Sonoco Products Co (SON) 2004 Q1 法說會逐字稿

Good morning. And welcome to the Sonoco Products Company First Quarter Financial Results Conference Call. My name is Carlo and I'll be you coordinator for today. At this time, all participants are in listen-only mode. We'll be facilitating a question and answer session towards the end of this presentation. If at any time during the call you require assistance, please press "*" followed by "0" and the coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today's call, Allan Cecil. Please proceed sir.

Good afternoon, and thank you again for joining us for our first quarter teleconference. With me today are Harris DeLoach, President and CEO and Charles Hupfer, our Vice President and CFO. First, permit me to make the obligatory disclaimer, if you will, that today's conference contains forward-looking statements based on current regulations, and are not guarantees to future performance. Additional information about factors that could cause different results and about the use by the company, if any, of non-GAAP financial measures, is available on forms 10-K, 10-Q and 8-K filed with the SEC.

For those of you who may not have seen our first quarter release earlier this morning, our reported earnings per diluted share from continuing operations were 41 cents versus 30 for the same period in '03. Our first quarter earnings included income of 9 cents per share due to the recognition of certain tax benefits and restructuring charges of a penny per share was in both quarters from both '04 and '03.

Excluding the tax benefit and restructuring, EPS for the first quarter was 33 cents in line with the company's guidance of 31 to 35 and first call guesstimate of 33 cents. With no significant recovery yet occurring in most segments of the manufacturing sector served by our Tube and Core and Paperboard businesses, we expect our second quarter earnings to be in the range of 33 to 37 cents per diluted share. That excludes any restructuring charges, and also assumes no significant change in volumes or process. We did not change our previously announced guidance for the full year of $1.40 to $1.45, again that excluded any restructuring charges and also since no significant changes in volumes or process.

To note those board, today, increased our quarterly dividend to 22 cents from 21 cents, and our 316th consecutive quarterly dividend will be payable on June 10th with a record date of May 21. Earlier in this week, I hope that you saw our announcement that we signed an agreement with Ahlstrom of Finland to form a new joint venture, which will combine Ahlstrom and Sonoco's paper based tubes or/and core board businesses with Sonoco having a 64.5% interest in the new JV.

We expect the transaction to close around at the end of second quarter. Note those are expected to add about 100 million in annual sales from the new JV. After a two and a half year standstill, Ahlstrom will have the right to put their interest to us for purchase based on a predetermined multiple of earnings, and during the seventh year we will have the right to call Ahlstrom shares. The joint venture will significantly increase our position in Scandinavia and in Eastern Europe, particularly improving our exposure to the paper industry. We expect that the JV will be basically neutral to our earnings in its first year.

You may recall that we recently announced an agreement with Demolli of Italy. With them we already have a JV that includes three Tube and Core facilities and a paper mill in Italy. And in that new agreement we affected a similar quick-call arrangement. We also have added to our presence in China by purchasing Ahlstrom's Tube and Core plant. That plant serves the building in Chinese market, the paper mill of course. We also just announced a new protective packaging operation in Mexico to provide protective basis from OBE (ph), the international plant manufacturer, for use in Mexico and Latin America.

As you will hear from Charlie Hupfer in a few minutes, we have seen the benefits this quarter of our restructuring actions and productivity improvements which we believe supports our goal that we are well positioned to take advantage of any volume improvements resulting from the impact on our industrial segments as any general economic improvement might occur in the markets that we serve, and expected volume improvements from an increasing number of new products and improving sales from -- in our consumer sector. So, those are preliminary remarks. I'll turn the meeting over to Charles.

Thank you, Allan. Let me start with looking at the income statement. Sales for the quarter were 695.4 million; sales were up 5.9% over last year. Our gross profit was 121.6 million. Our S&A cost, selling and administrative cost was 66.3 million, that's actually 5.2 million favorable to last year, and to Allan's point of view it reflects our restructuring program that we announced and implemented in August of last year, and it also reflects these are ongoing cost containment program. That leaves EBIT to be 55.3 million, which is $2.9 million better than last year.

Our interest expense for the quarter was 8.7 million, that's favorable over the last year by $3.5 million. And does not stock for minute comment there and interest is favorable, and we pay down debt year-over-year to the tune of $168 million. Last year, at this time, we have some gather our portfolio $100 million it matured in November with the coupon 5.875. We paid that debt or we fold that debt into our commercial paper programs and then paid that off on a few to proceeds of the sale of high density film division and just from general proceeds from the result of operations. So, our debt down substantially year-over-year and you'll see that in this interest state here.

