Sonoco Products Co (SON) 2006 Q1 法說會逐字稿

Welcome to the Sonoco first quarter 2006 financial results conference call. [OPERATOR INSTRUCTIONS] At this time I will turn the call over to your host Mr. Allan Cecil. Sir, please proceed.

Good afternoon and thank you very much for joining us for our first quarter teleconference. With me today are Harris DeLoach, our Chairman, President, and CEO; and Charlie Hupfer, 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 that might be use for 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 had morning reported earnings per diluted share for the first quarter of '06 were $0.44 versus $0.37 for '05. Base earnings for diluted share which is a non-GAAP financial measure that excludes certain items were $0.46 for this year's first quarter compared with $0.40 in the '05 first quarter. Base earnings for the first quarter excluded after tax restructuring charges of $0.02 and $0.03 per diluted share respectively for the '06 and '05 first quarters. A favorable state tax adjustment increased reported and base earnings for the first quarter of '06 by about $0.03 per share.

Despite decreased sales volume in tubes and cores and in services plus higher raw material costs with exception of OCC, the first quarter marks the eighth consecutive quarter of year-over-year increases in base earnings for Sonoco. Charlie will discuss in a moment the positives and the negatives impacting this quarter's earnings. I would like to point out if I may that the first quarter is historically our weakest quarter in tubes and cores and then we traditionally see an improvement in the second quarter, and we would expect that will again be the case.

Also with the exception really of last year's first quarter CorrFlex has historically experienced weak first quarters and then enjoyed increasing performance through the remainder of the year which we also expect to again be the case in 2006. I might say that this was also the eighth consecutive quarter of year-over-year increases in earnings for our consumer segment providing I think further verification of our strategy to reverse our historical ratio between consumer and industrial markets. I would also note that the consumer business sold approximately $16 million in new products during this year's first quarter which was an increase of over 0.5 million compared to last year's first quarter. You may recall that we -- when we began talking about new product sales we defined new products as those introduced during the past two years. Since some 6.5 million that was included in last year's first quarter as new products were excluded this year, what we really experienced in reality in the first quarter was a 7.2 million move up in the amount of new products this year versus the same period last year.

The Company continues to also enjoy strong cash flow from operations driven by our ongoing emphasis on working capital, and certainly from improved earnings, and this cash flow was also used to help fund our previously announced program to repurchase 2.5 million shares of common stock which was completed in early April. Looking ahead, we expect second quarter earnings in the range of $0.44 to $0.47 per diluted share, and that excludes any restructuring charges or significant general economic changes. Based on the first quarter performance and current operating conditions, we've increased our guidance for the full year to the upper end of the 1.96 to 1.99 range from our previous guidance of the upper end of the range of 1.90 to 1.94. I would also point out that we expect our third and fourth quarter performances to be fairly similar to each other. With that prelude, I will now turn the conference over to Charlie.

Thank you, Allan. Let me start with sales. Sales, 818.8 million, that's up 5/10 of a percent over 2005 and EPS is $0.44 versus last year's $0.37. EPS includes restructuring in both years. So as usual what I will do is add back restructurings to both years to arrive at what we'll call base earnings. Now, you can find a reconciliation of reported EPS in base earnings in the website, and it is also on our press release.

In the first quarter 2006 restructuring charge was 2.4 million pre-tax and that's 1.4 million after tax. What this represents is the residual cost related to the ramp up of our 2003 restructuring program. The 1.4 million after tax equals $0.02 a share, it actually rounds to $0.02 a share or we round it to $0.02 a share. What that means is, is the base earnings are therefore $0.46 a share. Last year's restructuring was $5 million pre-tax, 3.1 million after tax or $0.03 a share. Base earnings would have been $0.37 plus the $0.03 or $0.40 per share last year. Our comparison is $0.46 this year to $0.40 last year.

Now, P&L or the income statement on the basis of base earnings is that sales are up 5/10 of a percent, so 818.8 million up 5/10 of a percent and EBIT is 74.8 million, which is up 10.8% from last year's 67.5 million. The gross profit margin was 19.1% this year compared with 18.2 last year. As I go through the analysis, you will see that an awful lot of that was driven by our productivity improvements year-over-year. Selling, administrative, and other costs only increased about 0.5 million, and that's on $81 million worth of spending, so we feel real good about having controlled selling and administrative costs year-over-year. So coming down the income statement, profit before tax is $64 million, that's up 10.1% over last year's $58.1 million.

Now, interest is higher year-over-year, and that's due to higher short term rates, our commercial paper rate was about 200 basis points higher this year than last year. That increase in short term rate was offset at least in part by debt reduction year-over-year. The big driver isn't so much higher interest rates in the U.S. It is really higher debt levels outside the U.S. much of that in South America where we funded the start-up of our Brazil metal end plant and that's funded in local currency, and the interest rate there is about 19%. That's one of the big drivers in interest year-over-year.

