know of any issues Ghansham its, we thought the performances was quite good both from a pricing standpoint as well as a volume standpoint and it could have been mix, mix issue, but we have no real issues going on there.

So looking at the back half of the year in terms of margins in that business should we expect any sort of incremental improvement as you push through some pricing, assuming that volumes hold with 2Q level, is that fair?

I don't know that you don't see a awful lot of pricing where you will see some pricing in the second half of the year as we recover some product contract pricing. I think you would see margins probably staying about like they have been for the six months let me say.

But your visibility on volumes seem okay for that business.

Visibility seems pretty good and as Charlie said the only thing we obviously are seeing down year-over-year is the coke side which I suspect is going to continue to have the housing.

Right.

There's nothing that it raises a red flag to me on the consumer side over the balance of the year.

Buton the flip side, do you see any benefit from the average consumer the U.S. staying at home and we've read a lot about at home consumption increasing as people are trying to save their incremental dollars. Do you still expect some sort of incremental benefit in that business from that phenomenon?

Ghansham, I do. I think we said in the first quarter, we've seen a pound of dough basically flat and normally dough starts to tail off in the first quarter. We've seen frozen concentrate which is been up and while the years it's been down, last ten years it's been on a downward trend, which is a startling an indication to us that the consumer is staying home, easing at home and buying snacks and preparing more food at home, which is beneficial to our consumer businesses.

Okay. That's very helpful. Thanks so much.

Thank you, Ghansham.

We have a follow-up question from Mr. George Staphos from Banc of America Securities. Please proceed with your question.

Thanks guys. Thanks operator. I just wanted to take you back on Ghansham's question. One thing that I had a follow on is... if consumers are already eating more at home and as you relate it Harris, volumes ex the coke business seem to be pretty good. Why did we see a deceleration in 2Q relative to the first quarter revenue trend? Is there anything that's fixed item and I have got to think that the coke business was weak in the first quarter as well?

George, I don't know that anything was much weaker in the first quarter. Deceleration of... I can't think of anything George, frankly.

Okay. Okay.

We'll look into it and we'll discuss it with you George.

Okay. And on the margin front perhaps the fact that last year when did you start having difficulty with the flexible business?

In the second quarter.

So, and that's going to likely be a lower margin business, won't it be

That's right.

So if it was running a great amount of volume this quarter, maybe that was the reason more on a percentage basis, margins were not as strong as first quarter?

That could be a good explanation. Because clearly we had sales increases in there, but we will check on that.

Okay. All right, fair enough. Charlie, on working capital, I know you are pleased with the progress. But what else should we expect the rest of this year and just thinking about it in dollar terms maybe so much simplistically, what should we expect this year? Should it be a use of cash or a source of cash?

I'd expecting that I don't have a reforecasted cash for the whole year but the... with the ordinary pattern, certainly is that we use cash in the first and second quarter and free it up in the third, and then, especially free it up in the fourth. So as it relates to working capital, specifically, I think I mentioned the 42 days at the beginning of the year. We would expect and our goal was to have that reduced. These are internal calculations that we can reduce to an average of 39. So, we expect some improvement in days. I would expect dollars would tend to be flattish, it's simply because of the exchange rates in growth.

Okay.

So, I certainly expect to see this short fall in the first and second quarter's turnaround. I expect that an overall operating cash and the working capital components to balance themselves out as well.

Okay. Given that you are to your credit reducing discretionary spending and we're seeing a cheer upon corporate and SG&A, if that's the mind that... how are you ratcheting up hurdle rates either on productivity projects or on or in general capital investments? Can you give us a sense and could CapEx be, I know it's early, but could CapEx be somewhat lower next year given what you're seeing right now or is it way too early to call that?

No. We certainly don't have any initiative in place to try to significantly reduce capital spending. Again two-thirds of our spending is profit generating. And so it wouldn't serve us to try to reduce that. Our discretionary spending is more around things like travel and costs that perhaps are not directly related to customers or related to growth. So we're being pretty judicious in the overall standing program.

Okay. Last and I'll it turn over as we think out through the end of year; you said you have largely done buying or paying down debt. As over time the company has a valid talk of acquisition, its difficult to handicap I know but should we... come December, the analyst meeting, do you expect that we'll be talking about perhaps some additional businesses that you have acquired or do you think the hours are more like looking what you seeing right now, is that you could be in a position of buyback of more stock? Thanks guys.

George, I would hope that when we get to the analyst meeting we would talk about some businesses that we've acquired and ration out those and what they are going to add to 2009, if we don't do that for whatever reason, I can't speculate about what the other naturals might be.

I understand. All right guys, thanks very much.

Thank you, George.

Bye-bye.

Our next question comes from Mark Wilde from Deutsche Bank. Please proceed with your question.

Just a couple of follow-up issues. Harris is it possible in any of your businesses that have an early read on how people are preparing for the holiday season? I know that this is kind of the time a year when a lot of producers start to ramp up for that holiday season?

Mark, I think it's probably a little bit early for that. We are generally an early indicator, because we do see some of this, but what we are hearing from the customers is cautiously optimistic about the balance of the year. The proof to that is when they stop placing new orders and but it's a little too early. That was the reason my response to you about the POP, that will start kicking in the next 30 days. And I would say, the last month or so, has been what we would have expected and some nice improvement. But it's still growing there.

Okay. And then the other question I have just on the acquisition side, I just wonder whether... with perhaps some converters being squeezed by cost right now. And then the fact that it's probably a more challenging market for... from a financing standpoint, whether this really... from a couple of different dimensions puts you in a better position from an acquisition standpoint than you've been in over the last couple of years?

We keep our balance sheet strong. So we can take advantage of those opportunities when they do present themselves Mark. And my history says in times like these you normally do find opportunities that are opportunities of that because of the consistency of what you just said. But I would hesitate to speculate anymore about any type of acquisition that I've already done.

That's fine. We'll keep an eye on you.

Okay. Thank you.

Thank you.

There are no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

Well, thank you very much. And let me again thank all of you for joining us today. We appreciate your interest in the company and look forward to talking to you in the near future. Thank you, again.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.