On our tax expense was 7.4 million and that's favorable over the last year by $7 million. the effective tax rate using that 7.4 million, would only be 16%. And what the 7.4 million reflects is, we've release 9.1 million in the income following the completion of RRS (ph) exam for the years 1999, 2000, 2001. The 9.1 effectively represents tax benefits that have been included in prior years, though we're at least upon the completion of this RRS exams. After that 9.1 and an another small adjustment for restructuring, our on going effective tax rate remote in the line of 35.5%, which is what we would expected to be in second, third and fourth quarters. So, that's what the underlying rate is built into this quarter.

Equity and earnings of affiliates was $1.3 million, discontinued operations obviously zero in this year and last years number we had a 1.7 million that reflects the profitability of the high density film division for that first quarter of last year. And of course we sold high-density film in the fourth quarter. So, we had no number for high density in this year. When you bring all that down to the bottom, net income is 40.4 million and that is 11.4 million higher than last year's first quarter. And EPS is 41 cents compared with 30 cents. That's a comparison that, that obviously reflects the reported numbers that is really isn't entirely inaccurate comparison, simply because of some of those adjustments. So, I'm going to just talk you through that, if we start with as reported EPS of 41 cents.

Now, we have an adjustment of 9 cents a share for the adjustment to tax is that 9.1 million equates to 9 cents a share. And we had a restructuring charge on a pre-tax basis of 1.3 million after tax around 900,000 that equates to 1 cent a share. So if I adjust for both the 9 cents and the 1 cents then my off base operations or EPS for my base businesses will be more like 33 cents that Allan mentioned earlier right in the middle of our 31to 35 cent range. If we do the same thing for last years first quarter, we had 1 cent of restructuring. So as reported number of 30 cents really is 31 cents if we just focus on our base business. So the fairest comparison is 33 cents to 31 cents and that's about a 6.6% year-over-year increase.

Now let me switch gears and talk about sales and what I'll do is go through what we call the sales bridge, which is just an analysis that reconciles last year sales to this years sales. And of course we've over trying to reconcile its $38 million whereas the increase sales for the quarter. 38 million in total, 26 million of that is in the industrial sector and 12 million in the consumer sector. And I'll give you the numbers -- the reconciling numbers and you will able -- to end the tie this and as the difference between the segment numbers that are found in the press release.

The chart that I have in front of me has volume in mix as a column -- in the first column. And then in the next column, it would be Sonoco the consolidated numbers. The next column is industrial and then the fourth column on this chart is consumer. So starting with volume and mix, we have a negative $9 million. In the industrial column, we have a negative $5 million and in the consumer, negative 4 million. The next item will be price, and price is a positive $6 million for Sonoco as a whole, 4 million for industrial, 2 million for consumer.

Acquisition is the third item; acquisitions are 6 million in total, 3 million for the industrial sector, 3 million for the consumer sector. And then the last item is exchange and it will be almost dollar exchange and it is 35 million in the Sonoco column, 24 million in the industrial column and 11 million in the consumer column. So you know, those are the components that will bridge both the last year's industrial and consumer and consolidated sales to this year sales number. And obviously the big-ticket item is the exchange, the 35 million.

I'll comment briefly about volumes and won't go into an awful lot of detail but volume as I said has a negative 5 million in the industrial sector. About three quarters of that really is coming from our Tubes and Cores business in the US, where we start coming into the new year, a slow start in January and that volume picked up in February and March. But there's no question that we were down year-over-year in terms of volume. The textile industry remains soft in our numbers, anywhere from 9% to 16% year-over-year decline depending upon the segment.

But other segments are strong like the film core segment. In Europe, our tube and core volume, while plus mix was essentially flat and it's the same story, we've been telling in the prior quarters. A good volume growth in some areas, Turkey for example was up 23%, Poland's volume was up 38% but we did see declines in France, in Netherlands and the UK that ranged in the 8% to 13% range. Tube volume in Asia was up 15% with pockets of strength in places like Malaysia and Indonesia and China. The tube volume in Latin America was up 60% and protected packaging volume was up 6% and our Baker reels division had volume up 6% too. That's starting to see some growth in the utility in building wire industry.

We did see a decline year-over-year in trade sales to our paper division domestically. On the consumer side, we have a negative 4 million in volume and that's really coming from three things, one is our rigid paper and plastics business, showed a volume decline year-over-year and we're still seeing some decline in the dough and the powder beverage business and in the FAQ business. Some of that actions related concentrates juice cans were up slightly that's a result of our taking over customer out of self manufacture and plastic coating packages were up and that reflects the strength in the house and the industry.