Now, in terms of taxes, taxes are 20.1 million versus 20.6 million last year. It is easy to think of taxes in terms of the effective tax rate. The effective tax rate this quarter is 31.4%. The effective tax rate last quarter was 35.4. So a pretty significant decline in the effective tax rate. In the first quarter this year we recorded a reduction in tax expense related to a discrete adjustment to state taxes following the resolution of a specific state tax issue. When that issue was resolved, it allowed us to free up approximately $3 million or $0.03 per share of reserves, and the way the accounting works because that was a discrete adjustment that we learned about and took place in the quarter, we accounted for it in its entirety in the quarter. That was something that we had not expected.

The after tax effective of that tax adjustment as I said was about $0.03 a share. So coming all the way down to the bottom line, our base earnings are $46.5 million, that's up 16% over last year's 40.1 million, and EPS is $0.46 versus last year's $0.40. Our guidance was $0.41 to $0.44, so we exceeded our guidance. Admittedly our guidance assumed that we would have a 35% effective tax rate, so if we adjust out that $0.03 difference for the discrete tax adjustment, we would be at more like $0.43. I think the real number is somewhere between $0.43 and $0.46, and what that means is that we're to the mid -- we're really on the high side of our guidance or over our guidance depending upon how you want to look at that tax adjustment. All in all we felt like this was a very good quarter for us no matter how one looks at it.

Let me comment now about the segments. You've got segment reporting in the press release, and then I will go on and talk about the sales and EBIT bridge. But a couple comments about the segments first. Our consumer packaging segment had a very strong quarter. Sales were up 7.7% year-over-year, and EBIT was up 15.6%. On our composite canned volume in the U.S. was -- well, U.S. and Europe was very strong year-over-year, and I will talk about that a little bit later. Price/cost was generally neutral in this segment. We had very good productivity. Good volume, neutral price costs, and good productivity is what drove the results in the consumer segment.

In the tube, core, and paper segment, sales are down 4.2%, but EBIT is up 9%. In terms of sales, we did see volume declines in tubes in the U.S. and in Europe, and we saw lower selling prices of recovered paper, and I will talk more about that in a minute. Those were really the two drivers of the reduction year-over-year in sales. In terms of EBIT, we had very good productivity across all of the tube, core, and paper businesses. We saw fixed costs reduction, and here is where we see the lower costs coming from the recovered paper as a component of our cost of sales. So that's sort of what fashioned the increase in EBIT versus the decrease in sales year-over-year.

Now, in terms of packaging services, sales were down year-over-year 7.7%, and EBIT was down 13.9%. This difference relates, year-over-year difference relates almost entirely will CorrFlex. CorrFlex is a seasonal business. Allan was talking about this earlier where they generally have a low first quarter, and then they build through the year to a strong fourth quarter. What we saw in 2005 was that the first quarter was unusually strong where they had eight special launches and two rework projects. In the first quarter of 2006 it was really more ordinary business or business as usual, so we really didn't see -- it is not so much that CorrFlex was weak in this first quarter, it is that they were so strong in last year's first quarter. The real question is are they on that trend to have an improvement in the second quarter and then grow to the third and fourth quarter levels that we'd expect. Right now the one thing that I can tell you is that we've seen almost a doubling in the number of design projects that are in the pipeline from the beginning of the year, so we're looking right now for that ordinary build up that we'd expect to see in the third and fourth quarters. The last, isn't really a segment, it's other. In the other category, sales were up 7.1% and EBIT was up 32.3%. In this particular group our protected packaging, our Baker Reels businesses showed very strong year-over-year performance.

Now, let me take you to the sales bridge that we ordinarily talk through. Here what I am doing is reconciling the $4.4 million increase in sales year-over-year, and the four categories -- I'll mention and then come back and talk about each of them, volume is a positive 3.6 million. Price is a positive 4.7, that's price increases, 4.7. Acquisitions is a negative 3.7. And then foreign exchange/other is a negative 0.3. That should add up to $4.4 million increase.

So we start with volume. The majority of our volume comes from our rigid paper and plastics and that's mostly composite can. The majority of volume is composite cans and in our domestic operations we saw a volume increase of 6% year-over-year. That was generally good across all product lines especially Colt cartridges, nuts, snacks. We saw some conversions from metal to powdered infant formula to composite cans. Generally across the board good performance year-over-year, and in rigid paper and plastic, again, mostly composite cans. In Europe that volume was up 15% year-over-year largely the result of new customers that they've brought in over the last year. Our flexible volume was flat, and we did see declines year-over-year in metal end volume which we expect to pick up as the year goes on. That's basically the packaging, consumer packaging segment.

