Sonoco Products Co (SON) 2004 Q4 法說會逐字稿

Welcome to the Sonoco fourth quarter earnings conference call.

My name suspect Ann Marie and I will be your coordinator for today.

At this time all participants are in listen-only mode.

We will be facilitating a question and answer session towards the end of today's conference.

If at any time you require assistance please press star followed by 0 and a coordinator will be happy to assist you.

I would now like to turn the presentation over to your host for today's call, Mr. Allan Cecil, Vice President.

Please proceed, sir.

Good afternoon.

Thank you very much for joining us for our fourth quarter teleconference.

With me today are Harris DeLoach, President and CEO and Charles Hupfer, Vice President and CFO.

Today's conference contains forward-looking statements that are based on current regulation and are not guarantees of 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 as filed with the SEC.

Reported earnings for the fourth quarter of 2004 were $0.35 per diluted share.

These results included after tax restructuring charges of $0.08 per diluted share and the favorable impact of $0.02 related to the continuing Medicare Prescription Drug Act.

Sonoco's guidance for the quarter was $0.40 to $0.43 excluding any restructuring charges and including the $0.02 related to Medicare.

Reported earnings for the fourth quarter of 2003 were $0.75 per diluted share and included after tax restructuring costs of $0.13 and a $0.51 gain from the sale of our former High-Density Film business.

Our earnings for the 2004 fourth quarter were positively impacted by higher volumes, including the impact of acquisitions, and productivity leading to improved margins.

The '04 fourth quarter also benefited from $0.04 of favorable tax adjustments.

All of these favorable factors were partially offset by a before and after-tax charge of $0.07 per diluted share related to an adjustment at our wholly owned subsidiary in Spain resulting primarily from under reporting of expenses there.

Year-over-year sales growth of 21.2 percent in the fourth quarter brought the Company's total sales at year end to an all-time record level of $3.2 billion.

This was the third consecutive quarter that the Company has experienced improved year-over-year operating results across most of our business units.

As Charlie Hupfer likes to say, we believe 2004 proved to be a breakout year for Sonoco, culminating in a 20.6 percent increase in total shareholder return.

This is the second consecutive year that we have seen double-digit returns.

But with 2004 behind us we now look forward to '05 and what we believe will continue to be positive results from our acquisition and joint venture initiatives, the geographical expansion of our global market leading businesses from our unique total solutions packaging supply chain offerings including continued aggressive new product development to help consumer product companies differentiate themselves in the marketplace and to help improve their profitability, and for continued emphasis on productivity improvement.

We expect first quarter 2005 earnings in the range of $0.36 to $0.39 per diluted share.

This guidance excludes any restructuring charges which cannot be estimated at this time.

And as previously reported we currently expect earnings per diluted share for the full year of 2005 to be in the range of $1.75 to $1.79 also excluding any restructuring charges and assuming there are no significant changes in volume or price.

I'll now turn the meeting over to Charlie Hupfer, our CFO.

Thank you, Alan.

Let me begin with just some brief comments about the consolidated statement of income that was provided in the press release.

Net sales 885 million, that's 21 percent higher than last year.

The earnings before interest and tax, 57.4 million, is 69 percent better than last year.

Coming on down the income statement, income from continuing operations of 35 million was 84 percent better than last year.

Now, in last year we also had $54 million of income related to the dis -- related to our sale of our High-Density Film division so we had the fourth quarter's income for High-Density Film, plus the gain, and that was $54 million in last year's fourth quarter.

And so, of course, what that does is take the 2003 actual to $73.4 million of profit compared with the 35 million so on a net income basis we're 50 percent below last year.

Obviously the big difference is the sale to High-Density Film business and we'll get into that analysis in a minute.

So EPS was $0.35 compared with $0.75 cents.

Now, to start the analysis, I'm going to provide the composition of net income for the fourth quarter and really we only have one item to adjust for, and that would be restructuring in the quarter.

Restructuring as it affected EBIT was $10.7 million.

About $7 million of that restructuring charge comes from expenses related to the closure or the expected closure of plants in Europe around the formation of our joint venture Sonoco Alcore.

And then we also had some restructuring costs related to the closing of our Richmond plant in the Flexibles division.

So total expense for restructuring on a pretax basis was 10.7 million, and what that does is absent that restructuring, EBIT would be 68.1 million.

Now, income taxes were affected positively by the restructuring charge, 1.2 million.

So absent that restructuring benefit, income taxes would be 18.3 million.

So that's 18.3 for the quarter without any effect for restructuring.

Coming on down the income statement, equity in affiliates was a positive 1.8 million and so -- and that really represents Ahlstrom's share of the restructuring charges, and so without that restructuring benefit, the base equity in earnings of affiliates would be 4.2 million.

Then net income would be adjusted for restructuring of 7.7 million -- or restructuring equals 7.7 million so the base earnings without restructuring would be 42.7 million and that would equate to $0.43 a share.