But overall our volume in rigid paper and plastics was down from year-over-year. And it was down from year-over-year in flexible as well. We have some accounts that are strong and others that are weak. We haven't seen as much as we would have liked and expected to see in terms of new product in flexible in this particular quarter. The one project that we have that we talk about tugged at sales roughly about a $1 million worth of sales but the start up obviously a little slower than we had expected.

Commenting on that for just a second, we've been asked reported to track our new product sales and we think in this first quarter, we had new product sales that were probably about $4.5 million in this quarter, but didn't exist in last year's quarter. And that's coming from the wild -- copying in from eventually towards the package. But anyway, volume was down to some year-over-year. In terms of price, price was up, as I said 6 million in total, 4 million in the industrial sector, that virtually all over relates to our recovered paper operations, as OCC and other recovered paper costs increased that represents higher selling prices for recovered paper. Although, we'll see in a minute also represent higher costs for our paper division.

So, when we're focusing on sales here, we see just the highest selling price. In fact, that division had its selling price increased roughly from $78 into the mid $90 range. We also saw some price increases in protective packaging that were largely formula driven. Speaking of OCC, before I get off that topic through the quarter, we saw OCC increased from $65 a ton at the beginning of the year to $80 and then to $90 by the end of March. And then it stays with $90 as you see here in April.

We've responded with the $50 a ton price increase in our paper division effective March 1st , but it had -- wouldn't had any impact on the numbers in this first quarter and we also responded with an 8% tube increase effective April 1st. So, we've got some pricing in the marketplace to help us to recover these increased costs.

On the consumer side, we had $2 million worth of increased pricing and that's largely coming from flexible. Acquisitions in - give that account during an half lot of volumes, 6 million in total, 3 million each in industrial and consumer. And then, as we've said exchange was 35 million and that's now reflects the strong euro, which is up 19% plus the strong Canadian dollar and Australian dollar. Well, that's the sales bridge.

Now, I will - I'll give you the EBIT bridge and here what we're trying to do is just reconcile EBIT. EBITDA for Sonoco last year was $54 million and for the industrial sector 31 and for the consumer sector 23. 31 and 23 make-ups to 54, what I'll do, is reconcile you from that 2003 EBIT down to the 2004 EBIT. And the first item is, volume mix and that's the negative $6 million, negative 2 million on the industrial side and the negative 5 million on the consumer side. These numbers that we dropped the depth emulsion (ph) and they don't know who's that up in that surrounding.

These are - we feel good of approximation of what's going on with our business and not entirely accurate, with the last decimal. So, anyway volume was 6 million and as I said consumer is down 5, industrial down 2, that's the profit shortfall, from the volume shortfall that I talked about in sales. In terms of price cost, we have a negative $1 million for Sonoco, made up of the negative $2 million in the industrial sector and the positive 1 million in the consumer sector. An then talking first about the industrial sector in the negative $2 million, and what that's reflecting of course is the price increase, that we talked about in sales offset now by the costs, that are coming to largely in our paper division.

We saw our paper division costs of recovered paper go up something a little less than $19 of ton. And that of course increase, there in their cost and then left us in the US with an integrated price cost negative of about 3.2 million. That was offsetting followed by favorable price cost in Asia, in South America and in protected packaging. So we're all netted to a negative $2 million in the industrial sector. In the consumer sector, were we're positive $1 million. The next item is productivity. And productivity is a positive $11 million for the Company, broken down by $5 million in industrial and 6 million in consumer.

This productivity obviously, is the big part of our earnings performance for the quarter. It reflects continued focus on our Six Sigma programs or leading programs, and even outside of those programs, we have a focused effort on staff reduction and we certainly see the benefits of that in the quarters result. And then other is the last item in this reconciliation. And other is a negative 1 million at -- and those are consolidated lines a positive 1 million at the consumer line and a negative 1 million at the -- I'm sorry, the positive 1 million at the industrial line and a negative 1 million in consumer.

Starting on well, I've already given you the industrial and consumer. Generally, I'll tell you what's in this category. And this is where we put all the inflation increases. We put wage increases we put energy increases here. Although, we really didn't have much in the way of energy increases year-over-year. Natural gas was actually down to the last year, coal pricing is up year-over-year was relatively flat. But we netted the wage increases, inflation increases with our purchasing savings and that's a result of our purchasing programs things like our EBIT program, and also the restructuring savings are in this other column.