We saw declines in North America in tubes, so this would be tubes and cores of around 5% overall. Our textile tube and core volume was down 8%, and our paper mill core volume was down around 5%. We also saw volume declines in tubes and cores in Europe, approximately 9%, and that's due to the loss of some key customers in the Scandinavia area, and also to some pretty aggressive competition from Asia in our Turkish business. On the other hand in that particular segment, tubes, cores, and paper, we did see increases in outside sales of paperboard. That's largely edge board and partitions board and some specialty boards that were up 19% year-over-year. Then of course the other big driver in volume is what I have already alluded to, and that's the negative volume from CorrFlex, and again that's due to the absence of the special work in 2006 versus 2005.

Now, in terms of price. Price was a positive $4.7 million. Most of that price increase comes from our consumer packaging segment, and much of that is a result of contractual resets that we have early in the year in rigid paper and plastics, and the average of all of those resets and negotiations with customers is probably around 4% year-over-year. We also saw price increases in tubes and cores in North America, and what that reflects is some portion of our June 2005 price increase. We see the benefit of that in this first quarter compared with last year's first quarter. We also announced a February 2006 price increase, but that didn't have much of an effect on the quarter. We haven't started to see the impact of that yet.

In Europe, tube and core pricing was down. We actually saw price decreases in the first two quarters of last year and then it stabilized. We're now starting to see some price relief with the March 2006 announced price increase, but that's not reflected in these numbers yet either. The biggest negative in pricing isn't really a negative at all. It is the selling price of recovered paper that we buy and then sell onto third parties. We buy recovered paper, OCC principally. We use a lot of it internally to manufacture paperboard, and then we sell a good bit of it to the outside market. The price of OCC dropped pretty dramatically in this year's first quarter compared with last year. The price was actually down 23% year-over-year, so while that affects pricing and obviously pricing affects sales, it doesn't affect cost of sales or our profit margins at all. So that's probably one of the biggest -- that is certainly the biggest driver that sort of held back pricing in this particular quarter.

In terms of acquisitions, the negative 3.7 relates principally to the December sale of our Charlotte folding carton operation and then foreign exchange was just negligible. In terms of EBIT, the EBIT bridge, what we're acting for here is a $7.3 million increase year-over-year, and the four components are volume/mix which is a negative $6.2 million, price cost which is a positive $3.1 million, productivity $15.7 million, and then other is 5.2 million negative. Those four categories should add up to a $7.3 million positive increase or year-over-year difference.

We'll start with volume mix. Negative 6.2 million. The majority of that shortfall relates to CorrFlex, and again it is not a drop off in their ordinary business as much as a result of no special launches or rework like we had last year. We did see some negative mix in the consumer segment, powdered infant formula is generally a little lower margin than some of our other products, and then in our flexible division we saw some unfavorable mix as well in just the mix of customers that they were serving this year first quarter versus last year. The principal difference again is CorrFlex which will be found in the packaging service.

In terms of price/cost, we're pleased to have another quarter of positive price/cost which means we're more than covering these cost increases that we've had to take. It is interesting when we look behind these numbers because price as a whole was down 6.4 -- price as a whole was down $6.4 million, but the cost was down $7.5 million, so we had some positive increases or actually this is on the tube and floor side where we saw price decreases down 6.4, but the cost was decreased by 7.5, and that's really waste paper dropping by 23%, and so again, it is not so much that price is a factor, but it is the cost side that came down. On the consumer side, so I guess what I am saying is most of our price cost is driven by our tube, floor, and paper segments in this particular quarter because on the consumer packaging side that was basically a wash. While we had a significant price increase year-over-year, we also experienced a lot of cost increases. So for example aluminum, depending upon the different specs that we used was up anywhere from 12 to 16%. Resin was up around 8%. Film was up about 1.3%, so while most of our pricing activity was in the consumer side, that's where most of our cost increases were, too, and so that was basically just a wash.

Productivity, $15.7 million. We had good productivity across all of our segments. Our domestic paper operations ran at virtually 100% utilization. That certainly contributed a lot to the overall productivity. Then lastly other, other was a negative $5.2 million. This other is our catch all category where we include wage increases, energy, freight, our best estimate for the year-over-year energy increase, and this is net of the hedging that we do, is right at $5 million year-over-year increase. Our estimate of freight is $2.5 million year-over-year. We also had some positives in here. We had some cost reduction that's coming from restructuring last year that reduced our fixed cost base. So we've put it all together a negative $5.2 million in the other category, and that should explain pretty well I think the EBIT bridge and the $7.3 million.

