Sonoco Products Co (SON) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Sonoco third quarter earnings conference. My name is Kelera (ph) and I will be your coordinator today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. If you require assistance during the call, please press star followed by zero and a coordinator will be happy to assist you.

As a reminder, this conference is being recorded for replay purposes.

I'd now like to turn the presentation over to your host for today's call, Allan Cecil, vice president of investor relations. Please proceed, sir.

Good morning and thank you for joining us for Sonoco's third quarter teleconference. With me today are Harris DeLoach, our president and CEO, and Charles Hupfer, our vice president and CFO.

First let me say we hope this change in our traditional reporting date and time has not been an inconvenience. The reason that we have done this is because we have reduced the number of accounting personnel as part of our previously announced $60 million in structural cost reductions that we made in August. So, consequently, we are extended our closing process by a couple of days, and the result is that we have had to change this conference call by a couple of days.

First, permit me to remind you that today's conference contains forward looking statements based on current expectations and certainly are not guarantees of future performance. Additional information about factors that could cause different results and about the company's use of non-GAAP financial measures is available on forms 10K, 10Q and 8K filed with the S.E.C.

For those who may not have seen the third quarter release earlier this morning, and -- and it's still early, I certainly -- certainly in other time zones, we reported earnings per diluted share were 14 cents versus 30 cents for the same period last year.

Our reported earnings in this year's third quarter included restructuring charges of 16 cents per share compared with restructureing charges of 4 cents in '02. The restructuring charge relates to the previously announced $60 million in cost structure reductions. As anticipated, third quarter earnings were also impacted by approximately 4 cents per share in higher pension and post retirement expenses.

In September, we announced a definitive agreement to sell our high density film business. Therefore, results from this business for all periods have been collapsed into one line in the condensed consolidated statements of income and under assets and liabilities in the condensed consolidated balance sheets. This expected disposition will modify the $60 million in cost reductions to the targeted -- approximate $54 million.

For the third quarter, we had flat year over year sales. This primarily resulted from lower volumes in most of our businesses, with some favorable impact coming from foreign exchange. The company has identified a possible impairment on approximately $20 million of operational assets in Asia. Should an impairment be found, it would be recorded in the third quarter, if known before we file our financials with the S.E.C. Otherwise, it would be recorded in the fourth should it exist. If fully impaired, the charge would be about 8 cents per diluted share assuming that we determine there is an impairment.

Looking forward in the industrial segment, there has been no significant change in demand for our engineered carriers and paper operations. However, consumer demand is fuming an increase in the number of new products entering our consumer products pipeline, many of which has just been introduced or are expected to be prior to the year end, including the first hermetic single wrap composite package in North America in the snack food, powdered beverage and pet food markets.

We also expect to introduce our new flexible, retortable, stand-up pouch for pet food and add new introductions to the multilayer, high barrier and aseptic plastic bottle which we recently introduced on the West coast containing a soy-based nutraceutical drink.

Having further reduced our overall cost structure, continued our productivity improvement, begun filling our consumer pipeline with new products and reached an agreement to sell our high density film business with its exposure to the more cyclical high density resin markets, we believe we have significantly further improved an already strong position to benefit from up-ticks in demand in the markets we serve.

Contemplating completion of our high density sale during the fourth quarter, we expect our EPS in the fourth quarter to be in the range of 80 to 84 cents, including an estimated gain on the sale of high density of 52 cents per diluted share, but not including future restructuring charges which cannot be estimated at this time or the impact of asset impairment charges, if there are any.

So, with that preface, I'll now turn the meeting over to our CFO, Charlie Hupfer.

Thank you, Allan. As we have noted, sales were $688 million. That's up modestly from last year, two-tenths of a percent, EPS is 14 cents per share, down 53 cents compared with the 30 cents last year.

To further analyze those numbers let me give you a chart that I have in front of me that will break down the different categories, and the columns that I have across the top are just the category, then the as-reported numbers would be the second column. The third column would be restructuring, and the fourth quarter column would be without restructuring. It's just the difference between the second and third columns.

EBIT as reported was $24.6 million, and the restructuring charge that we took was $24.2 million. So, without restructuring we have EBIT of $48.8 million and that ties into the segment reporting numbers that show industrial at $29 million and consumer at $19.8 million. That's the breakdown of the EBIT line.

So, the next category is interest net and that's a negative $12.5 million, and would move all the way to the fourth column. The next line is tax to the negative $4.3 million, and in the restructuring column, we have a negative $8.5 million, and sowithout restructuring or the fourth column is negative $12.8 million.

Equity in affiliates and minority interest as reported is 2.6. In restructuring we have a negative 0.1, and so the fourth column would show a positive $2.5 million, and then income from discontinued operations is $3.3 million, in the as-reported column, and $3.3 million in the fourth column.

So, therefore, net income is $13.7 million as reported. Restructuring is $15.6 million, and the fourth column would be $29.3 million. And in EPS terms, as reported is 14 cents, restructuring is 16 cents, and the last column would then be the sum of those two, or 30 cents.

Now, I won't go into that much detail on the 2002 numbers, but following the same format, EBIT in 2002 as reported was $53.4 million, the restructuring was $6.3 million, and so, therefore, in the fourth column without restructuring is $59.7 million.

In EPS terms, last year was 30 cents, as reported. Restructuring column would have 4 cents, so without restructuring would be 34 cents. So, from now on, my comments are going to be following that fourth column, so I'll comment on EBIT of $59.7 million last year compared with $48.8 million this year, and EPS of 34 cents, compared with 30 cents this year.

Before I get to the sales and EBIT bridge, let me talk a little bit about the restructuring charge of $24.2 million. The starting point is $24.2 million, $19.6 million of that relates to our August 18th announcement where we announced that we would eliminate 340 positions at a cost of $22 million. So, we still have some restructuring charge to take on that August 18 announcement.

We also had $3.5 million related to the closure of two plants and a prior year adjustment of $1.8 million. So, those three numbers, 19.6, 3.5 and 1.8 add up to the $24.2 million and of course I have already given you the tax effect, and it comes down to 16 cents per share.

On the plans that we have already announced, we would expect 17 more million dollars, and that will -- most of that I would expect would fall into the fourth quarter, so we'll certainly have a restructuring charge in the fourth quarter.

