Sonoco Products Co (SON) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Sonoco fourth quarter conference call. My name is Gina, and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] Now, I would like to turn the presentation over to your host for today's call, Mr. Allan Cecil. You may proceed.

Good afternoon, everybody. And thank you so much, for joining us for Sonoco's fourth quarter teleconference. Participating with me today are Harris DeLoach, Chairman, President, and CEO; and Charles Hupfer, Senior Vice President and CFO. Also with us today, is Roger Schrum, Staff Vice President, Investor Relations and Corporate Affairs. Some of you have met Roger and know that he is succeeding me as I will retire at the end of the month. Roger has been with the company over a year now. He brings some 25 years of investor relations experience to the job and I'm confident that you will find him to be accessible and quite responsive. With that, it's my pleasure to turn the meeting over to Roger.

Well, thank you, Allan, and [inaudible - technical difficulty] certain uncertainties. Therefore, actual results may differ materially. Additional information about factors that could cause different results and about the use by the company of non-GAAP financial measures are available on forms 10-K, 10-Q, and 8-K filed with the SEC.

Let me review briefly the highlights of Sonoco's 2006 fourth quarter and the full-year results. As released this morning, reported earnings per diluted share for the fourth quarter of '06 were $0.39 versus $0.38 for the same period in '05. Excluding the effect of restructuring charges and the company's previously announced cost reduction measures, which are primarily focused on certain of the company's international operations, our base earnings per diluted share, which is a non-GAAP financial measure totalled $0.56 for the year's fourth quarter compared with $0.58 for 2005. A reconciliation of base earnings is available on our news release and Charlie will discuss these results in more detail. I would point out that our results in the fourth quarter of 2006 were above the high end of our previous announced guidance and FirstCall's consensus estimates. In addition, our results for the fourth quarter were just under the unusually robust results generated in the same period in 2005.

Sales in the fourth quarter were up 3.6%. Cash from operations in the current fourth quarter, which is normally our strongest cash generating quarter, was $163 million, which is substantially higher than the $67 million reported in the same period last year. A significant reduction in pension expenses year-over-year along with continued improvement from our working capital initiatives help drive cash flow growth. As Harris stated in our news release this morning, 2006 was a strong year for Sonoco. The company set records for sales, earnings, and cash flow from operations. EBIT margins improved for the third consecutive year driven by record productivity improvements and our working capital initiatives -- which, I might add, exceeded our goal. Cash flow from operations for the year reached an all time high of about $483 million, more than doubling last year's results. We used cash to further grow the company, pay increased dividends, reduce debt, and buy back 2.5 million shares of common stock. Looking forward to 2007, we'll remain focused on growing our top line, further improving margins, and building cash flow to help meet our ongoing objective of providing shareholders with average annual double digit total returns. As announced this morning, we expect first quarter '07 base earnings to be in the range of $0.47 to $0.50 per diluted share excluding any restructuring charges. This compares with $0.46 per share reported in the same period in 2006. Also as previously announced, we expect the full year to be in the range of $2.28 to $2.31. That excludes any restructuring and assumes that there will be no significant changes in volume or pricing. With that brief introduction, I'll turn it over to Charlie.

Okay, thank you, Roger. And I'll try not to repeat some of the same numbers. Sales $989.5 million, we're up 3.6% over last year's $954 million, net income $39.5 verses $38.8 last year. And EPS $0.39 versus $0.38 last year. But we do have restructuring in both years and we had a number of one-time charges in last year's fourth quarter that I'll walk you through.

In this year's fourth quarter, 2006, we had a restructuring charge of $20 million. Most of that relates to our $35 million plan that we announced on October 11th. The majority of that plan was international and most of this charge in this quarter relates to the closure of a paper mill in France. We've assumed very little tax benefit related to the mill closures. So the after tax impact of this $20 million charge is $17.4 million or $0.17 a share. So adjusting $0.17 is what brings us back to the $0.56 that we call base earnings.

Now in 2005, we had a number of unusual items. First of all, we did have a restructuring charge -- it was a relatively modest $2.8 million charge, which was the clean up of some of the residual for the 2003 restructuring plan. That amounted to about $0.02 per share. And $0.10 adjustment for taxes related to the $125 million dividend repatriation under the American Jobs Creation Act. That was about $0.10. So those three items add up to $0.20 a share and that's what takes us to what we call base earnings of $0.58 for 2005. So with those in mind, let me just go through the income statement using the base earnings concept.