So basically the $0.43 a share is simply the 35 that we described plus $0.08 cents for restructuring.

And we're defining that 43 as our base earnings, and that would be earnings without restructuring charges.

Now, when I do the same thing to last year I have restructuring of 16.9 million, and absent that, base earnings would be $50.8 million.

I had income tax, benefit of 5.9 million.

So absent that income taxes would be 10.4 million on base earnings.

Again, equity in earnings of affiliates I had charge last year of 1.5 million, so absent that charge our equity in earnings of affiliates last year would be 3.2 million.

And then, of course, we had discontinued operations, the sale of the High-Density Film division, that's 49.4 million, so absent that, discontinued operations would be $4.9 million, and that represents the income for the fourth quarter from the High-Density Film division, not the gain on the transaction.

If you were taking down those notes, and making those adjustments, net income would be 36.5 million or on a base earnings basis or $0.38 a share.

So, again, the $0.38 can be reconciled as the as reported number of $0.75 , and then the three components are restructuring of negative $0.13, a gain on the sale of High-Density Film division of a positive $0.51, and that leaves base earnings of $0.38.

So absent restructuring and absent the gain on the sale of High-Density last year, probably the best measure of year-over-year performance are these base earnings levels, and that, of course, would be, as I said, $0.43 for the quarter compared with $0.38 last year.

Looking at the -- at just the income statement, then, on this base earnings basis, net sales of 885 million are up 21.2 percent, earnings before interest and tax of 68.1 million are up 34.1 percent.

Equity before -- income before equity and affiliates of 39.1 million is up 37 percent, and coming all the way down to net income, net income of 43.2 million is up 18 percent.

And so I think that's probably a fairer year-over-year comparison.

Now, the $0.43, as Alan mentioned, does have the $0.02 in it of the Prescription Drug adjustment that we took in the third quarter retroactively adjusted the first and second quarters, and now again we see it in the fourth and we'll have that, it's really $0.07 on an annual basis, we'll have in that each quarter going forward into 2005.

Our guidance was $0.40 to $0.43 so we're clearly on the high side of our guidance, and anybody that has made an estimate of our quarter's performance, I think what those people need to do is look at the estimates, conclude whether in that estimate, because it seems to be going different ways, in that estimate the $0.02 for Prescription Drugs is or is not in the number.

If your estimate does not have Prescription Drugs, the Prescription Drug adjustment in the number, then you'd make that change.

So, for example, if it didn't have it in that number, to compare against my $0.43, you would add $0.02 to your number, or subtract $0.02 from my number.

So we need to make sure that everybody's consistent.

The $0.43 that I've cited here has the $0.02 of Prescription Drug in it.

Now there are a couple of other things that are in this $0.43 as well.

Let me take a minute to talk about the adjustment for Spain that's referred to in the press release.

We have looked at the financial results for the period from the third quarter of 2004 going all the way back to 1999.

We've found that through that period of time the financial results were over reported, and they were over reported principally because our local management failed to properly report local financial results to us in U.S. dollars and in accordance with U.S. GAAP.

So we became aware of this adjustment and have worked through the last couple of weeks to define the amount of the adjustment and also define a proper accounting treatment.

We believe the proper accounting treatment is to not restate those prior periods, but to take the cumulative effect of this misstatement, or misreporting, into the fourth quarter's results.

And so that cumulative effect of this misreporting is $7.2 million that relates to the third quarter -- actually relates from 1999 through the third quarter of 2004, and also we have an increment to our restructuring charge of 2.2 million that relates principally to 2003 activity, that was also misreported.

So, in the number that I just cited, the $0.43 a share, since that does not include restructuring it is important to know that it does include a charge of 7.2 million or $0.07 a share as a charge against the earnings that's included in that $0.43.

Now, having said that, the press release also makes reference to income tax adjustment where we released reserves of about $3.5 million, or $0.04 a share.

I'll spend a minute and talk about the release of those reserves.

It related really to valuation reserves on net operating loss carry-forwards that related to our operations in Brazil principally.

And at the time that those operating losses were incurred we did not attach a tax benefit to those losses because we didn't feel at the time that we could credibly argue that our Brazilian subsidiary would have sufficient profitability to absorb those losses and provide us with a tax benefit.

So we didn't have a tax benefit attached to those net operating losses, and over the last year or two, clearly the profitability of our Brazilian operations have improved significantly and last year, of course, we started up our metal end plant in Brazil and incurred more costs there, but we're largely through that.

So when we look at the performance of our entire Brazilian operations in 2004 and then projected on into 2005 there isn't any question that we'll be able to absorb those net operating losses.

And as a result of that we're required, under the accounting principals, to basically free up that reserve or release that reserve into income.

And that's what we've done for this Brazilian net operating loss and to a much lesser degree a similar situation in Mexico.