The total cost of all of the plans that have been announced to date should equal $40 million. Our savings should equal $42 million. So, we have in fact have a one-year pay back on the restructuring that has been announced to date.

Let me comment on one other unusual item in our P&L, and that's this line called income from discontinued operations. The accounting for our business, when that business is put up for sale is that you collapse the whole P&L into one line item on the income statement is called discontinued operations. That's the $3.3 million. That's essentially the high density film division's income statement from sales all the way to net income, collapsed into that one item. Then we restate the prior years on the -- on the same basis.

We also collapse the assets that are held in the high density film division into a line item on the balance sheet called assets held for sale, and that would be $75.6 million, and we collapse the liabilities into a category called something like liabilities held for assets for sale -- liabilities related for assets held for sale, and that would be $20.2 million.

That's the accounting for the proposed sale of the high density film division that we announced some weeks ago. We're selling that division for $85 million in cash, and $38 million in notes and preferred interest, and as was noted, we do expect a gain in our best estimate right now 52 cents per share. That will undoubtedly be a fourth quarter event.

Let me make a couple of other comments on the P&L. This was said we have 30 cents, down 4 cents. That essentially is pension. Pension is 4 cents in this quarter, so EPS was flat with last year's quarter. That's a trend that we have seen for some time now where adjusting for pension earnings have been flat year over year.

In terms of interest the interest is $1.1 million favorable, and that's largely because we have lower balances principally in our commercial paper program. Lower rates, about 80 basis points this year compared with last year. And lower rates in Europe, especially in Turkey and in Poland. Those would be the principle reasons why interest is favorable.

The tax rate is 35.2%, which is favorable to last year, and inline with the previous quarters. Our gross profit margin is -- you cannot see this from the numbers, but the gross profit margin is 17.5% compared with 18.7% last year, so, we are down 1.2 percentage points. About 0.7 of that is pension alone.

Now, let me turn to the sales bridge that we ordinarily give you. This is another chart. The columns, of course, are first category, the next column would be Sonoco total, the next column is industrial, and then the next column is consumer.

And we'll start with 2002 sales, and 2002 sales are -- under Sonoco column are $686.8 million. Under the industrial column, sales are $359.1 million, and under the consumer column, sales are $308.7 million.

Now, what we're trying to do here is, of course, reconcile from last year's 2002 sales to this year's 2003 sales, and the first reconciling item is volume. And volume in the Sonoco or total column is a negative $19.6 million.

In the industrial column, it is a negative $5.8 million, and in the consumer column, it's a negative $13.8 million. I will come back and talk about each of these individual categories in a minute.

Price is the next reconciling item, and that's a negative $4.2 million in the Sonoco column, a negative 5.1 in the industrial column, and a positive 0.9 or $900,000 in the consumer column.

Acquisitions is a positive $5.1 million in total, $3.4 million industrial, $1.7 million consumer. And then the last reconciling item, is exchange/other, and that's $20 million in the total Sonoco column, made up of 11.9 in the industrial column and 8.1 in the consumer column.

So, those numbers should add up to the 2003 totals. The 2003 totals are $688.1 million in the total column, $363.5 million in the industrial column and $305.6 in the consumer column.

So, let me talk about those categories generally, and then I'll move on and give you an EBIT bridge.

But starting with the industrial -- well, yes. Actually starting with volume and of course, I said volume was $19.6 million negative. On the industrial side, that's $5.8 million negative.

What we see here when we look behind the numbers is essentially that our molded plastics business and our baker reels business, and we have talked about these in the past. Molded plastics has volume that has been in decline. They sell into the food filtration, the wire and textile industry. Their volume has generally been down 10% or greater. So, those two businesses combined had a volume shortfall in dollar terms of $6.9 million, which means that the rest of the industrial business was positive.

And what we see when we look behind that is essentially in our tube, core and paper business in North America, we have sort of a mixed position where tubes and cores had some negative volume, or volume declines year over year, largely with continued weakness in our paper mill core segment and in our textile tube segment.

On the other hand, our paper group had improved sales volume year over year. Most of that was coming from the recovered paper operation with slight declines in our trade sales of paperboard itself.

When we look to Europe, we see a flat situation where our tube and core group was up overall. They were up about 5%, and looking behind that, we see some pretty big increases in certain places like Turkey, which was up 49%, Poland, which was up 43%. But on the paper side, that was offset by declines in volume. Most of that coming out of one of our French mills. Then protective packaging was strong and positive for the quarter. Continued good sales into the white goods industry, plus their new bulk pack product.

So, again, volume is -- in the industrial sector is largely made up of molded plastics and baker negative offset by paper protective packaging positive and some declines in our tube and core group in North America.

Now, turning to the consumer -- no, that's -- let me look at price cost first. OK. I'm sorry. Turning to the consumer segment. I got my notes mixed up a little bit. I'm going to talk about volume in the consumer segment before I move on and talk about price.

In the consumer segment, volume was down $13.8 million. More that half of that is made newspaper the flexibles group. There, frankly, there has been some share loss, and more of that decline is coming from the markets that we sell into. Some of our customers have just had weak quarter over quarter performances, and that's reflected in our business, and in some instances, it's case where last year they had promotions going on that they were filling up the pipeline, and we don't have that this year.

So, while there has been some share loss, we believe most of the decline and the decline is more than half of that $13.million is coming from the business -- customers that we serve, and weaknesses in their underlying business.

We did see some declines on the ridged paper and plastics side as well. Their volume was down in the snack concentrate and dough category. But volume was up nicely in the kulk (ph) category, adhesives and sealers where we have seen good increases there.

Moving down to the next reconciling item, price. Price is a negative $4.2 million in total, $5.1 million added on the industrial segment and all of that is coming from recovered paper.

OCC last year averaged roughly -- actually last year averaged over $100 a ton, and this year it's more like $75 a ton.

So, price is down significantly in the recovered paper group. We'll see in a minute, though, when we get to EBIT that -- you know, that's a positive on our paper decision.

Price was up in the industrial products division, reflecting a second quarter price increase that was announced in the 7.5% range, and that was -- that was implemented in the second quarter and some of that is found as an increase here in the third quarter and in our Latin American operations, they have been very successful in increases pricing to match inflation.

On the consumer side, price was up $900,000, and we have seen modest increases in rigid paper and plastic, that's composite can and also in flexibles.