Switching gears now, our cash flow was strong. Operating cash flow was $69 million this year versus 22.6 last year. We ordinarily have a typical pick-up in working capital in the first quarter. Last year we saw first quarter networking capital go up 56.2 million. That was a use of cash. This year it only went up $15.8 million. That's really the biggest component of the year-over-year differences. What that probably reflects is us starting to get a little bit of traction with our working capital reduction program. That's the program where we talked about taking $75 million worth of working capital out of the system. I don't think we're on the road -- we're starting to get on the road to do that, and I think we will be able to achieve that goal by the end of the year. We're starting to see some of the impact already here in the first quarter by not having that big run-up in networking capital again.

Capital spending was 27.8 million. Dividends were 23.1 million in the quarter, so our cash flow after capital spending and after dividends was $18.1 million versus last year a negative $28 million, so a real good quarter for us in terms of cash flow. Our balance sheet remained strong. Our debt, total debt did increase by $32 million, but that's after paying $70 million to purchase 2.1 million shares. At the end of the quarter we bought back 2.1 million in the very early April while we finished that program and bought back the full 2.5 million. In fact, the 2.5 million ran the overall total up to 82.7 million, and we bought those shares back at around $33 a share.

A couple other comments, about 75% of our domestic natural gas consumption is hedged right now, and it is hedged at a price of $6.22 a decatherm. I know that is something that the analyst community always wants to know about. My understanding is that the current spot price is about $6.70. Allan talked about new products, $16 million in this particular quarter, flexible snack and seal, the stick pack, and a new profile end from the Phoenix operation were the largest contributors there.

And let me just wrap up with guidance. Allan's already talked about the $1.96 to $1.99 for the year, $0.44 to $0.47 for the quarter. I will just comment that we put together our forecast on the basis of going out to our divisions and building up a reforecast for the year. There is very little change in our reforecast process for the remainder of the year versus what we had been expecting. Remember that we put our forecast together, and we assumed that we would have about a 35% effective tax rate. In this first quarter we had that $0.03 discrete tax adjustment which certainly affected us, so as we look to the second, third and fourth quarters, we'd move the effective tax rate back up into the 35% range because that discrete adjustment is behind us, and we don't see anything like that on the horizon.

We certainly expect 2006 to be a solid year. EBIT should be up around 12% year-over-year. That's the way our forecast is put together, but then some of that gets eroded by the higher interest costs that I talked about, higher taxes at 35%, and minority interest which is our partner's share of the profits, most of that being our European operations. Our forecast certainly is doable. It is not a slam dunk. I certainly believe it is doable. I believe it's doable on the high side of that estimate, it does require further improvement in our European operations. Some of that means that the price increase that's been announced sticks and goes into effect, and also further improvement in our Brazil metal end operations. Those are my comments on the guidance, and Allan, I will turn it back to you for setting up for questions. Thank you, Charlie, and we're now ready to take questions.

[OPERATOR INSTRUCTIONS] We have a question from George Staphos of Banc of America Securities.

Hi, guys, good afternoon.

Hello, George, how are you.

Not too bad. First question was on volumes in tubes and cores. You had another relatively down, somewhat disappointing quarter here, and this is in terms of volume. It is now two years in a row of using [Inaudible] in the tube and core business where the business was down versus the prior year first quarter. Aside from textiles, is there anything else that's structurally occurring that's leading to the decline in volume? And could you tell us has business picked up in April? Are you seeing a more normal pattern here in 2Q?

George, you asked a couple questions. Let me try and address them. As we look at the industry down in the tube and core data it's showing, at least in North America the same sort of decline that we have seen. We have seen that decline in textiles and primarily in the paper segment. But what we -- talking to customers particularly in the textile side and the film side we think there is a phenomena going on that we've seen in the past, and that is that high energy costs, these people are simply not wanting, and backing off of the exposure to the higher energy costs. We think we certainly have seen some of that in the first quarter with all the natural gas costs. We have seen -- we did see in March a typical pick-up that we normally see in the March time frame, and we've seen a further pick-up in tube and core volume in April.

Okay. That's helpful. I guess I was also a little surprised that you didn't see more of a pick-up in spread in tube and core, and I realize you got the majority of your $3 million from that segment, but you did have pricing going up last year. When was your price increase effective in tube and core this year, February 1, or towards the end of February?

I believe it was towards the end of February if I am not mistaken, George, and as Charlie said, most of the increase was the June increase that we put in last summer's increase, and got very little of that increase in the first quarter. Although it is has gone relatively well actually.

That's what I was getting at.

You will see that come around in the second quarter.

Excellent. Last question, and I will turn it over from here. Flexible, what was going on such that volumes were flat. Was it a tough comparison, and can you update us on what's new with snack and seal? Thanks.