So I just point that out, that while I describe base earnings as $0.43 a share, base earnings does include two adjustments that go either way.

One is charges that are properly accounted for in the fourth quarter but you could argue don't belong in the fourth quarter, and, of course, there is a -- this tax adjustment that is properly accounted for in the fourth quarter but it also relates to prior years, or prior periods.

So even with those adjustments, actually with those adjustments, it's very clear that this was a strong quarter in terms of overall performance, not only at the sales line but all the way through to the net income line.

A very solid performance.

And I'll get to that now because what I'm going to do now is go over the sales bridge and then I'll briefly go over the EBIT bridge.

And these bridges are where we reconcile last year's amounts to this year's.

So for example, last year's sales were $730 million in the fourth quarter.

This year's sales are $885 million, so we had an increase in sales of $155 million.

Now, the breakdown of that $155 million is 41 million is in volume, 17 million is in price, and that would be price increases, acquisitions accounted for 78, $79 million, and then exchange, $18 million.

So that should add up to the 155 million.

Let me talk for a minute about volume.

We saw solid volume increases across the board in each of our segments and each of our divisions.

Volume, as I said, was 41 million.

Actually, 40.9 million.

The domestic Tube and Core volume in the U.S. was up substantially over last year.

It was up a solid 4.4 percent with some segments a little better than others.

Our Tape Core volume was up 9 percent, Paper Mill Core volume was up 5.4 percent, but we did see a decline in the Textile volume as we reported in prior quarters and that decline was a little bit less than 6 percent, but when you roll it all up we were up in terms of volume in our basic Tube and Core business by 4.4 percent.

Our paper division volume obviously follows and tracks pretty well the Tube and Core division.

Their volume was actually up 6.5 percent, and that's largely because their trade volume was up 11 percent.

That's sales to outside customers.

And then the division volume was up 4.5 percent tracking the division increase in the industrial product side.

So we had good volume increases in both the Tube and Core business and the Paper business in the U.S.

In Rigid Paper and Plastics our volume was up 7.3 percent.

We saw good increases really across the board.

In the Snack category volume was up 10 percent.

In the Nut category, up 17.

Fiber Caulk was up 25, and Juice Concentrate, which had been declining, was flat largely because we've converted some producers from self manufacturer into Sonoco's product.

So all in all Rigid Paper and Plastics, and, of course, the paper component of that is our Composite Can group, volume was up 7.3 percent.

We were very pleased to see volume in our Flexibles business up 16 percent as some of our major customers' volumes, customers like Master Foods and Kraft and Pepsi up with anywhere from 23 to 34 percent year over year.

We saw volume in the quarter for the retort pouch that we've talked about for some time, and we had some promotional products.

So all in all 16 percent increase year over year.

In terms of Asia we saw Tube and Core volume up 1 percent.

That's not an awful lot but it was mixed by territory.

We had strong volume in Malaysia, which was up 15, Indonesia up 11, China up 21, but it was offset by some weakness in Singapore.

Then our European volume was flat.

In Turkey our volume was up 5 percent but we did see some declines in the Netherlands and in Spain.

So volume was strong across the board and it accounted for almost $41 million worth of our increased sales.

Price was relatively strong as well.

It accounted for $16.8 million worth of our sales.

And on the domestic side, our Tube and Core business, prices were up in the 2 to 3 percent range, and that reflects some of the increase that we announced back in spring of last year.

And then also had very little effect, hasn't really worked its way into the average numbers yet but we also announced a price increase on October 1st so we did see some good levels of pricing in the quarter compared to last year.

As I said, prices were up 2 to 3 percent in the Tube and Core business.

In our Paper business prices were up about 6.5 percent and that's related mostly to the April price increase that we announced.

Very little of that would be reflective of the November price increase that we just most recently announced.

Then we saw good price increases in our other businesses, too.

Baker Reels was up 12 percent, Molded Plastics up 7.

Each of our divisions was charged with the responsibility of taking their cost increases and to the extent possible passing it through and to a large degree we were successful.

Acquisitions accounted for $78.8 million of the increase.

Much of that is in CorrFlex.

About $54 million.

And then as it relates to the Sonoco Alcore joint venture where we had two months of that combined venture that would have been $25 million of acquisition related sales.

Then, as I said, exchange was 18.5 million.

So all in all from a sales point of view a strong quarter.

Combination of acquisitions and volume were the principal drivers.

Now, looking to EBIT, and these are the EBITs that I'm providing, the ones that I went over a minute ago adjusted for restructuring, and that's why I took the trouble to go through that because I'm starting with an EBIT of $50.8 million.

That was EBIT last year.

That EBIT grew to 68.1 million this year.

That's an increase of $17.3 million.

The components of that are volume, volume accounted for 7.3 million dollars.

Now, what that is, that's the profit impact of the volume increase that I just described when I was talking about sales.

That's 7.3 million.

Price/cost was a negative $2 million.