Acquisitions of the $5.1 million in the industrial category. The acquisitions are -- two acquisitions we made last year in the baker group and in the consumer category, it's Keating group. And then exchange, $20 million in total, 18.8 of that is exchange and most of that is the euro. The euro appreciated 17% year over year.

Now, let me turn to the EBIT bridge. Now, I'll give you the same bridge in the same format. Four lines or columns. First one is category. But then the second one is Sonoco, the third is industrial, and the fourth is consumer. 2002 EBIT was $59.7 million. That's in total. Industrial was $36 million, and consumer, $23.7. The first reconciling item is volume. Volume was a negative $5.9 million.

In the industrial sector, it's a negative $2.5 million and in the consumer, it's a negative $3.4 million. Price cost is a negative $800,000, so that's 0.8 in total 0.4 in the industrial side, 0.4 in the consumer side.

Productivity is a positive $4.1 million. That's 0.2 negative in industrial and 4.3 positive in consumer. Inflation is $4.7 million negative, $3.4 million of that is industrial, $1.3 million is consumer, and other, the last reconciling item is negative $3.7 million in total $1.1 million of that in the industrial group, $2.6 million in the consumer group.

So, those numbers should add up to the 2003 EBIT of $48.8 million in total, $28.4 million industrial, and $20.3 million consumer.

Let me make a couple of comments about the total column and then a few details about the industrial and consumer. What we're doing with this EBIT bridge is reconciling from last year's 59.7 to this year's 48.8. That's a difference of $10.9 million, $7.6 of that is in the industrial segment, $3.4 million in the consumer segment. The $5.9 million of volume, that represents the profit impact of the volume decline that I just talked about on the previous chart. That's the volume decline of 19.6. This is the profit impact.

$800,000 or 0.8 negative price cost. That's largely neutral. This is the best price cost position that we have seen in the last four quarters. We'll see in a minute that we really have recovered those cost increases and in North America we're actually positive.

Productivity is $4.1 million in total and I'll talk in a minute about the negative productivity that we have in the industrial segment.

Inflation is a negative $4.7 million. Inflation is largely made up of wages, which we had 2 to 2.5% increases last year. So that's a year over year difference. The next biggest item would be energy costs. Then in the last category, other that's a negative $3.7 million, pension on a pretax basis is $6.7 million, of that $3.7 million.

What we actually have are increases, and see have seen it especially in Europe and in our molded plastics operation, they have reduced their selling and administrative costs. They have reduced their plant fixed costs. That positive is coming through in this other line and offsetting the negative pension.

When I look at the volume, the $2.5 million in the industrial sector, again, that's largely coming from our molded plastics operation, and our baker operation. And in fact, $2.9 million of that -- of that negative 2.5 is from those two operations. I have already talked about their volume shortfalls.

So, what that means is that we have still some -- some decline in the U.S. in terms of volume in our combined industrial products and paper operations as I described earlier, but we have clearly seen volume increases in Europe and in Asia and in protective packaging.

And they offset each other and so most the decline that falls through in total (inaudible) coming from crolin (ph) and baker. On a price cost basis and now I am going down the industrial sector, price cost in the industrial sector is a negative $400,000. Can we look behind those numbers and as I just mentioned a minute we actually see positive price cost in our North American tube core and paper operations.

So what this is, is actually a combination of really two things. One is we did have two price increases that I mentioned on the previous slide and we had the lower OCC cost or basically lower furnished costs and now those lower costs clearly reduced the selling recovery of paper and that's what caused the decline that we saw in sales. But on the other side it reduces the material costs going into the paper division. In fact, the paper division's material costs were 26% less this year than they were last year. 26%, that's on a material cost per ton basis. When you put all of that together, we're actually positive in North America, tube core and paper.

Some slight negatives in Europe where while we have volume gains, we did give up some of that in price, and that was purposefully to regain some share there, and then we have some slight declines in some of our other businesses. Much of that is formula driven.

Productivity is $200,000 negative in the industrial sector. That's all coming from our -- basically our paper division. Our paper division had 131 more machine days down in 2003 than they had in 2002. The paper machine's down, productivity slides pretty quickly in that group. That's the principle reason for the decline. We did see about a half million dollars worth of decline in Europe. That's largely resulting from the transfer of business out of the plant that we have closed in France to other businesses and some of the inefficiency around that transfer.

Inflation was a negative $3.4 million in the industrial sector. As I said earlier, that's wages and energy. Of that $3.4 in the industrial -- in the industrial segment, $2.7 million of that is in tube core and paper in North America, and 2.1 of that is energy alone. So, most of that decline is in energy.

Now, I might point out here that we are embarking on a program that will use more hedging year over year to take some of the volatility out of our energy costs in the paper group. Then in other in industrial is a negative $1.1 million, and that's all pension -- pension in fact is $3.3 million of that, because as I said earlier, we have had nice reductions in plant, fixed costs and division S & A in some of our other divisions.

Now looking at the consumer group, volume is a negative $3.4 million. That's again the volume declines in both flexibles and in rigid paper and plastics. Price cost is a negative $400,000, and -- we have had modest price increases and modest cost increases in both rigid paper and plastics and in flexibles that net out to this $400,000.

Productivity is a very positive $4.3 million. Most of that is in the recovered -- I'm sorry, the rigid paper and plastics group, converting efficiencies is a result of our fixed segment, our lien programs. Their scrap has improved and material substitution. $4 million of that is coming out of our domestic rigid paper and plastics group.

Inflation is a negative $1.3 million. That's wages and other, again, $2.6, that's largely pension. The other comments that I would make before I'm -- before I leave is I want to talk a little bit about cash flow. Operating cash is $121 million for the quarter. That's $22 million more than last year. So, we are real pleased with our operating cash flow. A number that we have described in the past of free cash flow is that operating cash, less capital spending and dividends. That's $25 million greater than last year. I'm pleased about the performance in cash flow.

What this represents is a -- is a significant turn-around from the first and second quarters, and a lot of it is driven by improvement in our networking capital in this third quarter. That's a result of some very conscious programs to bring working capital in line. I described them -- I described that we were going to do that at this last conference call.

Then lastly, the balance sheet, the balance sheet remains strong. Total debt -- we show a paydown of $58 million, again largely coming from our improved cash flow. Debt to total capital, as we calculated at the beginning of the year was $44.5%, at this September date, it's 41.7. We have used our cash to pay down debt, and improve our debt to total capital.