Again, sales were $989.5 million, that's up 3.6% over last year's $954.9 million. EBIT was $93.1 million, that's up 2.3% over last year's $91 million. We had interest -- interest is $11.2 million verses interest of $11.5 million last year. So, our profit before tax would be $81.9 million, which is up 3.1% from last year's $79.5 million. And that's an important point. That we are up year-over-year on a profit before tax basis. Because taxes were $29.4 million and these are taxes that are on these base earnings and that compares with last year's $25.2 million. We also had affiliate earnings this year of $4.4 million compared with $4.1 million last year.

So when you put it all together, our base earnings were $56.9 million, down 2.5% from last year's $58.4 and EPS is $0.56 down from last year's $0.58. But again, we were above last year at the profit before tax line and behind last year at the profit after tax line. And of course, the difference is the significant difference in the effective tax rate for the two quarters. And I'll make a couple comments on that in a minute. But we think this is a very good quarter, with ahead of our guidance of $0.53 to $0.55. And it's very much in line with what I expected and what I talked to the financial community about at our December 1st analyst meeting. I said then that we'd be on the high side of our guidance of $0.53 to $0.55 and we came in even a little bit higher than that. As I look back at my comparisons, operations including affiliate income was favorable to what I expected in December at that meeting. Interest was slightly favorable too. Taxes were unfavorable to what I expected, and we had a bit of an unfavorable share adjustment. We've had a number of shares that have been exercised through our stock option plan and that added to the -- or detracted, I guess I should say from the EPS calculation. So with those adjustments in mind, we were very close to what I expected at December 1st.

Now, thinking about the comparison to the fourth quarter 2005, that was in fact an outstanding quarter for us. I went back and looked at last year's notes and saw that sales were up 8%, mostly volume driven and profits were up 33% year-over-year. So the fourth quarter just stood out last year. Our productivity was good, price cost was positive because we had some contract pricing that was set just before waste paper prices dropped in the fourth quarter. So that opened up some price cost margins for us. Our paper mills ran at 99% of utilization. And the tax rate was especially low in the fourth quarter of last year, the effective tax rate was only 31.7%. So we clearly weren't expecting a repeat of the quarter like we had last year. So the reason I mention that is that's why we're especially pleased that the profit before tax line we were actually up year-over-year.

In terms of interest, I said interest is favorable -- $300,000. That's largely coming from debt reduction. And that is paying -- and also paying off some high interest rate Brazilian debt. Paying down debt, paying down the Brazilian debt was offset in part by higher interest rates on a commercial paper program. And another comment on taxes -- the effective tax rate in this quarter was 35.8%. I've already mentioned that in last year's quarter, it was 31.7. We had a number of unusual adjustments in the fourth quarter of last year. For example, we recorded in the fourth quarter the impact of the manufacturing deduction that was a part of the American Jobs Creation Act. The 2006 quarter was just a more normal quarter from a tax perspective.

Turning to the segment reporting, when you look at our segment, you'll see that Tubes and Core/Paper segment showed sales up 5.2% and EBITDA 13.6%. We had solid performance, especially in Tubes and Cores in the U.S. and in Europe. On the consumer side, sales are up 2.1% and profits -- this is EBIT interest -- earnings before interest in tax was down 7%. And that 7% decline is a result of the profit shortfall on volume. Most of that related to the U.S. and much of that in composite cans and in metal ends. I'll talk a little bit more about that in a minute. Packaging services -- that segment had sales that were up 5.4%. And EBIT up 3.8%. And that's largely volume driven in our CorrFlex business. And then lastly, all other was up 0.4% in terms of sales and profits were down 7.9%. Our reels business was especially weak this quarter, especially in the building wire category. And also part of our plastics business that sells into the automotive industry was weak. And both of those businesses are in the other segment.

So, now let me turn to the sales bridge. And what I'm doing with this sales bridge is I'm accounting for the $34.6 million year-over-year increase sales going from $954 million to $989 million. And the categories would be, first of all, volume. Volume is a negative 0.9. So that would be a negative $900,000. Price, on the other hand, is a positive $16.1 million. Acquisitions/Dispositions Divestitures is a positive S1.8 million. And Foreign Exchange Translation is a positive $17.6 million. So those four numbers should add up to $34.6, which is the year-over-year change in sales.