And when we get into the numbers a little bit we'll see that price cost on the industrial side of our business is Engineered Carriers and Paper, was largely flat or positive, slightly positive, so most of this negative price cost is coming from our Rigid Paper and Plastics business and it was our inability to pass through steel increases.

Productivity accounted for a positive $13.9 million.

Other, a positive 3.1 million.

Then, of course, we had the Spain adjustment, and that's a negative 7.2 million, and we had the positive Prescription Drug adjustment of 2.3.

So those numbers, volume of 7.3, price cost of a negative 2, productivity of 13.9, other of 3.1, then a negative for Spain of 7.2, and Medicare 2.3, should add up to the 17.3 million dollars.

Again, volume was a big contributor, as we talked about with sales, and in terms of price/cost I've really already commented there.

The biggest negative driver was the steel increases that we incurred in the Rigid Paper and Plastics business.

They experienced a 2 percent increase at the beginning of the year, and then surcharges of $70 a ton after that.

And we've been largely unable to pass that along until contracts reset at the beginning of this year.

So a lot of that will -- negative will go away in 2005.

As it relates to the industrial side of our business, I've already talked about the pricing and -- in Tubes and Cores and in Paper, but we also saw costs run up.

Our average waste cost went up basically 25 percent.

Southeast Yellow Sheet was $85 a ton versus $65 a ton last year.

Our overall averages went up pretty much accordingly.

So they're up around 25 percent year-over-year but again those cost increases were offset by the price increase so the negative price cost here is all in the Rigid Paper and Plastics and relates to steel.

We did see resin costs go up anywhere from 38 to 54 percent.

And then we saw costs in things like lumber and plywood in our Baker Reels business go up around 20 percent, but again their program of price increases is largely offset that.

So price/cost was slight negative and it's all Rigid Paper and Plastics.

Productivity was a very positive 13.9 million, and, of course, this is a familiar story.

We've seen solid productivity gains for a good many quarters now as a result of our Six Sigma and Lean programs.

Across the board productivity improvements in this fourth quarter, along with our Scrap Reduction program.

Now, of course, it doesn't hurt that volumes have been so strong.

Our Paper division was producing at around a 93 percent capacity utilization rate.

And then other.

The category that's a positive 3.1 million, other is made up of a couple of things.

Some of the negatives in there are energy costs.

We had unfavorable energy costs of about 3.4 million.

Most of that is natural gas.

Some of it is coal.

Also in this category we had a number of start-ups.

We had start-up costs that we've talked about before in transferring some composite can lines around as well as the start-up costs in Corona, California, for our plastic bottle and Warsaw, Wisconsin for the self-heating bottle.

Both of those plants are in start-up mode and so we incurred a little less than $2 million worth of costs there.

What turns those negatives into a positive is this is also the category where we include the profitability of CorrFlex.

Now, I guess that's it.

I've already talked about the Prescription Drug adjustment and the Spain adjustment, so let me move on and talk about the cash flow for the quarter, then the balance sheet, then I'll be done.

In terms of cash flow, we had a solid quarter.

We were pleased with it.

Our operating cash was $113.9 million.

That's a little bit behind last year's 126.

In fact, it's $12 million behind.

We also had capital spending of 33.5 million and dividends of 21.6.

I know some of you use a statistic of free cash flow.

And when we do that we generally define it as operating cash minus capital expenditures and minus dividends.

Our free cash flow for the year, or for the quarter, rather, was $58.8 million.

So we again were pleased with the free cash flow.

If you remember at the end of the third quarter, I projected that we'd have $80 million of free cash flow in the quarter, and so I missed my estimate by a little bit.

And principally the reason I missed it was we did pay an additional $5 million into our pension plan that I hadn't contemplated.

The interest rates were declining, it seemed like a prudent thing to do to make sure that our pension plan was fully funded, and, in fact, at the end of the year it was over funded by around $12 million.

So we did make an extra pension contribution, and also I had expected that net working capital would provide a positive $45 million in cash.

Looking at trends from prior years, and, in fact, we only achieved about $29 million in cash from net working capital in large part because our results in the month of December were actually much stronger than we expected and so we didn't see the tail off of cash coming in through collections and no receivables being added to the list.

So at any rate net working capital didn't change quite as much as I thought it would.

Having said that free cash flow is $58 million for the quarter, and for the year $46 million.

Since it is a focus, working capital has consumed a good bit of our cash this year let me mention again that we have a pretty active working capital program.

We look closely at the dollars and the days related to inventories and related to receivables.

When I look at the year to date days of inventory, for example, I see that in 2002 we had 41.3 days, in 2003 41.3, and in 2004 our average was 41.9.

So we feel like we haven't lost any ground in our collection efforts and that the run-up in receivables and also in inventory is just largely this level of business activity, which, as I said, continued strong through the quarter.

We were real pleased with the month of December and we finished the year on a strong note, as evidenced by the overall numbers of $0.43 a share.