Allan, that's the extent of my comments.

Thank you, Charlie. I think we're ready to open it up for questions.

Ladies and gentlemen. If would you like to ask a question, please key star-one on your touch-tone phone. If your questions have been answered, or you wish to withdraw your question, please key star-two. Again, to ask a question, please key star-one on your touch tone phone.

Your first question comes from George Staphos of Banc of America Securities. Please go ahead, sir.

Good morning. Hey, guys. On the flexible packaging line item, can you comment in terms of why you think you're losing share and what's going on in the market? I had couple of follow-ons.

George, this is Harris.

Hey, Harris. How are you?

Let me start to put Charlie's comments in perspective. I think he said there was some $13 million of decline in the consumer side. Flexibles, I'm not sure how much was there.

I said more than half.

More than half of that. But the market share loss or the lost business was less than $1 million. So, we're not talking about a huge amount of money.

OK. Thank you.

Now, in terms of the new products that you have been working on this year, these were I think, first discussed at large last year at your December meeting. So, I assume that they're progressing the way you would like them to, would that be fair to say?

George, I don't think any products have progressed as rapidly as I would like it to, probably the way Charles expected them to. We have in the market today in the grocery chain, in the Wal-Marts of the world and Orville Redenbacher product. We have a Sunkiss product or Sara Lee product that is in the grocery stores there. We still have a major cookie that is going to be launched be. It's been delayed, as you know, but -- so, I would say it's going well. On the SonoWrap side, we had the blow-molded product in the nutraceuticals that Charlie talked about. I'm pleased where it's going.

I guess the follow-on to that is the margins in consumer continue to get to levels -- I haven't seen in the time that I have covered this company. Every quarter has been a record, but not the kind that you would like. And I guess if the new products are starting to kick in, and high density film has now been removed from the portfolio, and that was a drag on your margin, when do you expect that you will see an increase in margins in the consumer segments?

George, I would expect an increase in the margins coming into next year. You have got a couple of things different. Obviously, flexibles margins primarily because of some operating issues -- operating issues, frankly cautioned by the loss of volume -- caused by the loss of volume or the downturn in volumes. The high density film margins have been somewhat of a drag.

And we also have in that sector today that we have had some years in the past, the services of business, which is a low margin -- lower margin business. But I would expect to see some improvement in that -- in the first quarter of next year.

But it's a long ways before we get back to 10% or better that we have seen?

I would hope that we would be back there next year, George.

All right. I'll be back, guys, thanks.

Thank you.

Your next question comes from Mark Connelly with Credit Suisse First Boston.

Thank you. Just two questions, Harris. First, can you give as you little color on what's going on in Asia both in terms of demand and in terms of waste paper supply?

And second, I wonder if you could comment on any expectations or aspirations that you have for further acquisitions?

I'll be glad to, Mark. With regard to Asia first, I think Charlie mentioned on the tube side, we have seen some demand pick up in Asia. In discussions which is not meaningful to our P&L, but in discussions with our Japanese affiliate, they're seeing pickup in Japan as well. So, I think that bodes well.

As far as waste paper prices in Asia, I think they're basically about flat right now. This is normally the time of the year when we have high generation in this country, and the Asians generally come in and take advantage of this, so I think you're going to see OCC. prices in Asia staying where they are, maybe drifting down a little bit, probably for the next quarter or so, and then who knows. Hopefully that answers that.

On the -- on the acquisition side, you know, I guess you'd follow what -- Mark, what I have really been talking about, and that is are we trying to change the character of the business of this company from being a 55% industrial, 45% in consumer to virtually flipping that. So, to do that, the growth has to be on -- greater growth has to be on the industrial side of the consume -- the consumer side of the business. So, that is where I would see acquisitions focus being --having said that, however, and I have said this in the past, the industrial side of our business, both particularly in North America and in Europe, there are in fact -- we think, consolidation opportunities in both of those markets, and we certainly will take advantage of the -- those efforts when they appear and the synergistic effects that go along with those. Hopefully that gives you some flavor.

Thanks very much.

You're welcome, Mark.

Your next question comes from Edings Thibault of Morgan Stanley. Please go ahead.

Thanks. Good morning, gentlemen.

Good morning.

Great. Thanks. Just a question to focus in again on the consumer business. I think last quarter you had reported some contract losses due to some of the operating issues at your plant. Is that factoring in to some the negative volume number in this quarter as well, and when can we expect to sort of cycle through, that sort of market share loss to next year?

Mark, I don't think that the contract losses that we talked about really have impacted this quarter in terms of contract business losses. I mentioned in response to George's question that -- that the number of -- was less than $1 million of business lost this quarter.

But I think where it has had an impact, and we talked about this before, those operational issues that we incurred the first, second, third and into the fourth quarter of last year, certainly manifested themselves in the amount of new business that we were trying to bring into those plants, because we were having operating issues, and frankly, our sales force was not bringing in the new business.

The lead time in this business is comparatively long, and so I would have to say that those operating issues did impact the quarter in that regard. As I have said before, the operating issues and all of those -- in all of those plants are much improved. He think you will see us have improved sales in that business certainly going into the fourth quarter of next year. So, hopefully that gives you some flavor for your question.

Yes, it does. Thanks. Just, you know, you guys mentioned that your price costs basis in North America was probably as good as it's been for the last several quarters. But we're hearing about higher resin costs now 15% higher costs of polyethylene going into the fourth quarter and I just want to make sure that our -- or understand how long you think it will take you to cycle through those higher resin costs and begin to potentially --presumably that will cause a little bit of negative pressure on the price cost line, at least in the consumer business next quarter when you expect to be through that.

Edings, it could and probably should. But let me take high density film out of the discussion, because obviously high density film is a business in and of it it's own. As long as we have that business and it's set to close the first week or so in November. We will be work with the other -- the new owners to perfect the strategy on how to deal with the price increases and try to put those into the market.

So let me take high density film out of it. The remaining plastics business businesses that we have, most, if not all of those businesses are tied to the escalators, de-escalators in contracts. And it would really depend upon the date that we were able to raise prices contractually in those businesses. Without looking at the specific contract, most of those have clearly quarterly or year-end adjustment periods mid-year. So, we are coming up obviously on the end of the year. So I wouldn't think that would be a meaningful impact to us.

Got it. So, there will be some pressure in the fourth and would you expect to be through it.

