Sonoco Products Co (SON) 2005 Q4 法說會逐字稿

Ladies and gentlemen, good day.

Welcome to the Sonoco fourth quarter 2005 year-end financial results conference call.

My name is Megan and I will be your coordinator today.

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

We will be facilitating a question and answer session towards the end of this conference [OPERATOR INSTRUCTIONS]

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

Good afternoon, everyone, and thank you so much for joining us for our fourth quarter teleconference.

With me today are Harris Deloach, our Chairman, President, and CEO; and Charlie Hupfer, our Senior Vice President and CFO.

Today's conference contains forward-looking statements based on current regulations and are not guarantees of future performance.

Additional information about factors that could cause different results and about the use by the Company of any non-GAAP financial measures is available on forms 10-K, 10-Q, and 8-K, as filed with the SEC.

As released this morning, reported earnings per diluted share for the fourth quarter of '05 were $0.38 versus $0.35 for 2004.

However, excluding the effect of restructuring charges and unusual expenses, our base earnings per share, which of course is a non-GAAP financial measure, totaled $0.58 for this year's third quarter compared with $0.43 for 2004.

This was on sales improvement of about 8%.

The fourth quarter marks the 7th, I believe, consecutive quarter of year-over-year increases in our base earnings, and of course there is a reconciliation on base earnings in today's release.

Charlie will discuss in a moment the positives and negative impacting this quarter's earnings.

At the end of the fourth quarter, we had achieved a positive free cash flow, which we used to make a pension contribution and to pay dividends and, along with repatriated cash, to further reduce our debt.

At year end, our domestic pension plan was fully funded and our debt to capital ratio was down to 35.1% from the 43.1% immediately following the CorrFlex acquisition.

Cash flow from operations should average about 300 million annually over the next few years.

In '06 we expect to use our available cash for acquisitions, for capital expenditures and benefit plans, debt reduction, and of course dividend payments, as we have been doing since 1925.

Also as previously announced, we expect to repurchase between 2 and 2.5 million shares by the end of the first quarter.

2005 has been a good year and, as Harris has said, may well prove to have been a breakout year for our Consumer Packaging and our Packaging Services segments.

These were led by the full-year benefit of CorrFlex point-of-purchase, along with volume growth and continued margin improvement in our flexible packaging business, and increased volumes in our ends and closures business.

Looking forward to '06, we'll remain focused on growing our top line and certainly on improving margins and managing productivity costs.

As announced this morning, we expect first quarter '06 base earnings to be in the range of 41 to 44 per diluted share, and that includes some $0.02 per diluted share related to the expensing of stock options and excludes any restructuring charges.

This compares with $0.40 in the first quarter of '05, which of course does not include the $0.02 stock option expensing.

I should also point out that the first quarter is historically our weakest.

As previously announced, we expect the full year to be in the range of $1.90 to $1.94.

That includes some $0.03 from option expensing, and excludes any restructuring and assumes that there will be no significant changes in volume or pricing.

With those same qualifications we expect base earnings for '06 to be in the upper end of that range.

As we move further into the year, we'll certainly keep an eye on our actual performance in relation to such issues as OCC prices, which historically have increased during the first half of the year, though that has not yet occurred, and on several general economic issues that could impact us, such as rising interest rates on top of very high personal debt levels, and continued economic weakness that we are seeing in Europe.

With that additional clarity, we'll then decide whether to readdress our earnings guidance for the year.

With that introduction I will now turn it over to Charlie Hupfer.

Thank you, Allan.

Like Allan, I am pleased to report this quarter.

It was obviously a strong quarter for us.

We had good cost control in the fourth quarter and much better than we expected volumes, and you can certainly see it in the results.

At the December analysts meeting I predicted that we would be at the high side of our guidance.

We at the time had had a strong October, but we were seeing a weaker November then.

The real surprise was December, which just came in exceedingly strong for us.

We reported sales of 954.9 million; that's up 7.9%, and EPS $0.38 a share; up 9.7% from last year's $0.35.

But these numbers have a couple of what we consider to be unusual items in them that end.

As well as that, there is restructuring.

We have restructuring in both years.

So let me walk through how we arrived at what we call base earnings.

Again, we start with the as-reported numbers.

Restructuring in 2005's fourth quarter was $2.8 million pre-tax.

That works out to be 1.9 million after tax or $0.02 a share.

What this represents is the last of the plant closings under our 2003 plan.

The second item is that we have a 10.1 million added taxes, incremental taxes, related to our 125 million repatriation program under the American Jobs Creation Act.

In late December we brought back $125 million.

That did trigger taxes, federal taxes, at the rate of 5.25% and on top of that, withholding taxes and some state taxes ran the total bill up to about $10 million or $0.10 a share.

So we backed that out of base earnings as well.

And then the third element was a 12.5 million pre-tax or a 7.6 million after-tax charge that we took to clean up the Fox River at one particular site that's outside of our DePere, Wisconsin plant.

And that 7.6 million after-tax number is $0.08 per share.

Let me make a couple comments on that.

The DePere plant was purchased in 2001 and it is a part of our wholly-owned subsidiary, Sonoco/U.S.

Paper Mills.