We also have some unusual items in the other column for example in consumer we have a 1.1 million startup cost related to our new Brazilian operation. That's the middle land operation it was started up in the beginning of the year. We have an increment of $900,000 in our rigid paper and plastic group and that's their development products or projects, things like plastic bottles, things like, moving cans all around. And we also have in that category, some residual costs related to the closure of our Fulton, New York flexible packaging plant. And most of that cost was incurred in the fourth quarter some 800,000 rolled into this year's first quarter and that's really all behind this now.

And we had exchange gains that will add to about $1 million, at this EBIT line in the other call. So what we have there is what reconciles Sonoco total of 3 million-profit improvements, 2 million on the industrial side and 1 million on the consumer side. I'll comment just briefly, you got our balance sheet in your press release. And the balance sheet remains strong with pay down debt by $6 million compared with the beginning of the year December 31st. Our debt-to-total capital ratio, as we calculate it, has moved from last years to December, 35.8 to 35%. So we saw a further improvement in our debt-to-total capital.

So, again our balance sheet remained strong and I'll now just conclude by commenting, I think this was the successful quarter for Sonoco. And it reflects a strong foundation in this quarter, on which to build the future quarters.

So, I'll turn it back to you Allan.

Thanks Charlie. And with that, we're ready to open for questions, please.

Thank you, sir. Ladies and gentlemen, at this time, if you wish to ask a question please press "*" "1" on your touchtone telephone. If your question has been answered or you wish to withdraw your registration then press "*" "2." Questions will be taken in the order they are received. Please press "*" "!" to begin at this time.

Your first question is from George Staphos with Banc of America.

Hey guys, good afternoon.

Hello George, how are you?

Doing, all right. I wanted to touch to start on the growth in the quarter. Obviously, it's been a tough last three years. Then an unusual economic time but you have seen signs of manufacturing, in three of your markets picking up. I mean continue growth volumes is picking up and you're riding too industrial production is being picking up. There is a little bit supplies with against the tube and core numbers, what else do you need to see was the volumes to start moving a little bit more incline with -- what we're seeing from some of the broader market indicators?

George Staphos, how you're doing?

Good, Harris. How are you?

I'm fine. George, I think -- Charlie said this, that actually February and March were not bad months on volume on the industrial side, the first week in January, I guess with the way you started with January 1st and that next week which was pretty low from on the volume standpoint.

Okay.

We saw a continued bill and -- in February and March and we've seen continued good volume in the first three weeks in April. The first quarter of 2003 was actually the strongest quarter in that business, that we saw I guess probably all of last year.

Yeah. In your tube and core volume were up 3%, 4%.

Yeah, they were and so when you look at that strong quarter, the comparison is get probably will gets the best quarter.

Yeah.

Then we saw obviously a tail off in the second third quarter and some pickup back in the fourth quarter. Normally, this is a business it tends to fail down in the first quarter, so I think the fact that we are basically flat with the fourth quarter of last year end and it seems to be soon or then in early January I'm cautiously optimistic but we are in fractioning some slow improvement, George.

Okay. Now in flexible you know one of third questions, the volume have yet to really pick up and I'm guessing margins to given the margins in consumer, can you give us did more color you talk to a couple of points to because we'll get more color onto where you stand and with that business --

Clearly, we think we're seeing operational improvement in flexible, we think we are seeing a margin improvement in flexibles. There is one major piece of business that we accounted on coming in the first year and excess in around $1 million a month we have the business in house now its taking along with get it done, because of some inventories from the formal supplier what I would say is as I said the shareholder this morning we expect this volume to be in this quarter so I think by the end of this quarter you will see the effects of some volume improvement there.

Okay. Should we -- we've talk large margin in the past conference call, should we be focusing on something else you know with this kind of normal marginal be with a little bit about taking volume improvement and that should we focusing at something else with the company longer term?

No. I think EBIT margin are get focused on George and I think clearly this is a quarter who have particularly on the industrial side but also to less degree on the consumer side and it compress against and I guess just probably more on the industrial side we have the impact of $25 mostly daily that impacted the companies margins look at very lower price increase they need during the quarter.

Yeah, but this isn't the first time you seen us if we go up (inaudible), you know, they been other years were our six years moved up and you've had strong industrial margin. So there was anything else that changed.

George I don't think so. We talked that the margins in the industrial business over the last few years are so, they'd certainly been more depressed as a result of just pricing pressure in the markets but I'm reflecting that in this particular quarter that we did hit the higher of the increased OCC, that I was making

Okay. I'll turn over to you guys. Thanks got it.