I would think so, Edings.

Got it.

You're welcome.

The next question comes from Mike Meek of Atlantic Investments. Please go ahead.

Good morning. It's actually Alex Rupers.

Hello, Alex.

First a suggestion to Charlie and Allan. There's a lot of numbers that you kindly released verbally on the call and all of us are writing frantically to keep up with you, all of those bridges that you make. Is it possible perhaps to consider a -- an attachment to your news release given that you give these number anyway, that would be helpful for us and perhaps other people as well. That's just -- that's just a suggestion.

It's a suggestion. We'll take it as a suggestion, if we have heard it before. The issue for us is that the --the bridges probably are -- you know, are certainly information that we use internally to evaluate our businesses to help us manage our businesses. But they're probably filled with many more estimates to get at things like volume versus mix, versus price than the account -- than the -- than the accounting records themselves. So, we'll have to think about that. But I take your point.

OK. And the other thing I wanted to discuss here, and just get your reaction more public forum, we have discussed this between us previously, is the issue of share buy-back and the objectives of the company. I mean, if we go back to quite a few of your presentations, there's this goal to be a $4 billion company, which is a laudable goal, particularly if you can get there with organic growth and acquisitions.

A simple look back to the last ten years has seen the share price fluctuate from $18 up to $38. We're at 22 despite the fact that the company which has such a good market position in so many areas is throwing after your generous dividends. $120 to $150 million a year. I don't know if it's been like that in the last ten years. That's billion dollar plus easily of free cash or after dividends and the share price has gone nowhere. A lot of that has gone to acquisitions, restructuring, repositioning the company, and of course, you try to continue to do that, but we haven't had any acquisitions for two years. You have got the grocery back sale. You have got a $3. whatever dividend.

You have to look at using your current authority of at least 5 million shares if not increase to buy back shares at least to make up for the dilution of the grocery back, and this does not, underscore, restrict your ability to do acquisitions. It does not hurt your debt rating to do $100 million or $200 million in the next year of share repurchase. I really want your response in this forum and obviously invite other people to give their thoughts on this as well.

Alex, I'll be glad to respond to that rather than Charlie. As you certainly well know, we have bought back a fair amount of stock over the last few years. We bought back almost 5 million shares, I think, in -- by the end of 2000. And the focus of this company has been on cash flow generation. If you look back in the time frame that you are talking about of the 1990's, the cash flow in this company was considerably less than it has been the last few years, because this management team is focused on cash flow. And we will continue to do that.

We think that -- as we have told you, that we think that the -- and the board of directors of this company has discussed that the long term growth of this company is better served by trying to grow the top line, and through organic and new product growth as well as acquisitions, and we have talked in response, I think, to Mark and Edings about where those acquisitions will be. We're not opposed to stock buy-backs, we will do that when it's appropriate, and at this point in time, we don't think that's the best use of our capital.

OK. Well, I appreciate that response. And I applaud you and your time for maximizing the cash flows. I guess we have a disagreement as to what the appropriate time. I think the appropriate time would be now with an asset sale of the size that you are getting shortly as well as the fact that we have had two years of no acquisitions so whatever, so I think that you can attack the noble goal of -- enhancing shareholder value, because that's the only real objective that you and the board should go after as opposed to becoming a $4 billion company.

I mean, maybe one leads to the other objective. I'm sure that's what you have in mind but you can attack these objectives with -- on many fronts. I'm not suggesting that you shouldn't do acquisitions. I suggest, as you know. That's the last thing that I would suggest. You can certainly do a multiple faceted approach. You pay very good dividends. You should definitely consider an active share buy-back program that would give people the idea that you're focused on enhancing shareholder value. I'm not going to take this kind of an anemic share price performance in a high cash regenerating company lying down. You have to do it on all fronts. That's something that I would like to discuss openly here and hear other people's opinions along the way.

I appreciate that. I think if you would look back in -- to September or October or August to September of the year 2000 and you had bought your Sonoco stock, you would have paid somewhere between $16.50 and $18 a share. If you look where it is today and calculate your dividend, there's been a good return. I appreciate it. I take your comments, and I welcome anybody else's comments about it. Thank you very much.

Thank you, Harris.

The next question comes from Ghansham Panjabi of Lehman Brothers.

Good morning, guys. How are you?

Good morning. How are you?

We're starting to see early signs of recovery in the U.S. economy. I was wondering how that affects your outlook for the industrial business?

I think what we have seen is we haven't -- I think the downturn in the industrial side of the business is stopped. I mean, we saw, as I have said before in the first quarter, we saw a fairly robust growth in the business, but that fell off in the second quarter and the third quarter we have seen just about flat.

We see some lights at the end of the tunnel one week and the next week, it's bust. I guess I would characterize our North America business overall as bumping along the bottom. I mention we have seen some up-tick in Asia, and we have seen some up-tick in Turkey and Greece and other places like that. We're cautiously optimistic that we are at the bottom and are seeing an upturn.

In terms of the composite, are you targeting the coffee market. Procter & Gamble is switching their Folgers into plastics. You have talked about coffee in the past few quarters as a potential market for composite (inaudible) your thoughts on that.

Ghansham, P & G has been working on that consumer for two, three, four years on the plastic container. We have obviously known that. But the answer is yes. We are targeting it, and it is -- it's both the other two majors.

So, we should not necessarily read this as a lost opportunity, then?

I think? I time something converts to plastic, it's a lost opportunity. But it's something we have known it's been a lost opportunity the last three or four years while we have been talking about the others.

Thanks. Good luck in the quarter

The next question comes from Timothy Burns of Cranial Capital. Please go ahead.

Good morning, everybody.

Hello, Tim.

Charlie, the -- Harris, I'm sorry -- I guess you guys have made a lot of investments in order to review and become smart and intelligent on a host of new packaging technologies, and we're seeing some of the stuff come through the pipeline. I just wondered if you might shed some light on, you know, are there minefields out there that you will avoid because of this? Are there gold mines that you will extract a beautiful harvest from and what's the timing of I guess this whole investment R&D?

Tim, good question. You know, I -- there's obvious mine fields out there that we would - we will try to avoid and rather than getting into those, let me define it like this. We think that the harvest, if you will are in primarily niche markets. That's where you have seen us target the nutraceutical bottles. You have seen us target the SonoWrap. If you go back over the 100 year history of this company, that's where we have literally maintained our margins and have had good opportunities.