The contamination in question is PCB, related to the manufacturer and/or pulping of carbonless paper that was done prior to 1971.

I think it was done sometime between 1950 and 1971.

U.S.

Mills, our subsidiary company now, never produced carbonless paper but they may have pulped some small quantities in the paper making process.

So as a result of that, the EPA is holding Sonoco -- Sonoco U.S.

Mills, rather, and another party responsible for the cleanup of this one particular site.

We've agreed with this other party to split the cost 50/50, so what we've done is we've booked our share, or $12.5 million.

As I said, this goes back into the early 70's.

Back then, U.S.

Mills had insurance to more than cover the claim, so we'll record the recovery of that insurance sometime in the future when we receive it.

Plus we'll get recovery from any other third parties that bear responsibility when we receive that as well.

But for right now we've booked the full amount of the claim.

One more comment there.

We were brought into this very late in the game.

In fact, our first verbal notice was in September and then again in October from the EPA, and that's why we made the reference in last year's -- last quarter's 10-Q.

But because we were brought into this so late, all the engineering has been completed, so we feel very confident that that 25 to $30 million cost is a good estimate of the total project cost for this site.

Some of the work will begin in 2006, but it won't actually be completed, we don't believe, until 2007.

So with those adjustments, what we define as base earnings for the fourth quarter is EBIT of $91 million, net income of 58.4 million, and that works out to be EPS of $0.58 per share, which was well in excess of the range that we had originally projected.

In 2004 fourth quarter, the only adjustment is to restructuring.

Restructuring was $10.7 million pre-tax or $7.8 million after tax.

So base earnings for 2004's fourth quarter were EBIT of 68.1, net income of 42.8, and EPS of $0.43 a share.

So the comparison that we make is on a base earnings basis and it is sales against 954.9 million, that's up 7.9% compared to last year's 885;

EBIT, 91 million, up 33.5% compared to last year's 68.1; net income, 58.4 million, up 36% to last year's 42.8; and again, EPS $0.58, up 35% compared to last year's $0.43.

In these base numbers our interest expense is relatively flat.

We did see short term rates go up about 2%, but we paid down $125 million worth of debt.

And so the interest cost nets out pretty much the same as last year, and also our effective tax rate is about the same as last year as well.

Now let me shift and talk a little bit about the segment.

The segment numbers were in the press release.

I think the segment numbers speak for themselves and I will address most of the issues when I talk about the bridge.

So here we see in the segment, again, sales up 7.9;

EBIT up 33.5%; and as I look through the segments, Consumer Packaging profits were up 28.7% year-over-year, and their sales were up 10.1%.

Engineered Carriers and Paper saw profits rise 47.6% and sales rise 8/10ths of a percent.

So let me explain that, go into a little bit of explanation there because I think it is important to understand.

Last year we did have a $7.2 million charge to our earnings related to the misstatement in Spain that we reported in last year's fourth quarter.

That misstatement went back from 1999 through 2004, so we took that charge in last year's earnings and obviously there is no comparable charge in this year, so that looks like a pretty significant year-over-year positive.

On the other hand, this year we had an ordinary impairment charge of about -- it was $3 million related to some selected assets in our Sonoco Asia subsidiary.

So if I adjust for these two -- and they're not non-operating items, they are included in base earnings -- but if I adjust for these two items, the 7.2 million and the 3 million, then the year-over-year EBIT increase is 24%.

And that's still a very healthy and solid quarter and good improvement.

Most of that 24% is driven by our U.S.

Paper division, which had very good volume and lower furnished costs.

I will talk a little bit more about that later.

The next item on the segment reporting is Packaging Services, and here you see profits up about 6.6% and sales up 24.5%.

Much of the increase in sales is really just pass-through sales at our pack centers, the one in Massachusetts and the one in Virginia, for Gillette and Hewlett-Packard, respectively.

So we have higher sales, higher costs, and they get passed through as sales.

There is very little margin on those sales.

The volume really helps us in terms of improving our productivity, but it does weigh down the profit margins that you see here.

This is obviously a very good business for us, though, very little investment, very high return, but you see the impact where we can see sales outstripping profits just because there is so much of those sales are pass-through sales.

And then the All Other category is up nicely as well.

A lot of that profitability is driven by Baker Reels, both in terms of volume and in terms of price.

Now, let me turn to the sales bridge.

Here is where I am reconciling last year's sales to this year's sales, and the year-over-year difference or increase is $69.9 million.

The four elements that we use, and I will talk about each of them specifically.

Volume accounted for $43.2 million, so roughly 60% of our increase in sales came from volume.

Price accounted for $11.9 million; acquisitions, $11 million; and foreign exchange, 3.8 million.

So that should add up to the 69.9 million year-over-year increase.

Let me make a couple comments about volume, the 43.2 million increase.

A lot of that volume was coming out of our Consumer Packaging segment.

Composite can volume in the U.S. increased about 2.5% year-over-year.

We saw solid increases in finer and plastic calking cartridges, composite cans sold into the snack industry were up, and new products like the self-heating can and some conversions of powdered infant formula all added to the volume increases in composite cans in the U.S.

In Europe we saw about a 10% volume increase in this same composite can group.