Allan, those are my comments.

I'll turn it back over to you.

Thank you very much, Charlie, and I believe we're now ready to open it up for questions.

Ladies and gentlemen, if you wish to ask a question please press star 1 on your touch-tone phone.

If your question has been answered or you wish to withdraw your question please press star 2.

Again to ask a question the command is star 1.

We'll pause for a moment as questions queue up.

Again, ladies and gentlemen, that's star 1 for questions.

And your first question comes from Edings Thibault of Morgan Stanley.

Please proceed.

Thank you and good afternoon gentlemen.

Hello, Edings how are you?

Edings, how are you?

Great.

And congratulations on a strong quarter here.

Thank you, Edings.

But I guess success breeds questions about future success, so I guess I'd love to get some insights from you on why you're expecting such a decline in the earnings in 1Q.

In particular looking at the level of business activity in particular, you know, Charlie, as you went over some of the sales bridge relative to the fourth quarter of 2003, it's -- it seems as if you guys are very much on track, you're seeing some very strong volume growth going forward and I'm just -- it seems as if that may not extend itself to the first quarter.

So if you could provide some -- perhaps some additional insights on to what types of either seasonality of your business or higher costs that you're anticipating that would lower your profits in the first quarter.

Edings, this is Harris.

I will be glad to try that.

First of all, as you know, and those that follow us know, there is a certain amount of seasonality to our business, and particularly on the consumer side of our business, the composite cans, and we do see a tail off generally in the first quarter as we do that.

We must admit that December was a little more -- was stronger than we thought it would be Edings, and we haven't seen as strong a December as we saw this year since probably 1999.

And I think of 2000 we saw certainly a tail-off in the first quarter of the year.

And, you know, is our conservatism built into our numbers with regard to what we saw in December with regard to the first quarter?

Maybe.

But clearly we have seen in January thus far almost across the businesses sales at a higher than last year but certainly below the fourth quarter levels.

So it really is sort of a wait and see, actually.

There is a little bit of seasonality in our CorrFlex business and clearly a lot of the transition -- we expect transition costs as we're in the mode of closing plants in Europe around the restructuring related to the joint venture.

And so we would not expect to see any profitability from the restructuring itself and, in fact, probably will have some friction costs there.

And all that's been factored in.

Great.

And I do see that, you know, you're implying at least some pretty strong profit growth.

Was there any -- as you look back at that December, Harris, was there anything that might have sparked that?

Any particular areas?

New contracts, new products that came on, you know, was there some pricing activity that is set to take place in January that might explain some pre buying, or is it just sort of pick up across the business?

Edings, as Charlie said, it was strength across all the businesses, consumer side, industrial side, and the other businesses in CorrFlex had a strong December as well.

We obviously, because our consumer -- particularly our composite cans contracts, many of those reset in January, and they were anticipating steel price increases.

That could have been some pre buying in the consumer side of our business, but -- that would affect January, but as you know, from previous conversations, there's not a lot of inventory either in our customers' ware houses or ours.

So yeah, there may have been some pre buying but not anything that should affect us long term.

Just nice strength in the business.

And steel is not a particularly large part of your overall sales by any measure.

No, it's not, but the metal ends, our consumer customers are seeing pretty nice -- pretty significant increases roll through the first of the year to cover the steel costs that we've seen, so if they have the option of buying at the old price versus buying at the new price and they could stock up they would certainly do that.

Okay, and then one actually very detailed question for you, Charlie, just to be clear, as you were giving us this adjustments to be potentially looked at in the fourth quarter one number I thought I heard was $1.2 million tax adjustment relating to the restructuring charges.

I wouldn't define it as an adjustment. 1.2 was the restructuring charge for the year, would be deductible, in certain jurisdictions, and that's just the expected tax benefit related to that charge.

And it wasn't -- because in your press release, and I guess my question is -- in your press release you mentioned a 10.7 million -- I mean, the income statement shows a 10.7 million charge related to restructuring.

That's pretax.

Pretax, and the after tax impact in the first paragraph is 7.7 million.

Okay.

And the difference there is equity and earnings of affiliates which is where we also include minority interest and so what it boils down to is that in that 10.7 million about 7 million of that is Sonoco Alcore and our partner Ahlstrom would pay their share of the charge.

So the way its shown is the 10.7 million is at 100 percent of the charge, but by the time you get -- then, of course, after tax that's 9.5 million, but that's still at 100%, and then Ahlstrom's share comes out and we're effectively tagged with is 7.7 million, or $0.08 a share.

So you start with pretax and you've got two components.

Tax and then Ahlstrom's share of the loss.

Okay.

Great.

Thanks for clearing that up.

And your next question comes from George Staphos with Banc of America Securities.

Please proceed.

Hey, guys.

Congratulations on the year.

I wanted to just maybe piggy back on some of Edings''s questions.