Hopefully when we get together in December and I hope that you will be there, we will have some more examples of those types of products for you that we can show visually better than trying to talk about over radio, over a conference call.

OK. So, I guess the other question that I had is the -- I wasn't able to listen to the call, if you had one, on the sale of the high density film business. I guess with the potential for future resin volatility, it's nice to have that one gone hopefully, but what kind of EBITDA stream are we going to lose? I don't know if Allan or Charlie could answer that?

We would answer that I guess in a round-about way. The one calculation that we have made is in a we would expect dilution, and we would expect dilution of about 5 cents per share.

OK. OK. So, just go back up the income statement that way?

Right.

OK. All right. That's -- that's good. And in terms of I guess the paper franchise, as a whole, and you got of got the flip-flop of results in productivity and performance, North America to the -- to the European market, is there more ground to be gained in terms of your paper technology becoming up to snuff in Europe, and as a follow-up, I guess, are you guys fearful still of the whole sucking sound coming from Asia on the wastepaper and the potential price impact on cost?

Did you say cheerful or fearful?

Fearful. Excuse me.

Tim, obviously, we spend a lot of R&D dollars on our paper technology, and we think that that gives us a significant comparative advantage in North America. We move that technology around the globe, and probably there are some opportunities in Europe.

The biggest issue in Europe, though, is into the. So much one of technology as the over-capacity situation in Europe. I think that -- the consolidation opportunities that we talked about in Europe.

Let me comment on the productivity in the paper group. It's important to realize this. We have targeted productivity improvement plans in -- in every one of our businesses. Over the last few years, paper has been at the top of the list in productivity achievements year after year using both lien and Sik Sigma (ph) and they are on target in the quarter with those. What drove the paper negative volume or productivity this quarter, frankly, was exactly what Charlie talked about. We had 131 more down days than we had in '02. To put it in perspective, there was 239 down days. Starting and stopping of paper machines is a big -- is a big productivity drain.

Some of that was -- there has been a significant emphasis this quarter on working capital and inventories. As I said in the conference call at end of the second quarter, in response to a question about where our inventory levels were, I said that they were high. It was a result of improving business conditions we saw in the first quarter.

And we went in to June expecting those to continue, and so they didn't, obviously, so we appropriately took the you down time in this quarter to lower those inventory levels, and they are -- they are in line with where they should be. So, that's the big driver, frankly, of the productivity --negative productivity in paper.

Got you. Last question, Harris, is the portfolio now where you want it to be, roughly speaking?

Tim, basically yes. Yes, it is.

OK. I mean it, sounds like operationally you're getting things pretty much under control. The portfolio doesn't have a lot of cats and dogs that you have got to worry about trying to tame each quarter, and you're slowly building up the consumer products business.

So, I mean, eventually, you'll -- you know, business will either improve, I guess, or you'll make an acquisition that will at least provide some future growth, huh?

We will have, I think you give a good analogy of it.

Listen, good luck, guys. Have a nice weekend. Go buckeyes.

Your next question comes from David Leibovitz of Burnham. Please go ahead.

Good morning.

Good morning, David, how are you?

All righty. A few brief questions.. One, how much restructuring do we have to look forward to next calendar year, or are we finally at long last -- hallelujah, praise the lord, over with it this December 31?

I think obvious lit bulk of it is over with. I think that next year there could be a couple of plants that could come down that carry over into next year. I don't know whether the number is three or four or maybe five.

I think when you have a plant network as big as we do, over 300 plants, and we are -- many of these plants are tied in to two specific customers, such as last year, the closing of the Dennison, Texas, plant that was tied into Pillsbury and it was a through the Laurel (ph) operation and Pillsbury decided to consolidate their efforts, I guess, General Mills did after they bought Pillsbury. We've always had those occurrences. I think we have seen in the last 18 months where we have taken some $100 million out of the cost structure of this company, you should not expect that going forward.

How many of your facilities -- and this leads to a line of questions that I hadn't intended to ask, but how many of your facilities are not dependent on a single customer?

That's a difficult question, but I would say less than a handful, maybe two handsful. Would be totally one customer dependent out of the 305 or 310 plants, David. Very small minority.

Also, in talking to the consumer sector, you had said at various and you sundry forums that the goal was to have the consumer piece of the business exceed the -- exceed the industrial commercial side in the foreseeable future. How much longer might be before that becomes a reality, and need it come via an acquisition or can it be done internally?

Obviously, the high density film business has been reported in our consumer sector, so there's some $180 million or $200 million of sales that are going away. Our goal, David, is to affect that change by the end of 2006 to accomplish that, obviously, again, a lot of that -- some of that, a good portion of that will have to come from acquisitions.

And are you in active discussion about acquisitions at this moment?

I cannot comment on that, David. It would be inappropriate in that I say I would always -- I would always say that we have dialogues going on at any given time that you would ask me that question, but it would be inappropriate for me to comment further on that?

Also, unless I missed it, I had very poor and very low quality reception, did you go into any detail at all about next year?

No, we did not. We will do that in December.

OK. Thank you very much. Look forward to seeing you then.

Yes, your next question comes from George Staphos at Banc of America Securities.

Hey guys, I just wanted to piggyback. Tim had asked you a question on OCC. I was not sure that I had heard the answer. If OCC. costs continue to go up for geographic and secular reasons, you know, historically, that's not been good for your margins. So, do you expect -- or how will you be able to navigate that on a going forward basis.

I think, George, if you look back over the -- I agree with you completely that there have been some secular fundamental changes in the OCC. market over the last, two, three, four, five years. But if you look back historically, we have actually gained margins over those periods of times with the one exception being the third quarter of last year.

I think that, though, if you look back -- well, I don't want to look back. If you look forward, you are going to see more volatility in that commodity, that raw material, and you are also going to see probably the floor is at a higher price than the floor was let's say in the early 1990's. That's because of the increased pressure on OCC?

Obviously, we have strategies in place to deal with that, which would be inappropriate for me to comment on, and we think that we can hand the those swings and protect and grow our margins during that period of time.

The view is while the trend may be up, you know, you will inevitably have down periods along the trend line. That's where you recover the margins. But it -- it will basically require those downswings, correct?

No. I don't -- I'm not necessarily -- I don't necessarily think that. I think we should be able to move pricing and gain margins when it does --when you do have the downturns.