Let me make a couple comments about each of these categories. As I said, volume was down $900,000. Volume was generally weak compared to an especially strong fourth quarter of 2005. In our Tube and Core businesses in the U.S., we did see volume down 3% year-over-year. In most categories, frankly, it was down -- in film cores, down in textile, particularly carpet cores. And that was offset in part by some volume increases into the paper mill industry where we sell paper mill cores. But overall volume was down year-over-year.

On the composite can side of our U.S. business, volume was down there as well, about 3.4%. Now we had a very big year-over-year difference -- an improvement in powdered infant formula canisters. But that year-over-year improvement was more than offset by declines in refrigerated dough, juice concentrate, and even in this particular quarter our snack and nut business was down year-over-year. So we had weak volume in composite cans.

On the positive side, our Flexible division reported volume up and around the 3% range. And as I said, CorrFlex volume was strong and that was really spread among four different accounts. They had a good performance in this quarter. So all in all, with a couple of exceptions, volume was a little bit weak, but especially as compared with last year's strong fourth quarter. Pricing, on the other hand, contributed $16.1 million. Price was strong in both Tube Core and Paper [sic] segment and the Consumer segment. Our Tube and Core business in the U.S. saw a price increase that was implemented in the third quarter, which we started to see the benefit of in this fourth quarter. On the paper mill side in the U.S. we implemented a $25 to $40 a ton increase in the third quarter and saw the benefit of it in the fourth quarter. And in Europe, we also had price increases. We increased Tubes in the 8 to 16% range depending upon the territory and paper in the 30 Euro range. We had good improvement in profit -- in sales from price in Europe, as well. Composite cans, their pricing was up year-over-year, just as it's been in other quarters, largely as a result of contractual resets early in the year. And our Flexibles business showed price increases largely coming from a fourth quarter of 2005 increase that still showed a positive year-over-year difference. So we had good pricing initiatives throughout most of our businesses and they totalled $16 million in sales.

Acquisitions/Dispositions, $1.8 million. So there's really not much there to speak of. Although we had $227 million in acquisitions this year, the majority of them came late in the year. There was a clear path -- the Demolli shares -- and they really didn't affect our fourth quarter results. And if you remember, we're already consolidating 100% of the sales of Sonoco Alcore, so when we bought that business in October, what we were really buying out was Ahlstrom's minority share. So it wouldn't have affected sales. And then foreign exchange is a positive $17.6 million, that's the weak dollar compared with virtually all the currencies we do business in. That $17.6 had a fairly negligible effect on net income because it is translation and not transaction gain.

Turning now to the EBIT bridge and here I'm reconciling the year-over-year EBIT growth of $2.1 million. Volume/mix is the first category and it's a negative $7.4 million. Price Cost is a positive $9.7 million, Productivity a positive $9 million, and the All Other category a negative $9.1 million. So those four numbers should add up to $2.1 million.

Let me comment first on volume. The negative $7.4 million. Although I told you just a few minutes ago that sales volume was essentially flat, the profit impact on that volume was a negative $7.4 million. So although volume was weak compared with a strong 2005, the real negative here that you see in the profit line that can be attributed more to mix. We had lower margins on our lightweight tissue and tile paper and also the tubes that we sell into that industry. We had a lower margin on our powdered formula canisters compared with ordinary composite cans. So while volumes were down in some of these segments, mix also contributed to the year-over-year shortfall in the volume mix category.

And then there's another point I guess I should make too and that is, we had lower profitability coming out of our domestic paper group. And that's due in part to lower division sales. I didn't talk about sales when -- inner division sales when I was talking about the sales year-over-year change because inner division sales get eliminated in consolidation. But it certainly does affect the profitability of our paper businesses. Our paper mill's operated at about a 95% machine utilization in this year's fourth quarter compared with 99% in last year's fourth quarter. So that negatively affected the profits in that group.

Now, price cost is a positive $9.7 million. We had prices from the previous discussion on sales that were up 416.1 million and our material costs were up $6.4 million. And the biggest material cost driver was waste paper. Waste paper overall was up about 9% year-over-year. We also saw some increases in film and adhesives that were up year-over-year in the consumer division. But overall price costs was a positive 9.7. Productivity was a positive 9.0. That's just a continuation of our Six Sigma Lean scrap reduction programs. And also we -- we are benefiting from the 2005 plant consolidations in Europe, which has certainly improved their productivity. And then lastly, Other -- and that's our catchall category, it includes energy, wages, freight -- and it's a negative $9.1 million. Wages, salaries, fringes account for about $7.4 million of that and energy and freight about $2.7 million. So that's sort of a quick discussion of the income statement.