A lot of that is new business and much of that's the single-wrap canister.

And our Flexible division, which is a part of the Consumer Packaging group, saw their volume up 2% and that's actually despite closing one plant.

We closed a plant in British Columbia at the end of 2004 and also giving up some low margin business.

So what that does is it speaks well for how well products like our Snack and Seal and other new products are going in flexible division.

But again, volumes were up there 2%.

In Engineered Carriers and Paper, overall volume declined a little less than 1 -- I am sorry, a little more than 1%.

That's overall in the Engineered Carriers and Paper segment.

In the U.S. we saw volume declines of about 3.8%, with textile volume down around 9% year-over-year.

In Europe we saw volumes down 4.5%, which largely reflects weakness in western Europe and a fall off in our textile business in Turkey.

On the other hand, our U.S. paper sales, trade sales were up 8% year-over-year as we continue to focus on trade sales, especially the specialty grades.

And I have already talked about the increase in Packaging Services that makes up about 60% of that $40 million increase.

So most of the increase is coming -- in fact all of the increase is coming from Packaging Services and from the Consumer Packaging divisions.

In terms of price, price is up $11.9 million.

Most of that increase is in our Consumer Packaging group and much of it relates to contracts that were reset through the course of the year where we're able to pass along cost increases.

Our overall Engineered Carriers and Paper segment prices were down year-over-year, but that requires a little bit of explanation, so let me take a minute and talk about that.

Our tube and core businesses in the U.S. did see increased prices.

We had a price increase that we announced in November of last year and a price increase in July of -- November of 2004 and July of 2005, and those price increases gave us a year-over-year increase in tubes and cores in the U.S.

We saw in Europe pricing was down, about the same percentage, but European prices seem to have stabilized over the last two quarters.

What's driving the decline in pricing in Engineered Carriers and Paper is our recovered paper prices were down.

Part of our business is to purchase recovered paper and then sell it into the marketplace and recovered paper prices, using as an example southeast OCC, was down $20 a ton this year compared to last year.

So that's what really pulled down our overall pricing.

We'll see in a minute when we talk about profits that that's a real plus.

But it certainly looks like a negative on the sales line.

Acquisitions, $11 million.

That's one month of the joint venture in Europe as well as the operation that we purchased in China.

And then foreign exchange is just the weaker dollar.

Now let me talk about the EBIT bridge.

EBIT -- what I am doing here is reconciling last year's EBIT to this year's EBIT and EBIT was up $22.9 million.

Volume and mix are 6.7 million of that.

Price cost is 8 million, that's a positive 8 million.

Productivity is a positive 14 million.

And then Other is a negative 5.9.

So that should add up to 22.9 million of year-over-year EBIT increase.

Starting with volume, volume as I said is 6.7 million.

That's the profit impact on that $43 million of volume that I talked about with sales.

And again, the majority of that is from Consumer Packaging and to a lesser degree from Packaging Services.

In terms of price cost, that's up $8 million, and most of that is on the Engineered Carriers and Paper side.

I went to some lengths a minute ago to talk about recovered paper because even though we saw declines in sales price coming from recovered paper, here is where we see that the positive effect.

And it is that our consumption of waste paper was down roughly 13% year-over-year, so the paper that we sell to ourselves to convert into paperboard, the cost of that and the cost, in cost, our cost of sales was down 13%.

And so it is that reduction in cost that contributes to the overall price cost -- favorable price/cost that we see in this quarter.

Interestingly, when I talked about sales and said most of the sales price was on the Consumer Packaging side, when you get to price/cost and look at it from an income point of view, it is about a wash.

Our price increases covered -- just barely covered, but they did cover -- our cost increases.

And we absorbed year-over-year steel increases of 15%, resin increases averaged out to be 23%, and film 7%.

So a lot of cost increases, but those were all covered with prices in the consumer side.

So when you put it all together, $8 million worth of favorable price/cost.

Productivity, positive 14 million.

Again, that's our Six Sigma, our lean, our scrap programs.

Basically productivity was good all across the board.

It was especially strong in our paper division in North America, where we ran our mills at 99% utilization.

Our mills largely ran through the Thanksgiving holiday and the Christmas holiday, and it was running those mills that produced a lot of the productivity.

But that's not the whole answer.

I will give you another example.

We saw scrap rates in our tube and core division reduced by 35% year-over-year, and we saw scrap rates in our flexible division reduced 14% year-over-year, so our scrap program, which is a part of our overall productivity programs, are really making a difference.

Other, the final category, that's our catch-all category, but we did have wage increases that averaged about 3% year-over-year.

We saw energy increases net of the hedges that we have increase year-over-year by $5.4 million.

And freight, with the run-up in fuel, freight cost us an incremental $4.9 million year-over-year.

Now let me switch gears and talk just a minute about the balance sheet.

Our balance sheet remained strong.

Allan referenced it earlier.

Our debt to total capital as we calculate it is 35.1%, down from 40.2 last year.

Excess cost -- cash was eliminated as a result of the $125 million repatriation.

We actually had a negligible borrowing, we borrowed about $15 million as all that cash moved around.

So there is roughly about $110 million that would represent excess cash.