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

Thank you. Harris just a couple of things, with respect to composite cans in the last couple of quarters; we have been getting relatively good news there. Are things backing off is the pipelines still strong or what's the real to enter that market?

Mark, I think, clearly the last couple of quarters we have seen an improvement. One of the major factors in the first quarter is the fact that in the first in early second quarter of last year. One of our major snack customers had a major build of inventories and it negatively impacted us in the late second and third quarter of last year.

Right.

And we obviously, have not seen that build this year, and this should smooth out in the second and third quarter, and we should get that volume are coming back. We have seen continued decline refrigerated build, and don't having a fingertips what the amount is but that is primarily as one customer that which required rents at the German mills. But concentrate is up as Charlie said as a result of Pasco. But we're seeing, we will see some volume a pick up over balance of the year and the composite can areas.

Is there much going on in terms of new product potential in that market? New customer opportunities?

Yes, there are opportunities, in fact we picked up some business in the fourth quarter of last year than we started running in the first quarter of this year with -- down in fiscal we picked up congruent business -- we frankly didn't get to a lot of the margin there because in this quarter because we were shipping from distance had to move to some lands around it, yes we're picking up new business.

Harris just one more question, can you talk about the customer feed back to your CC based price hikes and particularly whether the 8% in tubes will make you whole or put you ahead of the game on OCC versus where it is right now?

Well, I haven't talked to many customers in recent years, that the poor prices versus including Sonoco.

So, where are your customers? We're happy to take that ...

Where else, I mean that you can't be complacent. No actually, frankly, the market right now, I mean if its steel, its OCC, its energy and most people are seeing -- increases clearly Sonoco is and I think most people are understanding of that. And we have gotten good support from our customers and the market; you've shown good support for this increase. At least, at this point in time, if towards the end of April. The increases that are announced would -- more than recover the cost that we've incurred in when season margin improvements.

Okay. Perfect. Thank you.

Thank you, Mark.

Your next question is from Richard Holham (ph) with Smith Barney.

Good afternoon.

Good morning, Richard.

I had a question on the dividend increase and I just wanted just to sort of get an idea of philosophy behind that versus share repurchases, and how the board is sort of think about that? How you guys are looking at that going-forward?

Well, we've always I think it was a 380 consecutive dividend and our shareholders when we talk to them, they appreciate dividends. So, we have a history of increasing dividends and when we look at the new tax policy, we think it's especially attractive in this environment. Our Board is not opposed to stock buybacks. I think it was in 2001; we bought back a $120 million something of stock. We're frankly right now, we see our opportunities that we think of better for the companies and engaging in such a stock buyback although, we do have our own table of I think 5 million-share authorization. It was simply that when we locate our cash flow, when we locate our outlook for the balance of the year, I believe bulk of that was a good way to you -- reward shareholders at this point in time.

Got you. And I have a second question on resin prices and how you're seeing that in your rigid plastic containers business? I know that polyurethane prices have implemental I spoke during in -- have jumped up in the last several months. How are you -- are you passing this to a successfully --- how is that affecting it?

Frankly, we haven't seen, that much of an increase in resin prices at this point. I think I did hear the other day that they are sitting there, some announcements that are out there and we have -- in our consumer side of the business most of that business is on the contract, where we've passthroughs and traditionally we have not had difficulty recovering resin prices. As you'll recall, we sold our High Density Film business at the end of the year. And we were really leveraged by resin prices in the other parts of our business. Generally, we've got a pretty good recovery.

Okay. Terrific. Thank you.

Thank you.

Your next question is from Edings Thibault with Morgan Stanley.

Good afternoon, gentlemen.

Good evening.

Hi, Edings. How are you?

Great. Thanks. I just wanted to focus on some of these questions that have been asked, and particularly the question of industrial volumes. I guess I'm not trying to pin you down there Harris, if you see run rates continue at the pace that they have been running at over the first or since that first week in January, what kind of volume improvement would you be expecting in that tube and core business in the second quarter, kind of, what should we be thinking about for the balance of the year presuming the economy remains healthy?

Edings, I think, Charlie said or certainly I've said this morning that our forward forecast is based on current run rates and volume and they were the run rate should we have in the fourth quarter of last year. I don't mind you trying to pin me down and I'm not trying to be evasive. But traditionally, as I've said earlier, the first quarter is sort of, the lowest -- one of the lower quarters in the year, and we'd see a pick up in the second and third quarter. If we would foresee that obviously, we would get the leverage effect of that and that would be positive to us.

And is it too early, you know, sitting here on April 20th to make that call or you know, given the seasonality of the business?