I can, George. Most of the time flatness in flexibles can be attributed to one major customer, and without identifying that customer, the customer went out in the fourth quarter of the year with some confection price increases at the same time that two major competitors were actually having volume rebates and that happened to the same customer about three years ago, as a result their volume was affected and our volume was affected. The customer's quite confident that they have in place now pricing strategy to recover that and we've seen the signs that that's going on. That's the only fundamental thing that was an issue with flexibles volume. On snack and seal, roll out is going now with the Newton brand of cookies from Nabisco and the plan is still on track to roll that out to the other cookie lines in '06 and '07.

Okay. Thanks, guys.

Thank you, George.

And we'll take our next question from Ghansham Panjabi of Wachovia Securities.

Your composite canned volume increases, does that include Sono-Wrap.

No, it does not.

How did Sono-Wrap do during the quarter?

I don't think I have specifics on Sono-Wrap. I would guess, Ghansham, that it was down simply because the Pepperidge Farm Whims product got pulled because of not the package fortunately, but the product itself, the price point, and the high fat content of the product that it wasn't selling. The growth was on the composite canned side.

And the 15% growth in that business in Europe, what is that attributable to?

I think they've just had year-over-year brought on a lot of new customers and some of that might be single wrap kind of product out of Europe.

Okay.

They've just done -- our new manager over there, relatively new manager--.

Four years.

Four years. That's really starting to take traction now as really put the volume in there, practically as much volume as they can handle, frankly.

Okay. Just one broader question. Looks like you guys have seen margin improvement over the past three quarters on a year-over-year basis. Sounds like pricing is holding firm this year yet EPS guidance for 2Q looks flattish. I am just curious as to why you're being so conservative?

Ghansham, my outlook of the year hasn't changed at all. I think the first quarter was right where we thought it was going to be. It was right where we wanted it to be. It was in our guidance. Our cash flow was strong. Our working capital was strong. Our productivity was strong. We were a little disappointed obviously with the tube and core volume. We expect that to come back. I get accused of being conserve every quarter, and so I just accept that.

Okay. Thanks.

We'll take our next question from Edings Thibault of Morgan Stanley.

Good morning, gentlemen, and Harris, I don't think conservative is a bad word in South Carolina.

Thank you.

Just a question, I mean I wanted to try and understand what you think is going on within the paper segment. You mentioned in your press release that the mills ran 99% operating rates up from last year, obviously that wasn't on the tube and cores side. Is this sort of some inventory building? Do you have some price increases on the paperboard side, a way there? Should we expect that kind of strength going forward?

No. In fact, the inventory levels are down, Edings. Actually I think that what this is is to the strength of our system and we've said before we have a joint venture with Rock-Tenn where we run petitions forward and we can move in and out of that petition forward as we need to, and we have a similar situation with our Northridge contacts, and we also as I talked to many of you about our one face to the customer approach to these consumer customers, and I mentioned that we picked up in the fourth quarter of last year an amount of paper volume with one of the major tissue and towel manufacturers. As tube volume went down we were able to move this in these various places to keep the mill system running full, so we don't lose the benefit of that. There clearly has been no inventory build and in fact it has gone the other way fortunately.

The significant increase in outside sales and year-over-year we would have taken the Downing town paper mill out and that really resulted in a good bit of profitability in the sense that that production was shifted to more profitable mills and where we have better machine utilization, higher energy utilization, and so that was a year-over-year difference that would have contributed positively as well.

So it wasn't necessary that you did that many more tons of paper per se, with the smaller system you just ran a lot more efficiently.

We certainly ran more tons in that. That's where you see the edge board, the partitions board, the outside specialty board, and whether I say 19% up year-over-year, so that's where we actually compensated for some declines in our internal business and also picked up some of the slack because we closed down that mill.

But Edings, you're correct. We have run more tons, but we are running it more efficiently across the system without question.

Got it, and I feel like I'm kind of -- I don't mean to be beating you up on the tubes and core section. I was a little concerned by some of your comments on Europe. You mentioned some significant price competition in Scandinavia and declining volumes in Turkey which has historically been a strong point. What's going on with the Scandinavian price competition?

Well, it's not -- that's probably a poor choice of words. When we have seen -- we raised prices in Europe, and the industry is behind that pricing, and we have seen more pricing support in Europe I would say in the last 90 days than we've probably seen in the last four or five years. That is the positive coming out of Europe. When we put together the joint venture with Ahlstrom, one of the risks of that was the fact that store was the parent of core [Enzoe] which is a compartment of ours. Ahlstrom had a fair amount of store volume, and we always knew that that was vulnerable because we felt that they would internalize it. They did in fact announce I guess last summer that they were going to internalize it, so that volume was lost internal to the subsidiary, and it was expected and anticipated as we went into this joint venture.