Fair enough. I'll come back to that at some other point in the future. In terms of your payout ratio, how do you think about that? You to have a target over the next several years for your dividend payout relative to earnings. How do you get there?

Well, the way to get there is improve earnings, George. Our payoff ratio is higher than we traditionally like it to be. But we will maintain that payout ratio of the dividend, and we obviously may have to restrict future increases in it until we see earnings improvement.

OK. Is there -- let's say that hold at this level of earnings, which give me your guidance today, is about a buck and a quarter for this year. Is there -- is there a period by which if earnings stay at this level that you would reconsider the payout?

Given the cash flow that we have today, and what we would project, George, I don't think so.

OK. Last -- last -

The dividend level is where it is.

OK. Fair enough. The last question that I have for you, in terms of margins and consumer, again, rough numbers, you're around 6% or 7%, I think in, this past quarter, we talked about maybe getting to 10% by '04 at some point. How F. you have it, how do you expect to bridge to that letter in the next four quarters? What sources do you expect to drive that?

Well, I think it's going to be on the composite can side where the margins are pretty good, but also in -- improve productivity in that business as well as the lower cost structure in that business -- that will improve the margins out. I think improved operating efficiencies on the flexible side will go a long way to in fact do that. The new products that are coming on as they ramp up, frankly, the margins on these products are pretty good, so that's really the bridge to get there.

How much of the new product contribute next year.

George, I don't know, we'll quantify that for new December?

You need composites to grow in '04 to get there?

Well, we will forecast some composite growth in '04.

Thank you, guys.

Bye, George

The next question comes from Daniel Khoshaba of Deutsch Banc.

Good morning, guys. Can you just give us a little bit of color on the end markets for cores and tubes in terms of what market are holding up and which markets are perhaps weak. Construction, consumer, textile, that kind of a thing. A little color on the end markets.

Dan, I'll be glad to do that. Our construction tube, are holding up nicely and in fact growing nicely. The film is growing nicely. The specialty business, where you go from tape cores to any other -- what I just call miscellaneous is probably flat to -- probably flat. Where we're seeing the decline is in the obviously the textile industry in North America.

Right.

And the paper industry in North Carolina -- North Carolina -- the textile industry in North America is North Carolina. Those are the five segments that we play in and that's all of the flavor for them. That's probably a proxy for what's happening in Europe. As well. Asia is growing as I mentioned as is the Turkey Greece area, the Poland, the eastern block countries.

Harris, are there new kind of upstart paper core and tube makers in Asia that -- what's that market look like? I know that there aren't too many, if any, really -- certainly aren't any in North America and I don't think in Europe, but in Asia, are you seeing companies produce cores and tubes?

Dan, I'm not going to -- I don't know the answer to whether or not there's -- there are any upstart companies. As you travel around China, or wherever in Asia, there are literally hundreds of small tube players. I'm not being facetious. It may be a family that hand-winds tubes in the back of their house.

Yes.

So, it's a very fragmented market, but there are no large tube producers such as Sonoco. We think that is an opportunity for us, particularly as China comes on, is on, but is coming on, having to produce and wind at speeds that they will have to wind textiles and other things to compete in the world economy, that's an opportunity for Sonoco to use its technology and process to grow that business.

OK. I don't know if you have the answer offhand, but what has resin costs actually do in the quarter? Did you take higher resin costs this quarter?

Dan, I'm not that close to it but I don't think so. I don't think actually, we saw flat to some declining resin prices. I'm getting a nod from Charlie Hupfer that that's the case.

OK. Then last question, you know, you said that you wanted to kind of flip-flop the percentage of contribution of industrial versus consumer, and grow the consumer business. I guess about what, 55% of sales?

That's correct.

OK. And that's going to probably take some acquisitions, I guess you would agree?

I would agree with that.

-- to get there. Harris, what segments do you look at in the consumer packaging business that to you look attractive and perhaps, you know, warrant some investment, number one, and second part of that is how do you acquire --and -- you know and add value. That's been something that's been very difficult for packaging companies to do in general across all spectrums. You know, most acquisitions don't seem to really work that well in terms of creating shareholder value. What approach are you going to use to be successful in that?

Dan, I think clearly what -- what our focus -- our strategy that we set up a couple of years ago be g one face to the customer on both consumer sides and the industrial side of the business. Getting considerably closer to our major customers, the P & G's, the Nestles, and the Krafts and so forth.

We have composite cans, flexibles, the services business and the new products that we have talked about, the blow-molded layer bottles as well as the SonoWrap. We will look for acquisitions, frankly, that we can make, and we can leverage across our provider solution -- solution provider strategy with those customers in that business. And that's where you will see us target acquisitions.

We have not had acquired $270 million of acquisitions in '01. And the integration of those acquisitions have gone extremely well. They have all met their criteria. So, we think that we are good integrators of acquisitions and we have to be good buyer as well do your point. You cannot pay too much. A good acquisition becomes a good one.

OK. Thanks.

Thank you, Dan.

Your next question comes from Fred Spies of Spies Thornson and Capital Group. Please go ahead.

Yes, thank you.The price slash cost column in Charlie's tables, if you go back the last three or four quarters has gone from $8 million to this one that's almost flat. Should we fully expect that line to cross over this coming quarter and become a positive?

I think that clearly, we have seen it does go back eight quarters and it was positive and going back two years ago, what we see is the phenomenon that Harris was talking about earlier and that's with OCC costs going up, prices and then when the economy slows down. If we go back for some quarters behind that, we would see positive increases, positive price costs in that period of time.

I think what we're more likely to see now is we have our pricing in at the levels that OCC. is at today, and because so, I think what we'll see going forward is that it will turn positive, it's positive in North America right now, but it will probably be modest on the positive side. You know, I would not expect to see big increases, because at this stage, unless OCC were to go up and prices were to try to chase it, we're pretty much at balanced position right now.

If you took OCC. out of this, because you have been talking about getting price talking about getting price increases in all of your products, several of your product lines, would we see a positive?

Overall, we could. In the flexible side, we certainly have had price increases that you don't see much coming through in this third quarter that are contractual. But again, I think that would would be -- it would be a modest positive.

Basically you're saying that your price increases are just matching costs?