As a result of that our current assets declined by $37 million.

Our total debt, which would be current, which would be short-term and long-term, declined by $125 million, and our equity increased by $100 million.

Our cash flow was good for the quarter.

Cash flow was $66.8 million versus 115 last year.

So how can it be good for the quarter?

Well, we did pension funding this year.

We founded $63 million at the end of the year in order to fully fund our U.S. pension plan.

So our pension funding this year was about $48 million higher than last year.

If you add back that $48 million difference, then our cash flow from operations was just about equal to last year.

So cash flow performance for the fourth quarter was very strong, as it was strong last year.

One of the comments I usually make before I wrap up is to talk about new product sales.

We had new product sales that totaled $23 million in this fourth quarter.

That's versus 9 million in the fourth quarter last year.

So you can see the impact that all of our research and development work is having, and it is versus $19 million in the third quarter.

So it was a good quarter from the perspective of new products.

In our flexible division, that would be the Retort Pouch.

It would be that Snack and Seal product, the easy open and reclosure product.

In our composite can division it would be the SonoWrap, it would be plastic bottles and plastic squeeze tubes.

And in CorrFlex it is the SonoPop displays.

I will make a comment about hedging.

We don't hedge natural gas to speculate, but we do hedge it and have hedged it over the last couple years to get better visibility into the next year's costs and also to reduce volatility.

So I think it is interesting.

I told the audit committee yesterday that we had $15 million worth of gains in fiscal 2005 as a result of our hedging activities.

And then my last comment, let me talk a little bit about the 2006 estimate.

We previously estimated at our December analysts' meeting that our forecast for 2006 would be EPS of between $1.90 and $1.94.

Given the strong fourth quarter, we're pushing that forecast to the high side.

That is to the $1.94 side.

But our budgets are built from the bottom up, so we really don't have any basis right now to make a change in that estimate and we'll update it again as we do reforecasts after the first quarter.

But just as a reminder, our forecast assumed roughly an 11% increase in EBIT year-over-year, so at the EBIT line we're looking for about 11%.

The biggest year-over-year difference is in tax expense because we're assuming a more ordinary 35% effective tax rate in 2006 and that would compare with the tax rate of more like 32% in 2005.

So it is really the tax rate, interest, and a little bit of minority interest that's driving most of the difference because, again, we are expecting about a 10 to 11% increase in EBIT year-over-year.

Our first quarter 2005 -- actually our first quarter 2006 build up, rather, provides a range of 41 to $0.44.

I will remind you that includes $0.02 for stock options and as I mentioned earlier, it also includes the higher tax rate that's also built into the first quarter.

And so that gives you some basis for understanding why our forecasts for the year and for the first quarter are what they are.

Allan, that's the extent of my comments.

I will turn it back over to you.

Thanks, Charlie.

We're ready to open it up for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Amanda Tepper with J.P. Morgan.

Good afternoon.

Hello, Amanda.

How are you?

Good.

My first question is, December being so surprisingly strong, do you think there could have been any prebuys going on that drove the volumes up across some of your businesses that might come back in the first quarter?

Amanda, I don't think there was any more of a prebuy in the December time frame than we would normally see, because historically our products are so bulky, the cans and the tubes, they don't lend themselves to a lot of stocking, so I wouldn't think there was any more than normal.

So then, where do you think all these volumes came from?

I think what Charlie talked about is we saw strength across the consumer businesses and that's a result, I think, of the things that we've been doing in those businesses over the last few years.

We also saw a lot of paper volume that came in and a lot of that was external sales that -- and they're not really so much commodity grades because we don't produce a lot of really commodity grades.

These are engineered paper grades that our paper development people have been working with our sales people to find new customers to sell new grades of paper to, and those started coming on in the third and fourth quarter of the year.

So I think we saw just the strength of some activities, actually.

Okay.

And could you comment on the acquisition side, now with the even less levered balance sheet?

Are you seeing anything changing out there on the horizon, any more attractive opportunities?

Amanda, I don't think anything has changed since our meeting in New York, where I was asked by someone about the priorities and what I saw, and we knew then that we had paid down debt and obviously we've paid down a little more in the fourth quarter.

But we've done what we said we were going to do with the rating agencies after CorrFlex, that we would spend probably 18 months to two years paying down debt, which we had done, and that we were positioned to look a little more aggressively for acquisitions than we perhaps were able to do in late '04 and '05, and the priorities would be -- I mentioned the flexible capacity that we had that we would need to add some additional capacity there, that my preference was to do that through an acquisition rather than Greenfield.

I mentioned some expansion of our plastics platform and I think I also mentioned expanded presence of our CorrFlex-type businesses.

And those would remain our priorities and if something came along, obviously, it's a tack-on and some of the other businesses that met our criteria, we wouldn't hesitate to move in that direction.

But I think that sort of summarizes where we are and what our priorities would be.

Okay.

And then just one last question.

You did a very nice job on the new product side again in Q4.

Is there a pipeline of more new products coming in that you can continue that, you think, in '06 and can you talk about any examples?

Amanda, thank you.

We clearly have been working on that, as you know, over the last couple of years, and we see the pipeline continuing to grow.