Seasonality shows up every quarter every year pretty much the way you'd expect so I guess if you look at year on year trends, have you continued a 5 or 6 percent volume growth rate into the first quarter year on year as you saw in the fourth quarter?

Or has that tailed off a bit because maybe there was a little bit of pre buying, et cetera?

George?

Yes.

I'm sorry, we missed part of the question.

I'm not sure what the question was.

okay.

I don't know if my line cut out, but basically are you seeing the same type of year on year volume growth in the first quarter as you saw in the fourth quarter, which I calculated as, whatever, 5 to 6 percent?

Probably so.

For the first part of January, we're seeing volume growth quarter over quarter.

First quarter of '04 to first quarter of '05 we are seeing volume growth.

It's probably too early to tell what that percentage is and whether it's going to hold up to be as strong as the fourth quarter growth.

Harris, what was -- with your systems, what was the last data that you would have seen?

Would you have seen kind of a week ago or two weeks ago?

Probably week to ten days ago, George, but also the other thing that I think -- we were talking about this obviously a year ago, we saw a fairly weak January a year ago, if you remember, if you can recall, we had a fairly good first quarter, but January was basically flat year-over-year, and then we saw a pickup in February and March of the first quarter of '04, so we're comparing January volume up to, I guess, January was the weakest month that we had last year.

So, yeah, it's up, but it's compared to a weak January.

And it's still January.

It is still January.

I'm with you.

When we look at your guidance range, and when you look at it, what earnings per share are you comparing it to for 2004?

Should we be looking at the base earnings?

Should we be adding back another, whatever, net $0.03 or $0.04 for when you adjust for the tax in Spain to the fourth quarter?

How would you have us think about that philosophically, Charlie?

Well what we've been comparing ourselves to is effectively -- what we have defined as the base earnings, and then we add back the $0.07 of prescription drugs so we compare ourselves to $1.65.

Okay.

And that's probably the right way to look at it at that point, then what you have you've got that same $0.07 in both 2004 and in 2005.

Okay.

Fair enough.

And then last question I had for you is in graphics, we have heard from some of our other companies and trade sources that, well, frankly, different things, but at least one has talked perhaps about some fall-off in the business as we've entered '05.

Have you seen that, adjusting for seasonality, have you seen that at all or has your business from a yea ron year standpoint looked quite healthy with CorrFlex?

George, you reference graphics.

What --.

with CorrFlex and graphics.

In other words --.

oh, graphics, I'm sorry, I thought you were referring to a company, graphic.

No, we have not seen a fall off.

In fact we saw nice increases in the fourth quarter because we have no comparison from a year ago, but clearly we saw nice volume in CorrFlex in the fourth quarter and it exceeded -- well, did it exceed their performance of the previous year, I do know that.

Thanks, Harris.

Thank you, George.

And your next question comes from Ghansham Panjabi with Lehman Brothers.

Please proceed.

This is actually Sewing [ph] I'm calling for Ghansham.

We actually just wondered if you could give us some guidance for next year on your tax rate and working capital for '05?

Yes, actually the overall tax rates are in the low 30s for 2004 we have assumed that it would revert to the more normal 35 percent.

Okay.

And working capital guidance?

Working capital, I don't have a page in front of me but we've assumed that we would have -- we would consume working capital of about $35 million, if I recall correctly.

In other words, what clearly has happened from a working capital perspective is that as the economy slowed in 2001, 2, and 3, we actually brought working capital levels down.

We added I know each of those three years something like $50 million of cash flow as a result of freeing up working capital.

We clearly didn't do that this year and we're assuming that 2005 will be sort of a steady state and that we will, as we see the business grow, sales, profits that we will have about 30-some, if I recall, million more dollars tied up into working capital.

So just to be clear, its 35 in usage of cash.

That is your projection for '05.

That's my recollection.

It's somewhere in the 20 to 30 million range, is I believe what we had.

Okay.

And the last question I had is, I noticed you were talking about some price increases that you were expecting for steel closures for '05.

We just wanted to see -- we just wanted to get an update on that going forward.

What we were primarily talking about was a number of our Rigid Paper and Plastics, our composite can customers, have contracts, and those contracts reset in -- reset at the beginning of the year, many of them do, and so that became the issue, and that's what cost us the negative price cost in the fourth quarter.

Those -- and as I said I believe that steel had gone up on average probably about 13 to 15 percent and we weren't able to recover a lot of that, so that gets pegged into the reset for 2005.

And in some instances we're able not only to recover those charges but we'll make an estimate of what the expectation is because the steel companies will have announced what their price increases are and they'll get plugged in as well so we're looking for increases in that particular segment.

Sort of a natural process of the contracts that we have.

Do you have a range of what your price increases are expected to be, I guess?

5 to 7 percent I think is a good estimate.

Okay.

Thank you.

That's all I have.

You're welcome.

Thank you.