Well, what I'm really saying is that in last year, we had the phenomenon where OCC. went up dramatically, and our prices moved up, didn't quite catch up to OCC costs. And OCC declined. So, last year, we had some pretty negative price cost throughs the second, third and a little bit into the fourth quarter. Most of the fourth quarter was resin in last year and the high density film. But through that process, our pricing right now is, as I said, pretty well level with where OCC ended up.

And so, we're relatively balanced, and I think that there's no little reason --little reason to think that pricing would go up, and --unless there's some underlying movement in OCC. Some fundamental change. Back to the phenomenon that Harris was talking about earlier where through the cycle we do --we are able to get increased prices, and hold onto that margin through the decline. But that's all been grandfathered at this stage in the game. So, I think that it's relatively flat.

Your guidance, does that include -- your 30 cents this quarter includes the high density when you take out the gain, the 25 to 32 cents. Does that have anything from the high density in the -

Well, it contemplates high density moving out. And into -- moving out -- it's a discontinued operation right now which means that the full P&L as I said is clashed into the one line item, we would expect to close this transaction in early November, and our -- up, our forecasts have incorporated that.

Last question, the $142 impairment in Asia, what's the nature of that facility? Or business?

We look every quarter at the assets as we are required to do, whether we're required to or not we look at the assets around the globe, and as we looked into the third quarter, we looked at the value of the assets, and we have in Indonesia, we look at the value of the assets in China, Thailand and even our investments in Japan, and so, it's that area of the world that we are talking about, and as Charlie said earlier, and the release says, we will continue to look at those, and if there should be an impairment, obviously, we will take it. I'm not suggesting there is one other than the first look indicated that we may have an issue in one of those locations. We will obviously treat it appropriately and we -- in our disclosure, we wanted to point that out and point out the maximum exposure that could be affected in the event we should find something.

I understand the Asia and concept, but what's the business that you are aiming at?

Well, the only business we have -- well, that's not true. We have tubing core and paper operations in the composite can business in Asia.

Thank you.

You're welcome. I'm sorry.

Your next question comes from Edings Thibault of Morgan Stanley.

Hi, gentlemen. Just a quick one. Charlie noticed there had been reallocation of revenues to a much lesser extent profits in between the segments. Just wondering if you could give us, you know, what revenue were reclassified there and what the profitability was.

There's been no reclassifications between the segments so, the -- if I understand the question

I'm just looking at -- I know -

High density came out of all of the numbers.

I'm looking at your reported numbers this year versus reported numbers last year.

Well, that -

Based on the segments themselves, not the net number, which is, of course, the same.

That would be because high density has moved out of sales and cost of sales, and S & A and everything into that one line item, but we have not moved any sec segments around, so the industrial segment and consumer segment is composed of the same pieces that they were last year, with the exception of trying to high -- with the exception of high density, which doesn't show? The consumer segment now and doesn't show in the history of the consumer segment.

Got it. Did notice differences to last year. I'll follow up offline and try to get detail on that.

One of the things in the last and second quarter, we did announce that we will re-classing the freight. We had followed a practice of netting freight against the sales number, and we have concluded, our auditors helped us conclude that that should be grossed up. So, in this quarter and last year, there was about a $20 million difference between what we may are reported last -- what -- if you are actually looking at some last year numbers, what we would have reported last year in terms of sales, and so, you will really have freight as an increase, but that just simply is a reclassification, so, sales went up by the same amount that cost of sales went up.

Great. That's it. Thanks for the reminder.

Your final question comes from Albert Rosano (ph) of Circle T Partners.

Harris?

Yes.

Yes. Well, I'm last. Can I ask three questions and then -

Sure.

Call

Sure.

Thanks very much. Harris, three quick questions. Well, not so quick. The first one, I know that you cannot make specific comments on M & A, I just want to lay out thoughts for you on one thought is that in a weak economy, a company with a great balance sheet and strong cash flows is in a strong position, and you know, your -- you're until a strong buying position. The economy starts to get better and improves, at some point there's a transition from a buyer's market to a seller's market as asking prices start to go up. Can you share thoughts on that and maybe give us some color as to the pace and quality of opportunities that are being presented to you? And you know, just give us some view as to, you know, any concern as to what you might have as to the -- as prices --to prices going up as the economy starts to reawaken.

Second question would be, it seems like the company is heavily invested in doing a great deal of restructuring at this time, and it is going to be in the coming quarters. You can talk about how much time that is absorbing of your own personal time in terms of your -- in terms of time away from other activities, and is it possible that so much time is being devoted to restructuring and reallocating of resources that it's an issue and maybe you need more support in order to, you know, review the -- review your M & A program or manage your M & A program.

My last question would be, and this is -- real speculation, but I'd like you to indulge me. Is it possible that the sharp move in the dollar made certain international acquisitions that you may or may no not have been spending time on, suddenly less appealing than they might have been, and maybe -- is that a potential explanation for why, you know, the pace of M & A hasn't been maybe what some people in the market have expected?

OK. You obviously asked three questions and your observations, Albert are astute. Regard to the first one, it's no question that it is a buyer's market, more than a buyer's market when the business is like this. I don't think that that has turned, and I think that it will continue to be in the markets that we compete in particularly on the industrial side in the -- for the foreseeable future.

By the foreseeable future, I'm probably talking about the next six, nine months, somewhat of a buyer's market. We will continue to explore in those markets. I think the last question was the effect of the dollar. Obviously, it makes -- depending where you are some international acquisitions more expensive, but I think in the areas we are playing in, that's probably not an insurmountable issue.

With regard to the time on restructuring, clearly, you know I have said to the outside world that one of our key issues from going back from two years ago or three years ago was a cost structure of the company, and that it would get a fair amount of my attention. Obviously, it has gotten a fair amount of my attention the last two years. As it taken away my focus on acquisitions? I don't think so.

Clearly, we made the five or six acquisitions in' '01. We could have made the same number in '02, and we had dialogues with at least that many people. We walked away from those acquisitions because they did not meet our criteria of being non-dilutive in the first year. In returning the cost of capital in the next -- in the first three to four years. So, taken -- has it taken my attention on it. Absolutely, it has. Has it die lighted my attention on M & A in growing the business absolutely not.

Thank you.

Thank you.

Gentlemen, there are no further questions at this time. Please proceed with your closing remarks.

Thank you very much for your participation.

Ladies and gentlemen, thank you for your participation today. This concludes your conference. You may now disconnect.