Let me move now to the cash flow. Operating cash flow in the fourth quarter was strong. We had, it was $152 million, up $85 million over last year. The majority of that year-over-year difference comes from pension plan contributions. Last year we made about $56 million worth of pension plan contribution. This year it was a negligible amount. In fact, our U.S. pension plan is fully funded on both an ABO and a PBO basis. And so we didn't need to and did not fund the plan in the fourth quarter like we did last year.

Cash flow for the full year -- and we usually talk cash flow in terms of the full year. Operating cash was $482 million versus $227 last year. So our operating cash was $255 million more this year than last year. Our capital spending was very much in line with last year, was $123 million this year, $129 million last year. And dividends were $95 million this year and $90 million last year. So the net of all those numbers is that we had what might be called free cash flow. It's the net of operating cash, capital spending, and dividends of $264 million this year, only $8 million last year. So a full $256 million more cash flow this year than last year. And the big driver obviously is our net working capital program. The year-over-year difference is some $130 million. And also as I talked about, pension plan contribution some $67 million. So a very strong year from a cash flow perspective.

Let me talk for a minute about the balance sheet. And before I do that, I need to mention FAS 158 because -- and that's accounting for pension plans because it had a pretty significant effect on our year-end balance sheet. I talked about this at the December analyst meeting. There are two major changes that affected us as a result of FAS 158. One is that funded status is now defined as the difference between the projected benefit obligation verses the accumulated benefit obligation. And that added about $70 million to our liability that we would define as our U.S. pension liability. But the real big change for us and the one that affected the balance sheet was the deferred assets or deferred liability are now reclassified as a charge or a credit to equity in the other comprehensive income category. And so that's what's affected our balance sheet the most. As I pointed out, Sonoco's main U.S. pension plan is fully funded on a PBO basis. But as a result of this FAS 158, we took an after tax charge to equity of $180 million. And so that's approximately a 13% reduction in our overall equity. That $180 million is a little bit less than I estimated at the December analyst meeting. But very much expected.

So having said that, our balance sheet remains strong, our debt to total capital as we calculated was at the end of the year 37.5% and that is up, which would be unfavorable from last year's 35.7%. However, absent that FAS 158 adjustment, debt to total capital would have been 34.5%, down from last year. And that's after buying back $82 million worth of stock. And that's after making $227 million worth of acquisitions.

Let me make a couple comments and then I'll move on. For the year, I think Roger has already mentioned this. Base earnings per share $2.13, a record -- it was 10.9% better than last year. Sales were up $128 million. Price was the biggest contributor to that increase, $51 million. But volume was strong for the year at $41 million of the year-over-year selling price, or sales increase. So it's interesting -- while volume was fairly weak in the fourth quarter, volume was strong if you remember in the second and third quarter and for the year it totalled $41 million. And acquisitions were negligible. EBIT was up year-over-year $38 million and that's largely due to price costs and to productivity.

Now for just a couple loose ends. I usually talk about new products. Our new products in the quarter totalled $34 million. $30 million of that's consumer related, and for the first time we've gone in and tried to identify industrial related new products and those total $4 million for the quarter. So on the consumer side, the new products are principally powdered infant formula, the one-piece squeeze tubes that we have -- plastic squeeze tubes, some thermoformed products, and some Sonopop displays. Sonopop will grandfather off after this quarter. And on the industrial side, that $4 million is largely the new construction tube that we have called RainGuard. So for the year our new products would total $111 million. $95 of that would be defined as consumer related and $16 -- principally RainGuard type product -- as industrial related.

Our 2007 forecast -- at the December analyst meeting, I've provided some guidance for 2007. I said that EPS without any restructuring would be in the $2.28 to 2.31 range. Generally we see about a 10% growth in our base businesses and that's what's built into this number. We also see about $0.02 per share coming from the acquisitions. Now that's after interest and after tax. And then we have a negative that accounts for about a $0.04 or $0.05 drag and that's the effective tax rate. And we're projecting the effective tax rate to be in the 34 to 35% range. So basically about a 10% year-over-year growth in the base businesses. A little bit of growth coming from acquisitions and then a negative from taxes. Our first quarter guidance is $0.47 to $0.50 and that's, of course, compared with last year's $0.46.