It wasn't -- that's the lions share--.

It wasn't across or about anybody. It wasn't anything like that at all. In fact pricing just got better support now than, frankly, we've seen in a while.

With Turkey again, I know it's a small part of the business, but just to clarify, you said you were losing share to Asian producers. Is that your end customers losing share or?

Asian customers losing share, and that is driven primarily as a result of currency and other things of that nature.

Got it.

But let me point out to you that that has in the last 30 days rebounded fairly significantly.

Okay. Great. Thanks very much.

January, February we're down. March was up.

Small market volatile one.

Yes, it is.

Got it, well, good luck in this quarter.

Thank you.

We'll take our next question from Mark Connelly of Credit Suisse First Boston.

Harris, just a quick clarification. In CorrFlex the decline in point-of-purchase would be about the same. Was CorrFlex affected the same way overall? I just want to make sure there is nothing different going on in point-of-purchase.

I don't think it was -- no, there was nothing going on different in point-of-purchase. I would guess, Mark, that most of the decline was probably in the fulfillment side where we had the 8 or 9 new product launches in the manipulation of those last year would be my guess. I don't have the numbers, but my gut would tell me that point-of-purchase was probably flat year-over-year, not down.

That's helpful, and on the Baker Reel side, I guess you call it Wire and Reel now, can you give us a sense of what you're seeing in the market there and what your expectation is for the year?

We saw Baker was up year-over-year. Charlie may have the figures in front of him. If he does, he can look. It was up year-over-year both in sales and profits, and that business is running quite strong. It normally does well after natural disasters when you have a rebuild such as hurricanes in Florida and Katrina and so we certainly expect that to continue for the balance of the year.

Okay. And just one last question, a broader question. You talked about new products in the quarter. Can you talk about your outlook for your product pipeline, just in broad terms and how that looks? You mentioned the pipeline in a couple of specific cases.

Mark, we had $75 million or so of new product sales last in 2005, and we're on track to surpass that this year, and our goal is to get to this 125 to $150 million a year of new product sales as we define them, and that is something that's no more than two-years-old and we've got a good pipeline, and I feel like we'll certainly achieve that.

That's still a good target.

That's a good target.

Thanks very much.

Thank you, Mark.

We'll take our next question from Chris Manuel of KeyBanc Capital Markets.

Good afternoon, gentlemen.

Hello, Chris. How are you.

A couple of questions for you. First of all with respect to -- or Harris if you could just maybe give us a quick overview for what your volume outlook is for the rest of the year. I think that originally you anticipated all segments would be up for the year, some a little more than others. But in light of maybe a little lower volumes in tube and cores and what you had expected, do you think that it is still realistic to have some volume gains there for the year?

Chris, I think so. Let me contradict one thing. I think that the tube and core business particularly the North American piece was basically flat, '05 to '06, and -- but we expected flat volumes. We didn't expect it to be down 5% in the first quarter. As we look out and George Staphos' question, we have seen what we would consider the normal uptick in the March, April time frame. I am hopeful that the balance of the year in tubes and cores will get back more in its traditional trajectory, but we see nothing on the volumes for the Company that concerns us greatly for the balance of the year.

Okay. In the the rigid plastic side, I think that scenario where you've talked about once you add a little capacity number one, and then two that there had been some start-up issues, are all of those start-up issues resolved, number one, and then number two, any thoughts with respect to adding capacity or as an additional question to tie on that, acquisitions, thought process there going forward.

Okay. We think that the start-up issues at Warsaw from an operating standpoint are basically behind us. We have some market issues there now relative to one of the customers now in a dispute that that customer is having with a third party, and as a result of the dispute between the customer and the third party, our volumes are being affected, and we would expect to resolve that in the next 30 to 60 days one-way or the other. Operationally we think that business is improved. We have sufficient capacity in that plant to continue to grow it, but in response to your third question, we will still continue to look for a platform, we think plastics is something the Company needs in its portfolio, and it is something that would be, if we could find the right fit that we would be comfortable with.

Thank you very much, gentlemen.

Thank you, Chris.

We'll take our next question from Amanda Tepper of J.P. Morgan.

Good afternoon, guys.

Hey, Amanda.

First question, bigger picture, looking out on the acquisition front, not just capacity and plastics but touching on the JVPs in Europe and then more broadly as you look at your portfolio given your strong cash flow position and balance sheet, are you seeing more opportunities or not these days? Do you think we would be likely to see anything else and what areas would you be most interested in strategically?