As I've said, Edings again not trying to be evasive. The first three weeks of the month, we've seen some improving volumes. You know I think, we're cautious and that we saw improving volumes in the first half of last year. We saw a good first two or three weeks in April and buy bash fell off the cliff about this time last year in March, May and June and July were awful. And I do think, when I talk to my customers, the inventory levels are low. There's a lot of unknown factors out there, and I'm just reflecting frankly with you guys, what my customers are reflecting with me. They don't let.

Right. How about on the packaging services business, I think you've referenced some of the revenue growth in that businesses is there any new contract wins there or just continued expansion?

Those who are - our packing services business is going quite well and we picked up a new a new tax Senate at year end from P&G and Germany and it's been announced that Gillette is moving to Poland and we will follow them in the Poland. We have some active discussions going on with other customers at this point and this is business that we want to grow. We do it well, and if it's doing well and our consumer strategy of being solution providers for these major customers. So it's something you will see a squib.

Okay. And then also finds in a question of price. I know you are not a big seller -- a trade seller of paper. But can you talk about your ability to get all of your price increase that you ask for now and your expectation as of today that they remain there. You'll -- would you implement the full 8% price increase is a good support. I guess still I'm down again on that?

Yeah, I just want to say. You know, we consume about 80% of our paperboard. We have a couple of joint ventures that consume a little bit more and we have gone out and then pretty tough on this price --we've been very tough on this price increase. And I suspect, we may have lost a little volume early on in the price increase. But we are certainly seeing continuing growth in the outside sales with paper although a bit slow down. I think in March, as we announced the increase. At this point in time, I accept that we will meet the 8%, which I think of 8.

Great. Thanks very much, guys.

Thank you.

Our next question is from Ghansham Panjabi with Lehman Brothers.

Hey guys, how you are doing?

Fine. How are you?

Good. Harris, can you layout the rational force behind your announced joint venture in Europe?

I will be glad to Ghansham. The European market is the market and is certainly wide for consolidation and Sonoco is already number one in treating to -- and recycled paperboard. If you don't make that out, clearly we are clear number two. But either number one or number two. Also as number three and the consolidation is needed. This looks as the merely (ph) operation gives us coverage if you view from the people's of Italy all the way up in Scandinavia, and opens the paper industry in Scandinavia through us. Alstone (ph) is a technology leader like Sonoco particularly in the paper mill foresaid.

So it's a good technology blending our joint venture if you will. And also opens up Russia and Australia and another plant in Poland where there is awful lot of growth that Charlie hoped to talk about earlier. So, what we feel very, very positive about this and I think working with the awesome folks, we were able to put together a deal that makes good economic sense for both companies in the short term, and certainly gives Sonoco the control of long term that we want -- that we will own this business in March. So we feel very, very good about this. It's something that we have been in discussions with for awfully long time and glad to bring it to closure.

Okay. And what was the estimate capacity utilization as in, say, Tube and Core in Europe versus North America?

It's probably not dissimilar to the US at this point in time -- we have it probably, yes. There's probably more excess capacity in Europe than it is here, and then also with more excess capacity in core board. And you may not have picked up, but prior to the announcement of the joint venture, our Ahlstrom announced that they were shutting down their four other mill plants. Coreboard machine which I think has capacity of about 50 thousand tones a year, which will certainly be helpful in that market as well, that's done on Ahlstrom's watch and on Ahlstrom's ticket.

Okay. And finally, Charlie, free cash flow guidance for the year, please?

Sure, I can get back. Free cash flow -- increase in papers -- hang on a second. Here it is. Free cash flow -- operating cash -- you know, I'll give you operating cash, operating cash is 22.5 million for the quarter. Our capital expenditures were 24.9 and dividend 20.5.

And for the year just in terms of expectations for free cash flow?

We'd expect free cash flow -- it's same in the range that it was last year. We've been saying about $125 million plus. It came in a little bit more than that last year, came in more than that the year before. So we expect free cash flow to stay in that range. Capital spending, as I said, was 24.9 million. That's going to be at the right -- at the same place as we had last year, last year if I recall, is about 113 million of spending. So, it's going to be in that range; dividends around the same.

We would express and what we typically have in the first quarter is we have very good cash flow in the fourth quarter and some of that gets clogged back as receivables built up in January, February. And so we've seen our net working capital change under cash flow in the quarter but that work has so far in the second, third and fourth quarter. So, we expect cash flow to be in line with what it's been in the last few years, no reason for it, not a bit.

Okay. Great. Thank you so much.

Thank you, Ghansham.