I think I've said that I would like to be in a position to add 100 to $125 million of new sales each year in the fourth quarter, as Charlie mentioned.

I think the number was some 20 or $23 million.

So hopefully we're getting close to that number.

Yes, our pipeline is there.

Charlie mentioned the Snack and Seal, which is in the marketplace, but we have a lot more opportunities with that, particularly as the cookie manufacturer rolls that into other product lines that they have.

That's just one example, but there are numerous examples of that.

Okay.

Thank you.

Thank you, Amanda.

Your next question comes from the line of George Staphos with Banc of America Securities.

Thanks.

Hey, guys.

Good afternoon.

Congrats on the quarter.

It is one for the mantle piece.

Thank you very much.

Let's talk about the volume trends you're seeing in paperboard.

What grades are you, if not dislocating, what applications perhaps are you serving or again, what grades are you dislocating with some of the specialty grades.

-- specialty.

These will be specialty grades of paper.

Edge board would be one of them that comes to mind.

Also our partitions board that we we sell into our joint venture with Rock-Tenn.

So it is those kind of specialty grades of paper.

Okay.

Got it.

And what grades are being served?

Or what grades are serving those applications right now?

The edge board goes into like the corner post kind of marketplace.

Okay.

But what I mean, Charlie, is are we talking chip board or some other grades that you're dislocating that somebody else now is finding they've got too much capacity for?

No, these are specialty engineered grades where we work with the customer.

We've got a group that actually deals with the paper science and has specialty grades to meet their needs.

I can't tell you who -- exactly what it's being replaced by.

These would be unique grades of paper for the most part.

Okay.

Fair enough.

Thanks for the detail on that.

Now, in terms of the quarter, you talked about the areas where you saw strength, but where were you surprised at the end of the day?

Was it on the volume in new products?

Was it on the volume in consumer?

Was it on the productivity?

Relative to what you were looking at in December, what was the biggest driver?

George, I would say that we saw strength across most of the product lines in December, and if I were to look back over the last four or five, six Decembers, we saw a dramatic fall-off in business and I guess the last year I remember a strong December was Y2K in 1999.

Didn't you have a strong December, though, last year?

No, we did not.

All right.

You had a strong fourth quarter by a weakish December, then?

That's correct.

We had a strong fourth quarter, October, November, but December just sort of trended off.

Got it.

And we did not see that this year, and obviously, as Charlie mentioned, for the first time in a long time we ran our U.S. mill system straight through the holidays of Thanksgiving and Christmas.

And so that was obviously a big part of it.

But we saw strength across all the businesses.

So do you think you'll have to take a little bit more maintenance in the first quarter?

And what kind of run rates are you seeing early in January on volume trends right now?

George, I think on the industrial product side we've seen the normal seasonal fall-off from December to January.

I would say it was typical to what we've seen the last two or three years.

So, no more, no less there.

The can side is probably, as it normally is, these external sales of paperboard continue into the system, and the mill system is running at -- the same as it was in December.

Okay.

So would you say low single-digit growth is what you're seeing right now?

You've got to aggregate everything.

Yes, I would say that, low to mid-single digit growth.

Okay.

Thanks.

I will turn it over.

I'll be back.

Thank you, George.

You now have a question coming from the line of Mark Connelly with Credit Suisse.

Hi, this is actually Dohyun.

First, can you talk a little bit about SG&A in the quarter?

I believe the environmental reserve was actually in that number.

Am I correct in assuming that?

I will have to check on that.

It probably is correct.

SG&A is up a little bit in the quarter, but only a marginal amount, and certainly very little compared to last year, so if there is a big difference that's where it would be.

It's the 12.5 million.

Okay.

And do you have any guidance for SG&A for '06?

No.

As a general -- generally, what we've been doing is we look at that -- we actually talk about that at the Board level every quarter, and look at it on a monthly basis.

The way we make that calculation, it was a little bit more than 10% this year.

Our objective would be to have it more like 9, 9.5%.

Got it.

And can you also tell us what kind of pension expense you're expecting for '06 in your guidance?

Pension expense is up a little bit, year-over-year.

Pension expense would probably be about -- in next year's guidance about 45, $44 million, and that's up about $3 million from where we would have been at the end of this year.

Okay.

And I don't think you gave a CapEx number for '06.

We would look at CapEx in '06 to be around 120, $125 million, which was basically what it was this year.

Thanks.

Lastly, I just wanted to ask about OCC consumption.

I believe you consumed about 2 million tons annually.

I am just wondering if you can help us with how that breaks down between the different business segments and how you've changed that recently.

Well, the consumption would all be in our Paper group.

It would be in our Industrial Products and Paper group.

I think geographically we probably consume a million tons in North America, probably seven, 800,000 tons in Europe, 600,000 tons in Europe, and the balance of it is around the world.

The big consumption is obviously North America.

But you said 2 million tons for your Engineered Paper -- [inaudible] paper group.

I would have though that it's also something that you would use for the POP displays as well as some of the consumer products as well.

Well, the consumption of the OCC would be in our paper group where we make the paper that's transferred into these converting groups.

Got it.

It would be in Consumer Packaging with composite cans, it would be in tubes and cores and industrial.