Well, need to be careful with our comments here as always, but, Amanda, as you know, we're always looking, and we're always having some form of discussions going on at any given time. We're not seeing any more -- well, we're not seeing any less opportunities than we've seen. Our balance sheet is strong. Our debt is down, so I think you can draw the conclusion that if we can find the right fit, we'll pull the trigger on something. I think you should -- it is not going to be any different than what I have said. We added some capacity, it's immediate capacity in the flexible side that was necessary for snack and seal and some other relative year opportunities.

We've said we need and will have a West Coast presence in services some time this year, whether it is greenfield or acquisition, and there are several opportunities we've seen in the services side, both in the U.S. and Europe that could be attractive to us, and then it is the plastics arena that I talked about and then perhaps some tack-on's in the other businesses. I think you will see some activity there this year, but they will all meet our criteria of accretiveness in the first year return our cost to capital in a two to three-year period of time, three to four-year period of time and complementary to our businesses. We're working hard in that area.

Okay. And then on the CorrFlex side, understanding that you're looking for normal seasonal ramp after what was a very tough comp in Q1, when, because last year you had really strong year-over-year growth through the entire year in the consumer -- in the packaging services segment, so would you expect it to be up year-over-year on a revenue basis sometime in the next quarter or two?

Yes. We have seen I don't know if Charlie mentioned this or not. But we have seen the typical beginning in CorrFlex of what the typical year is. I think Charlie mentioned some 400 or so design projects which is the most design projects that I think they have ever had in there, so I would expect the second quarter to be much improved over the first quarter in CorrFlex, in the third quarter we'll ramp up even better than that, and we'll start to tail off at the end of -- towards the middle of the fourth quarter.

Okay. And then on your tubes and cores business, if you could just bring us up to speed given the fall off in some volumes in a couple places, roughly how does that geographic mix break out today on revenues in U.S. versus Europe? And can you comment whether you've been picking up any new business in Asia as some of these volumes are moving around the world?

Charlie probably has some numbers he can share with you, but by far the largest revenue would be in North America, Amanda, Europe would be second, and we do see year-over-year volumes in Asia up, not as much as we had anticipated because they have seen some of the same phenomena in the commodity films and the man made fiber with high energy costs that both Europe and the U.S. have had, but Asia is up year-over-year.

Okay. And then lastly just looking at your stock, the fact that you did for you a very large repurchase through April at a price higher than where it is today, what are your thoughts there on where you buy back your stock and how you look at your own valuation going forward? Thank you.

Amanda, when we made the decision to buy our stock back in December it was based upon, I believe it was undervalued at the time, and we wanted to buy back the dilution, and I am not the least bit concerned about the 32 or $33 that we paid for it because I am comfortable it was still a good buy.

Thank you very much and good luck in the quarter.

Thank you, Amanda.

We'll take our next question from David Leibowitz, Burnham.

Did you quantify and you may have and I missed it, Charlie, what the restructuring one-time charges would be for the balance of this year?

We don't have an estimate of that. Any time we give guidance it would be exclusive of any restructuring charges. The restructuring, basically we've wrapped up our 2003 program. The way the accounting works now, there will be some charges that come through for us for things like severance, things like rent, that are just accounted for when they're incurred. We will have some restructuring, but it is a fairly modest amount in this quarter, and absent any other plans I would expect it to be modest at best. We're not able really to estimate that, so we don't put it -- we're not able to estimate it, so we don't estimate it, and it is certainly not in our guidance.

Okay. Now, on the joint ventures where you have the various put and call options for and against you, are they on the balance sheet anywhere? Is there any way to dig them out?

No, not well -- I guess the answer is I don't know how to answer that, yes or no. In terms of the balance sheet, Sonoco Alcore, that is a consolidated entity. The whole of the operations, assets -- assets, liability on the balance sheet, sales, sales, cost of sales are all in the income statement, and then the partners share Ahlstrom is shown as a minority interest. That's fully consolidated. As it relates to to Demolli, the Italian company, that's an affiliated company and that just shows in that item called investments and affiliates. That's not consolidated. We have not really ever publicly announced because we don't know what the price would be if they put it to us. We have announced that it is formula based. It is a multiple of EBITDA.

And when do they have their first right to put it to you?

Any time. Well, let's say as relates to Demolli, it is any time and they have the ability to put it to us really for about the next two-and-a-half years after which time we have the ability to call it from them, so they could do it any time between now and the next two and a half year at their discretion. In terms of the Ahlstrom ability to put those shares to us, there is a two-and-a-half-year standstill that would have begun in November of 2004, so after two-and-a-half years which we're starting to -- after two-and-a-half years from November of 2004 then they have an additional three-and-a-half-year period of time that they can put it to us again based on this formula. Ahlstrom is a couple years out. Demolli could happen at any time. Having said that, it is not very likely Demolli just extended that a little bit so we have added two years to both sides, so put and the call side so I think it is not likely that they would put it to us having just extended it.