And we have a question from David Leibowitz with Burnham.

Good afternoon.

Good afternoon.

Good afternoon, David.

Two totally unrelated issues. One, normally, on the conference call, you talk about the successes with new products and new product introductions; I did not here much discussion of that today. Anything missed that we haven't heard about it?

No, David. In fact, we took a big portion of our annual meeting this morning talking about new products; and as we promised it in the last conference call, we would start tracking new product development, new product introduction, and into sales. And I am looking at a bridge, if you will, that goes back to the first quarter of 2003, where we had $4.5 million of new product introductions on the consumer side of the business; and the first quarter '04 was $8.9 million. So we had about $4.4 million worth of introductions of new products that actually hit the bottom line; but we have a lot of things in the works and feel very good about it.

And the second question. The joint ventures -- you mentioned the put and core features in two or is it three different joint ventures where these futures exist?

There are two. One is with the Demolli acquisition that we actually announced in January, where we've had an arrangement with Demolli for a number of years; although we did not have a call provision in that range. And we've renegotiated the agreement in the fall of last year where about after three years we actually have a call option in that. The same exists in the Ahlstrom agreement. The Ahlstrom agreement calls for after the joint ventures put together as a 2.5-year standstill; and, after that time, Ahlstrom has a put to Sonoco. So we have a call options. So that's how they work in those two joint ventures.

And what are the odd sticks of criteria that determine what the price will be on the core future and the put future?

They are formulas in both of those agreements, David.

Are those in any sort of attachment toward 10-K or 10-Q?

No. They're not.

So we have to wait for you to give us the good news?

We'll give you -- if there is good news, then we will give you the good news.

And if you were to take over both of the joint ventures, how many dollars of sales you'll have additionally to the company?

Okay. I have Charlie commented that the Ahlstrom joint venture, since we have a majority interest in it, we will be reporting the sales; and that will be approximately $100 million of additional sales to the company. And with the Demolli, since we have a minority interest in it we do not report those sales and that's about $80 million or a total $180 million.

And do you have to reserve cash or bank line, so that if you are put the joint ventures in both instances you would have adequate liquidity?

We do not have to reserve any, but we certainly in the back of our minds, know that clearly the Demolli could be put to us now although we have reasons to think that that likely will not happen, but certainly we have sufficient capacity to do that and do most in the other things that we need to do at this point in time?

Thank you very much.

Thank you David.

Your next question is from Matthew Cohen with Globus Capital.

Hey, good afternoon. Thanks for taking my call. I really have just one, sort of, simple question, sort of, media company so I apologize it seems that simplistic. At what level of volume do you start to leverage this volume mix impact that you talked about before, is it possible to, sort of, say if we get volume increases of 3% that -- this whole, sort of, 6 million volume mix goes away just, I mean, you've done a fantastic job taking the, kind of, cost out of the business from a productivity side, but just trying to sort of figure out the flex points with volume?

Well, you can almost start with $1, because the fixed cost of their and most any volume obviously, gets leveraged across that fixed cost, I would hate to speculate what a 3% increase in volume might mean to a bottom line. Charlie, would you?

No, I don't have an answer to that but clearly in our -- in the couple of our divisions, in our paper division volume because that's relatively high fixed cost, volume has a significant impact on profitability and the same is true in our flexibles division. Flexible has relatively high fixed cost with expenses but a lot of their variable costs is for practical purposes fixed, because they've got very skilled pressman that don't go away when volume declines. So, that's an especially sensitive business to volume and that's why we think in the second, third, and fourth quarters as their volume picks and some of those new products that we were talking about kick in that we'll see margins improve significantly there.

But you do feel, sort of with all the costs you've taken out for your productivity actions that with a very low single digit increase in volumes you could see quite a bit of operating leverage there?

Absolutely, right.

What's the biggest gaining factor to improving volumes?

Probably the biggest gaining factor is just general economic improvement.

Okay. Okay. Thank you.

Thank you.

Your next question is from Scott Mervis with Bear Stearns, Newcastle.

Yeah. Hi guys, just I am back from Newcastle. Can you just break it down a little bit or just explain the cash flow for the quarter a little bit better. It's 22.5 million for the quarter, is that right? And then the tax benefit is that -- you said 8 million is in there or?