Your next question comes from Frank Dunau of Adage Capital.

Please proceed.

Dunau of Adage Capital.

I just -- so let me just -- I just want to clarify one thing to make sure we are all on the same page.

Your guidance of 36 to 39 for the quarter and 1.75 to 1.79 for the year includes the $0.02 in the quarter and the $0.07 for the year, the Medicare adjustment?

Yes, absolutely.

I know this is a source of confusion and I apologize.

I'm not confused.

I just want everybody -- I actually know what it means.

I just want everybody on the same page.

Well I confuse myself sometimes.

It -- it certainly includes that.

I think that's a legitimate inclusion so I have no problem with it.

Just making sure everybody is on the same page.

That's the only question.

Thank you.

And your next question comes from Richard Holohan with Smith Barney.

Please Proceed.

Hi.

Two quick questions on the quarter and guidance.

Do you have a depreciation number for the quarter?

I might have missed it.

Charlie, do you have it?

I don't have it.

I don't have it.

No, I'm sorry, I don't have it.

Now, I think we gave it in the -- for the year to date.

Depreciation and amortization -- oh, it's in there.

Depreciation and amortization for the fourth quarter was 49.4 million.

Great.

I might have missed it.

I apologize.

And for '05?

We'd expect depreciation and amortization to be up a little bit to that.

My recollection is it's like 55.

But it's not substantially greater.

Our capital spending has been relatively consistent for the last couple of years.

It will tick up a little bit because of Sonoco Alcore and also because of some of our plastics

Okay terrific.

And second question was just on the steel pricing again.

I realize it's a small part but I'm just curious as to how your customers are responding to it.

Is it such a small part of the component of the full package that it doesn't make an issue -- it's not an issue, or have you heard any push-back on it, or is it automatic?

Well, let me come down in descending order.

It is a contractual obligation that we've had pass-through provisions in these contracts for years, and so it is somewhat automatic as it rolls through.

But although it may be a small amount, the customers still want to talk about it, and so it does become an issue to them, but it's contractually we didn't pass it through in the year last year, with the surcharges because we couldn't, and so now they are going through.

But I think the biggest thing of the steel increases -- what we're seeing, is an opportunity, frankly, because we're recovering the steel prices under our contracts, but we're seeing a lot of activity in the market of conversion from steel cans to composite cans, and I think there is probably more activity today and more interest today from customers who are in steel cans for a conversion to composite than I've seen in the last ten years, frankly.

So it's a lot of silver lining in that gray cloud.

And what's driving that conversion activity?

Is it just the elasticity of demand?

Cost of the steel can as a result of the steel price increases.

Right, right.

Interesting.

Okay.

Well, thank you very much.

Thank you, Richard.

Thank you, Richard.

Your next question comes from Fred Spies with Spies Thorson Capital Group.

Please Proceed.

Yes.

We've been giving you a hard time or holding your feet to the fire on the Flexibles and this volume is a pleasant surprise.

Can you help us out there, are some of the new products and recoup of market share occurring?

Fred, I think clearly the Flexibles business had a very good fourth quarter.

They've actually improved through the year, and each quarter of '04, and it turned out being a good year over year improvement.

Some of the volume that we had been looking at such as the retort pouch that I think Allan or Charlie mentioned finally got in, it ramped up.

Some other new products that we had ramped up, but also the operating -- just pure operations in the business, the Fulton closure that took place early in the year, we got that business into the plants, it was running well, and they continue to see, to your point, some additional volume, and we've picked up some additional volume early in the year, so I'm expecting a good first quarter from Flexibles and a good year for Flexibles.

And there were some numbers people have been guessing that you have in new products that you were actually able to sell after you got your efficiency back.

Was that number in the 50 to 100 million range?

We've don't -- we have actually -- I'm not sure I know what you're talking about, Fred.

We've talked before about new products which we define generally as products we are producing now that we didn't produce two years ago.

In this quarter we think that would be about $45 million.

And certainly the retort pouch would be a part of that.

Thank you very much.

Thank you, Fred.

Your next question is a follow-up from Mr. Thibault with Morgan Stanley.

Please proceed.

Thanks very much.

A few questions as you look through.

Number one, your expectations for capital spending in 2005?

Edings we are looking at somewhere spending around $130 million in '05.

So no material pickup there.

No.

Could you -- Harris would you mind just walking through some of the new start-ups, you guys are very active in Brazil and two new plants in North America, I suspect potentially in Asia as well.

Can you walk us through the expansion facilities that you have -- expansion that you've undertaken on an organic basis over the last 12 months or so?

Charlie mentioned being still in start-up phase as a couple of those.

Can you walk us through when you expect that start-up phase to conclude and when production ramps and how should we think about that being additive to the Company's volumes in 2005?

I'll be glad to Edings.

Start with Brazil.

We opened the metal end operation in Brazil January a year ago and we have four lines there today.

They're all up and running.