We would not transfer much paper at all into CorrFlex, the displays, that would be normally allignable with [inaudible].

Okay.

That's all.

Thank you very much.

Thank you.

Your next question comes from the line of Ghansham Panjabi with Wachovia Securities.

Hey, guys, how are you doing?

Hey, Ghansham, how are you?

You seem to be benefiting from lower OCC while your own pricing initiatives seem to be very firm.

Given where OCC prices are now, are your customers starting to push back a little bit on your new initiatives?

And can you also give us some color on the competitive landscape in Engineered Carriers in North America and Europe, please?

Ghansham, I am sure -- I am not that close to the price increases that we've announced in Engineered Carriers and Paperboard in North America, but I suspect there will be some push-back on it.

But it's modest and it's going reasonably well at this point.

We do have some contracts on the industrial side -- on both sides of our business, but on the industrial side in particular that are related to OCC, and those are basically quarterly adjustments, so they will reset as of January the 1st at whatever the price of OCC was at that particular time.

So we will see that.

The competitive reaction -- we see movement back from competition to move pricing up.

We've seen good support for it in North America.

And in Europe there are some folks out with some increases over that.

We've obviously announced a paper price increase and are contemplating a tube increase as we sit here.

And can you just expand on the comment on Turkey volumes?

Is this a comp issue or do you see some sort of secular slow down there?

I am not -- Charlie, I don't know about the comp issue.

We have seen some slowness in '05 on textiles around the world, even in China, and Turkey is a textile plant.

Turkey is affected not only by the Chinese imports that were going into Europe but also by the currency that makes it a little more difficult to export out of Turkey because of their currency situation.

So we have seen a slowdown in textile sales there.

Okay.

Great.

Thanks so much.

Good luck in the quarter.

Thank you, Ghansham.

Your next question comes from the line of Edings Thibault with Morgan Stanley.

Thanks very much and I want to echo the congratulations on the quarter.

This is a very strong performance.

Thank you, Edings.

And as a follow-on to that, I want to kind of just drill into a little bit your thinking on the first quarter and how you're laying that out, because just looking at that bridge, Charlie, where volume was 7 million, price cost, 8 million, alone, how should we think about how these numbers may impact your profitability going forward?

It sounds like the volume number is intact, although it will be a seasonally slower period.

Would it be fair to say, Harris, that because of these contract resets in Engineered Carriers that perhaps that price/cost differential won't be as great, even though OCC prices are still $20 a ton lower.

Or are you building in conservatism about where you might expect OCC prices to go over the next two to three months?

No, I don't think, Edings, we're being conservative about OCC pricing and you hit the nail right on the head.

During the quarter we had, obviously, October 1st a reset of these contracts on an October 1st price, and we saw pricing decline during that period of time.

We also saw, obviously, competition out trying to raise prices to cover energy surcharges, and so as I said, there has been pretty good support in the market to raise prices.

But we have to reset those contracts that we do in fact have in place as of the January 1st, and traditionally we've seen in the first quarter of the year, as you know well, that's when you see increase in OCC that may be weather related.

Now, we haven't seen the weather-related issues, certainly in the Northeast and the Southeast that we sometimes see this time of the year with snow and ice.

So we've seen a good flow of OCC.

I don't know when next month's numbers come out.

They may be this week.

They may -- but all I've seen is -- but you're right on the target of our concern, and our conservatism in the quarter.

Okay.

And Charlie, just touching on that bridge, you said the Other was a negative 5.9 million.

That's correct.

And you were talking about some of the costs.

I wanted to make sure, because you were talking about, I gather, some of these cost elements would be in other areas of the bridge.

Because you talked about freight being up 4.9 million.

We categorize all that in that Other, which, the negative 5.9 million had the year-over-year wages.

I don't think I mentioned what that was, but it is about $7 million.

The energy was 5 million.

Freight was 4.

That's also, and I mentioned it earlier, is where the impairment charge in Asia is found.

That's 3 million.

But then we had the 7 million, the 7.2 million last year that gives you a year-over-year positive effect.

And so you'd really have to put all of that together to look at -- to sort of figure out what is in that Other category.

But if the point that you're making, at least in part, is price/cost is up $8 million and some of that price probably does relate to some of the costs that we have down in Other.

Some of the energy costs, for example.

And so there may be a little bit of mismatching between price/cost and Other as I've described it here.

Is there anything we should be aware of in terms of the positives on that number going -- the beginning of year?

Because it would seem, again, that some of those price/cost elements -- excuse me, some of those Other costs, energy and freight, are going to be running at that kind of negative level, at least through the beginning of the year on a year-over-year basis.

Our -- I wouldn't disagree with that.

I don't know that -- I personally don't know anything in place that would change something like energy.

Our hedging policies are roughly the same.

We're hedged right now at about 70% through the first six months of the year and then 50% through the last six months.

So it averages out to be about 60% overall.

So I wouldn't expect there to be a whole lot of change in the energy.

I can't really speak to the freight.

I don't think fuel costs have come down any, so those costs will persist on into the first quarter.

Okay.

And that may be some of the reason why you're not being perhaps as aggressive as the progress in the fourth quarter might lead you to be, in terms of --

That could very well be true.