That right. Sure. That would start with net income of 40 million, 40.4, so that does included the debt benefit. Although, that works itself back out in the networking capital change, and sort of just watches out net income, which as I said start to 40.4, non-cash expense is largely depreciation is 37 million, and then networking capital change is a negative 62 million, and that's some increase in receivable, as I said which is natural and in inventory, which is natural, and then we had changes in liabilities including the network somewhat -- lot of the 62 million is including the change in the tax reserves where that tax adjustment came out. We also had 7.9 million for our pension funding in the quarter, and then all whether turns out to be 15 million, and if those numbers should add up to a operating cash of 22.5 million.

The other was -- the other is 15 positive?

15 positive, that's correct.

And you mentioned in your press release I think option, how much did you get in options?

I don't have that that would be relatively small number.

Okay. It's a small number. So, and then in that net change (inaudible) you're saying negative 62 it's been there to 8 million of pension and the 8 million of tax benefit?

I mentioned that I have identified it as a separate item.

Oh, that's a separate item?

That's correct. And I meant -- mentioned out net working capital -- we are probably out of comment on that because the -- it is -- it has been appropriate for the companies for a long time, and we take a lot of pride in showing some charts that show how our capital effectiveness has improved over the years. And so the question when I see number like this as we walk through the control of working capital and the answer is no. Well this is all -- networking capital changes is all ordinary and receivable and in inventory and probably we're out of the ordinary in terms of payables with the reduction in tax reserves.

What we do is we have a measure that we track, which we call the cash GAAP and you know, that's just simply days of receivable, days of inventory minus days of payable, and we watch that on a monthly basis and report on it on a monthly basis. And in December of last year of that our cash GAAP was 49.2 and the average for the year was 51. But the way we make the calculation and the average for the first quarter was 48.4. So we've maintained very good control over working capital and that's why I feel pretty confident when I answered your question earlier about working capital -- I am sorry, cash flow will be in line with our expectation.

Okay. And just -- and if you'd answer this question quickly just on a -- just looking at the balance sheet, the account receivable was like a use of 35 inventory as both of your, used a 19 and the accounts payable was of course at 16.

Right.

Yeah. That gets you why I used the 38, what -- the net was 62. What's the big difference between the 38 and a 62?

Here we just see the other accounts.

Okay.

Should be able to carry forward within.

But there is not something that stands out

No, there's nothing.

Okay.

Nothing out of the ordinary in net calculation.

Okay. Great.

We just put our working capital together a little bit different fashion.

Okay.

But you should be able to find all the products.

Appreciate it.

Sir, we have a follow-up question from George Staphos.

Hi guys. I just want a feedback on the subject of cash from operations and working cap. It doesn't seem like you're expected to a great degree, given some of the other question answers by raw materials other than OCC and you articulated what that was. Volumes weren't particularly strong in the quarter. And so I guess I'm a little surprising with the working capital build as it is. Is there any other call you could turn to the -- why working capital we build so much when you know volumes haven't been particularly strong now they're getting better. And commodity costs really have not been that bigger pressure for you?

George, I think the answer to that is we have had some pre buying of some raw materials, anticipation of -- that price increases and along we didn't want go into where they are but clearly, we could buy some steels of other things just anticipation of what's going out.

Okay. That's terrific. Now given that you feel pretty strongly -- that you should be able to get back to your normal free cash flow range. I realize keeping the track record on dividend is important to the company and there are not many companies that can match your track record. Is there a net $4 million increase in dividends in your view and little over you have the cash flow. You know could we see further dividend increases down the road or do you really think it wises at this time to keep your powder dry given whatever options, you're looking at or out there from a consolidation stand point.

Well George, we obviously look at dividends once a year so you will not see a dividend increase in Sonoco until in the situation brought until next year.

Yeah.

As we looked at -- I have looked for the year, it was our recommendation and obviously, we both agree that it was full of things to do so we feel very comfortable with that.

No, I know but it -- the well again a penny a share is nothing just needed that it's some things to be smaller than you could have done and it is not exactly a needle mover in the grants (ph) you don't seem to have even bigger cash flow as revenues are, so that's why I was asking the question, could you potentially more -- greater dividend increases next year.

George I don't want to speculate on what we'll do next year. We didn't do an increase last year, we felt like once that was appropriate and that's what we did and yeah, again I don't want to speculate on what we might do next year.

I understand. Last question, you're confident about that the pickup in flexible by end of the year? Is there a timeframe by which, you know, if flexible doesn't shows the improvement in volumes and margins that you may reconsider whether you participate in that business?

George, I'm confident that we'll see the pickup in margins and the pickup in sales and so I wouldn't more speculate on anything else with that.

Okay, guys. And good luck for rest of the year.

And, thank you, so much.

And so, we have no further questions at this time.

Thank you very much.

Ladies and gentleman, we thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.