And I would say that that plant today on those four lines probably 95 to 99 percent operational and doing well.

We had a number of our U.S. folks down there helping with it.

I think we're down to four people now, and by the end of next month, we'll be down to two people.

So I would say that that plant is up and running very well.

We will add a fifth line to that plant sometime later.

It will probably be -- come in in the fourth quarter of the year, but the learning curve we're up that learning curve pretty well in Brazil.

We have several new operations in China, and they -- we have the acquisition that we made from Ahlstrom, we have the Wujiang facility and another acquisition.

And I would say that they are operating reasonably well at this point, and Wujiang being the other, they're operating fairly well.

You come across to the two plastic operations.

You have the Corona, California, we installed the second blow molder there in December.

I would say they're getting pretty far up the learning curve in that plant as well, the plastics plant in Warsaw is a little bit behind the facility in California, and we'll probably incur some start-up losses there in the first quarter and maybe into the second quarter of the year, but I expect to be behind us about that time as well.

We mentioned -- Charlie mentioned, when we were talking about the first quarter the Alcore joint venture in Europe with Ahlstrom with the Tube and Cores, we have announced six plant closures that will take place in the first two quarters of the year.

Three in France, one in Germany, one in Poland, and one in the Netherlands, and so -- there will be continued issues with those as we close down and start up new plants.

We certainly have our arms around them but we're watching those fairly carefully because those are -- that's a lot of activity there.

That sort of gives you a snapshot around the world.

I may have missed something but I think that's pretty good snapshot.

Great.

And then just one number that jumped out at me a little, you referenced 5 percent growth in Turkey.

There's also a new plant starting up in Turkey that I forgot.

Thank you.

Don't forget the Turks.

They're good.

Historically you've never really given numbers around the Turkish operation per se but it's always been a double digit grower.

Is there a slowdown occuring at that facility, are you effectively sold out, is that why the new one is going on, or is it simply law of large numbers finally catching up?

We basically sold out in the new facility.

I think probably it may be some seasonality in Turkey as much as anything else from the fourth quarter.

We have seen double-digit growth there and we have nothing to -- that causes to us expect that that's going to change in the foreseeable future.

Got it.

Thanks very much.

Thank you, Edings.

Again, as a reminder if you do wish to ask a question the command is star 1 and your next question is a follow-up from George Staphos with Banc of America Securities.

Please Proceed.

Hey guys, a couple of quick ones.

Harris, when you look at the Flexible business were there any repricing or prebuy issues in that strike you in terms of what was in that 16 percent volume growth?

You mentioned obviously in composites there might have been a little bit of that.

Was there anything at all in flex or was that pure volume growth?

We think it's pure volume growth, George.

I guess the question, then, we've all been dancing around, I'll ask it pretty bluntly, if your base number in '04 is $1.65 and you're guiding to $1.75 to $1.79 if I just apply a 5 percent volume growth rate to your base which is, you know, probably par for the course at this juncture given the run rate you carried into the year, you already are almost on the verge of your guidance range before any effect of further price increases, operating leverage, et cetera, even OCC is probably giving you a little bit of a break sequentially.

So aside from maybe some start-up issues in Alcore, which is understandable, what else is there out there that gives you pause such that your guidance seems to be, at least, very, very achievable at this juncture?

George, I think this is almost the same discussion that we had in New York.

I think what gives us pause at this point in time is obviously we're coming off a strong December.

Is that going to carry over into first quarter of the year?

And obviously we'll have more clarity to that 30 days from now, 60 days from now as we come through the first quarter.

Europe is obviously a concern to us.

We've obviously taken about half of the restructuring costs associated with that.

We took that in the fourth quarter.

But there's going to be a lot of moving parts that come relative to transferring this business in and out and so we need to hit that on all eight cylinders, and that's a concern to me.

I think the other two things that are concern to me, center around volume.

Will volume continue at the same levels they are today, or are we going to see a tailing off?

Clearly we've seen a weaker Europe and so does this volume hold up?

And I guess the last thing is the ability to -- we've seen and we think we continue to see price increases of raw materials and are we going to be able to get these through the system in a timely manner and only time will tell for that, so are we being conservative?

In light of '04 and the fourth quarter, if I were sitting where you were I'd probably say, yes.

Sitting where I am, I'd probably say I'm being cautious.

And from a financial perspective, as I said earlier, we have assumed higher -- slightly higher tax rate and there's -- and clearly we've assumed higher interest.

We have at the end of the year our fixed floating mix is 42 percent fixed, 58 percent floating.

And so with a 58 percent floating mix and interest rates rising we'll see some of the impact of that, too.

So there's some financial issues that help pull down that number.

Okay, guys.

Good luck in the year.

Thank you, George.

You have no further questions at this time.

Thank you very much, and have a good rest of the week.

Thank you for your participation in today's conference.

This does conclude the presentation.

You may now disconnect.

Have a great day.