When we look at last year's first quarter, I believe it was about $0.40 a share.

This year's first quarter obviously has the $0.02 of stock options.

Stock options disproportionately affect us in the first quarter, just because of the way the accounting falls out.

Our CorrFlex business was extremely strong in last year's first quarter, as they had a lot of rework kind of applications that aren't being forecast into this year.

There is a 13% -- well, compared to the fourth quarter, there is a big -- the first quarter is obviously our weakest quarter and there is about a 13% decrease in the number of billing days, so it is really all of those factors thrown together.

But again, as the comment I made about the budget is just as true -- budget for the year is just as true for the quarter.

And that is, these are billed up from the divisions and so this is what the divisions are basically telling us the quarter will look like.

And so when I look at it, trying to reconcile from a strong fourth quarter to first, I think that we see the year-over-year seasonality, but when I look at it compared to last year's first quarter, this year's first quarter, it looks pretty reasonable to me.

Okay.

And how should we think about productivity?

Not just, obviously, for the first quarter but for the full year.

It has been an important source of operating profit strength for you guys, particularly in this period of strong cost inflation.

Order of magnitude, how should we be thinking about it?

I would look for -- Edings, I would look for productivity to be at least equal to the 77 to $80 million number that we had this year.

Great.

Thanks very much.

Thank you.

And the productivity that I define is sort of a calculated manufacturing productivity, and the number with -- the 14 million number compares with 13 in the third quarter, 6.7 in the second, and 10 in the first.

So our productivity programs have been in place for a long time.

They've contributed to our earnings for the last four or five years, and they're certainly expected to next year, and that expectation is built into the guidance.

Okay.

Your next question comes from the line of Chris Manuel with Keybanc Capital Markets.

Good afternoon, gentlemen.

Hello, Chris.

Couple questions for you.

First, if I could dive a little deeper into the hedging that Edings just asked about.

I believe at year-end or when you spoke to us last, in December, have you made some adjustments in your hedging for '06 versus where you were at that time?

It seems to me that you're a lot more hedged now than you were before.

Is that accurate?

No, that's not.

We haven't made any changes since December.

Our protocol would have been to have added a layer of hedges in about the October/November time frame and we would expect to have an average of 75% through all of next year.

We did not because of just the high price of natural gas in those hedges at the time.

We didn't enter into that series of hedges, so the 75 has dropped off to 70 and then, as I said, 50 by -- in the second half of the year.

Now, one of the reasons that it's beyond just high price of natural gas but obviously we've had some surcharges and some pricing that we've put into the marketplace to offset that as well.

So the model is a little bit different, but there is really no difference between what I am saying now and what we were saying in December.

Okay.

Next question I wanted to ask you centered around your Other category, where you indicated that the reels were exceptionally strong.

Can you give us a little more color there, what was behind the great performance and will this continue, in your view?

Chris, it was good performance over all the businesses in that segment.

Charlie singled out reels, and you asked about reels.

This is obviously large cable reels that go into the wire and cable industry, building wire, and that business historically is positively impacted as a result of rebuilds after natural disasters such as Katrina and Rita, and actually as I talked to the business, what they're seeing are the rebuilds that are taking place as a result of last year's hurricanes in the Florida region, and Katrina has really not kicked in at that time this point in time.

So I would expect strong performance out of that business for the next 12 to 18, 24 months, actually.

Okay.

And then the last question I wanted to ask you was, as you look at your guidance for the full year, what sort of base volume assumption are you factored into there?

Up 3%, 4%, 5%?

What's your assumption there?

Chris, I am not sure what the assumption is.

Charlie may have it.

But as we talk to the businesses and when we were putting budgets together in October and November, they were taking the run rate that they had had for the first nine months of this year and basically projecting that out for the year and it wasn't making a lot of changes.

So we're saying that the volumes should be basically what they were this year.

If the economy falls off on us, then obviously we've got some issues.

If it picks up -- and we didn't factor quite as strong of a December as we had.

But we were not messing with volumes one way or the other, frankly.

Okay.

Thank you very much.

Thank you.

Your next question comes from the line of David Leibowitz with Burnham.

Good afternoon.

Hello, David.

A couple of things I may have missed.

So if it is a repetition, I apologize.

What do you estimate your tax rate will be in '06?

We're using 35%, and that's up from about 32% this year.

And second, did you give out what you expect new products sales will be as a percentage of total revenue for this year?

I don't think we gave it as a percentage, David.

I would look for new product sales to be in the $100 million range year-over-year.

Okay.

And third, what percentage of sales will be consumer versus industrial in '06?

I would look for the consumer to be at least 50% of the total sales, maybe a little more.

Okay.

Also, in light of yesterday's Wall Street journal article, is your buyback of 2 to 2.5 million shares going to be open market or a forward contract?

It is likely to be an open market purchase.

We haven't started it.

We've -- obviously we've been in a blackout period for all of our management as well as the Company since December, but we'd expect to start it pretty soon, and I think it will be an open market purchase.

I haven't read the article that you're talking about but I did -- someone was telling me about it and that's certainly not the direction we're going.

Excellent.