Understood. And just two more brief questions if I may. At the end of this year what percentage of revenue do you expect to be on the consumer side?

At the end of '06?

Right. As a percentage of total revenue.

My guess would be somewhere 50/50.

And the target is still 55/45 or 60/40?

We'll end up driving it 60/40, David, if you recall it was 60/40 the other direction when we started in 2000, so we're about halfway there. I expect we'll have a little more consumer sales this year than industrial, but we're on track, and we feel good about it.

And the last question, is the only impediment to broadening your profit margins right now tubes and core or is it price flexibility and raw material cost increases?

All of the above. No, I think we've seen nice improvement in margins the last couple of years. It's the continued ability to pass through price increases in excess of raw material increases. It is the ability to continue to drive productivity through our operations and Charlie and I both had mentioned we had probably the strongest quarter of productivity improvement year-over-year since I have been at the Company, and I am real pleased with that. I think the combination of managing the price, the productivity, and improving some of these operations that I've talked about. We have 300 operations around the world, and some run better than others. So it is getting the ones at the low end of the spectrum up to the mid point and up. It is a combination of those three things, and we think we're making good progress in that, David.

Okay. With apologies, I do have one further question if I may.

Yes.

That is your pension and post retirement benefits number, when does that start coming down in a meaningful way?

That's so -- actually we've had very good pension performance in our plan, but the real driver has been the discount rate, and at the beginning of the year the discount rate or at the end of the last year the discount rate dropped down to 5.5%, and it set the expense for 2006, so that's the real driver, and if I recall correctly, every 25 basis points is about $3 million worth of expense, so as we see, you can pretty much make a calculation, as we see the discount rate move back up, that alone will have the most dramatic effect on our pension expense on the income statement.

This is the unfunded portion, correct, that we're talking about? Or are you just talking about the expense side of plastics?

I was just talking about the expense side. Our U.S. plan in terms of an ABO, the accumulated benefit is fully funded.

Okay. Thank you very much.

That's really not going to be the driver of pension expense as much as service cost and then in the discount rate.

Okay. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] We have a question from George Staphos with Banc of America Securities.

I will try to make it quick. First of all, Charlie, can you remind us I think there was about 6 or $7 million of hedge gains that were going to run through the P&L this year. Am I remembering correctly and if so will that come in ratably over the quarters and where would I find it in the P&L segments? And I had a follow-on.

I believe that's pretty good number. I would have to go back and check on that. That should come in ratably over the year. I mentioned that we are hedged at 75% of natural gas at what was it $6.20 some a decatherm, and just with each month as we close out one of those contracts, that's when we pick that up.

Okay. And that hits the segments, Charlie, the benefit?

The segment that it primarily hits is tube, core, and paper because most of it is in the paper group. A little bit of it in flexibles.

Right, right. Now, last question, sequentially if we look at the fourth quarter into the first quarter, in consumer, did you have increases in input costs from 4Q to 1Q or was most of the inflationary pressure year on year based on last year's ramp up?

In terms of some part actually had that number or some of those numbers. In terms of aluminum, I mentioned that we were up anywhere from 12 to 16% first quarter to first quarter. It looks like it is 11 to 16 compared to the fourth quarter.

Okay.

So that's up, but it appears that resin is down 5%.

So were inputs a wash for you for 4Q to 1Q in consumer?

I don't know that because I don't pull the numbers together that way.

Okay. Pricing, was pricing up sequentially? Because I know you have your January increases on a lot of these contracts.

It should have been, George.

Yes.

Okay. When I look at the sequential drop-off in percentage margins, if we make an assumption perhaps incorrect for now that inputs were flat and you had some pricing, is that just seasonality? Is that the effect of flexible slowing down? Is it mix? Which of those or other factors would account most for that drop-off?

I think it is seasonality. It is certainly not a business of slowing down. The fourth quarter was such a strong quarter across all of those segments, and typically especially in the consumer side, the fourth quarter is where we really see the uptick in volume, and so that's going to be our strongest quarter and our highest margins.

You also see some mix in that time frame when you will see in the first quarter the business slowing down which is typically higher in the fourth quarter and that is typically a higher margin product, George.

And just we're looking at the consumer segment this year compared with last year's first quarter it was -- it is up, looks like about 60 basis points, and then I see a pretty big uptick between the -- in the fourth quarter last year. So I think it is a lot of it is seasonality.

Great. Thanks guys, feel better, Harris. Have a good quarter.

Thank you, George.

Folks, we have no questions on the phone lines.

Thank you very much. We appreciate your attendance today. Have a good day.

Ladies and gentlemen, thank you for joining us on the call. This includes the conference. You may now disconnect.