Lastly, on the consumer side, at the December meeting in New York, you indicated you had some new customers for your self-heating container.

Can you identify them for us at this point?

We cannot, David, I'm sorry.

When might we start seeing the product on retailer shelves?

You know, I don't know that.

It's there.

It's there.

It's already out?

It's already out.

I am afraid to ask why you can't identify, but we could find it on a -- could you tell us what retailers to visit, then?

David, you would be surprised that some of my customers don't want me to talk about them and this is one that doesn't.

But if you can't find it, call me and I will send you a can.

I am not concerned about that.

I just want to know where to look.

The only company I know of who doesn't like anybody knowing who supplies them is M&M/ Mars.

But I didn't think they were in liquids, but I will take your word that they are.

Well, maybe there's somebody else.

Okay.

Thank you very much and I apologize for taking so much time.

I'm going to queue up again.

You now have a question coming from the line of Frank Dunau with Adage Capital.

Hey, guys.

I've got a couple of questions.

If you were to roll the natural gas hedges at today's prices, how much incremental or -- would that be in -- either in cost -- or maybe it is not in incremental, given where gas prices are now?

Fair market value of our hedges right now is about $17 million and that's an asset that's on the books.

Okay.

And as you go to surcharges, am I correct, you're not surcharging anything you're hedged out on, or are you?

That's correct.

That's the way that surcharge was put together.

Okay.

And I may have mis-heard something.

Did you say your consumption of paper was down 13%?

No, I said that the cost of the paper was down 13%.

That's the year-over-year furnished cost, which would just be sort of the average cost.

Cost itself was down -- cost of OCC and other papers were down probably $20 and then freight would enter into that.

So the overall average furnished cost was favorable.

Down means favorable by 13%.

Okay.

And so $20, that's year-over-year.

Do you know what it was sequentially?

Sequentially being --

Third quarter to fourth quarter?

Third quarter to fourth quarter -- It was -- I got it.

It was 90 in July, 90 in August, 90 in September and then it started dropping, 75.

This is OCC.

Yes. 75.

75, 60.

And 75 in October and then 60 in November.

Okay.

And as you talk about seasonally, that normally -- is it the early part of the year that it gets strong again or does it usually normally drop off like that at the end of the year?

You normally will see -- the end of the year is a high generation point.

If you see weakness, it is generally in the late third and fourth quarter, and you generally see a pick-up about this time of year, Frank.

Okay.

Thanks.

Thank you.

[OPERATOR INSTRUCTIONS] And you have a follow-up coming from the line of George Staphos with Banc of America Securities.

Thanks.

Harris, if you had your druthers, given how effectively you have been able to raise pricing over the last couple of years, would you prefer to see OCC prices stable to tight, or would you rather see them at this juncture declining?

I would probably prefer to see OCC prices going up a little bit, George.

Okay.

And -- for the reasons that I was suggesting?

Yes.

And then second question, just minutia, Charlie, you said you had $15 million of gains from hedging this past year.

That's for the whole year.

I really don't know what the -- that's pre-tax and I don't really know what the fourth quarter effect was.

Okay.

Would it have been any more, or do you think it would have been pro rata, or lesser of the total, lesser per quarter amount?

I guess, the natural gas prices have been pretty high all year, and so I guess the answer to that would be just to look at the hedge price and figure out where it's been high and low and look and see if that influenced any one quarter in particular.

So it could have been a little bit higher in the second half of the year, but not demonstrably so.

That's right.

Okay.

Thanks, guys.

Thank you.

You have a follow-up from the line of David Leibowitz with Burnham.

Given the price increases you have put in already, why do you estimate the average selling price will be, percentage-wise, up this year versus a year ago?

Even on flat volume?

Boy, David, I don't have a clue of that.

Mix and things play such an important role in that, I really couldn't even speculate on that.

But we have moved the prices and I guess we've seen some announcements by one of our major competitors on the tube side and we've talked about staged increase of paperboard, and so as I said earlier, we're getting good support for that so I feel good about it.

Okay.

And second of all, are there any more divisions or business units you might be looking to sell this year, if prices were in fact to meet your criteria?

We do not have anything on our radar screen to sell at this point in time.

And do we have anything on the radar screen to buy?

I can't comment about that.

Okay.

And then, let me be more hypothetical, if I may.

If there were a company to be purchased, would it be in an existing business that you are in or would you look to go a bit further afield?

David, I think I have said and I will reiterate, I think we have the business platform that we need, and our priorities would be those that I mentioned earlier to Amanda's question, it would be for capacity in flexibles, it would be plastics, expansion of our plastics platform, CorrFlex, and it would be tack-on acquisitions in our existing businesses.

Okay.

And last question, are there any developments out there in the field that give you pause that were something to come to pass it might obviate the need for one of your product lines?

I don't see anything on the radar screen today, and that's a long-range radar screen I am looking at.

Amen.

And thank you so much.

Thank you very much, David.

[OPERATOR INSTRUCTIONS] At this time you have no further questions.

Let me thank all of you for joining us today.

We appreciate your interest in the Company and look forward to talking to you at the next conference call.

Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference.

This concludes the presentation and you may now disconnect.

Have a great day.