We talked also at the December meeting about a stock buy back that we announced then and said that we intended to purchase 1.5 million shares of Sonoco stock. As in the past, we'll do that, it'll be a combination of block purchases and or open market trades. We expect to start that in the next couple of days once we've cleared through our blackout period. And then as we buy back these shares, the amount authorized will be replenished so that when we're finished buying back the 1.5 million shares, we will still have available for purchase 5 million shares of Sonoco stock. We don't have any plans to do that at the present time, but we will have that authorization.

And then my last point just maybe just a piece of business. It talks about our closing dates, which will change. Our typical closing pattern has been to have in a quarter 5-4-4. First month in the quarter is a 5 week month followed by a 4 week and then a 4 week month. What we have been seeing over the last couple of years as the calendar falls, we've been losing days in the first quarter because we always close on a Sunday and picking up those days in the fourth quarter. So, for example, in 2005 we had 86 days in the first quarter, 97 days in the fourth quarter. 2006 we had 85 days in the first quarter and 98 days in the fourth quarter. So we're going to change our schedule and catch that week back up starting with this year's first quarter. So our first quarter will end on April 1st and it will consist of 91 days. Our second quarter will end on July 1st, third quarter on September 30th. And then, of course the end of the year's December 31st. That's the revised schedule that we have. And what that means is that it will delay our press release by a couple days. So typically, we would release earnings on a Wednesday -- 17th, 18th of the month. We'll be releasing earnings with the start of business on Friday. So we would expect that to be Friday, April 20th, Friday, July 20th, and Friday, October 19th. And then we'll have a conference call sometime in the morning to discuss the results. So with that piece of business and with those results, Allan, turn back to you for questions.

Gina, we'll take questions now, if that'd be all right.

[OPERATOR INSTRUCTIONS] And your first question's from the line of Ghansham Panjabi. You may proceed.

Hey, guys. Good afternoon.

Hello, Ghansham.

The decline in European Tube and Core volumes, is this a function of some of the price increase initiatives you just implemented? Or is it weakened markets in that region?

Ghansham, primarily I would say the pricing initiatives that we have initiated and that's about a lot of it. Markets have not grown a lot -- may have declined a little bit. But I would say it's more of a result of the price that we've been putting through.

And I guess sort of a follow up to that. Your margins in Tubes and Cores are some of the highest that you've shown in a very long time. And apart from productivity, I think the bulk of it seems to be coming from pricing given the weak volumes. At what point does it make sense to start focusing a little bit more on market share and less so on pricing?

Well, I don't know when that point comes. It certainly doesn't come when OCC is going up at the rate it's going up right now and you need price recovery. So I'm not sure when that comes, Ghansham, to be perfectly honest.

And Charlie, real quick -- what was the FX bottom line impact for the quarter?

It would -- it was probably, certainly less than $0.005 a share.

Okay. Thank you.

Your next question's from the line of George Staphos, Banc of America Securities. You may proceed.

I wanted to pick up maybe on the OCC question. Harris, given where OCC's gone in the quarter, what would be the annualized impact on costs from that? Obviously you're trying to raise pricing -- could you remind us too now what pricing actions you have in the market?

Well, we announced on Friday, George, a $40 to $50 ton increase on recycled board. That's in response to essentially a $35 increase in OCC in January and February. As we look out, you look today -- I'm told the export price is somewhere around $180 to $181. That would suggest to me that you're going to see further increase in OCC in March. And we would obviously look at that and see what that is and contemplate should we have another increase of what we've already done sufficient?

On the $40 to $50 per ton increase on board, did you also come with a Tube and Core price hike, as well?

George, we have not as of, what is it, 2:30 today, but I wouldn't be surprised to see something fairly quickly.

Okay. So $35 a ton would be roughly $70 to $80 million of cost pressure if you don't offset it with price? Obviously you're going to do that, but

You're not far off. You've got the offset in our waste paper collection operations where we cover some of it. And the balance of it we will cover with increases.

Okay. In terms of the consumer business -- on the one hand, you're doing well with your products. But again, when the composite business is really working, that seems to be the contributor to incremental margin in the business. How quickly do you think these composite can volumes can -- and profits can turn around? And was the end making volume shortfall largely related to the composites? Or was there other issues as well with Phoenix?

No, it was primarily to the volume and composites, George. Almost entirely.

Okay. And just in terms of the outlook for composites going forward?

We feel good about the composites going forward this year. The -- we had a tough compare -- I know how tough it was. We obviously didn't compare very well to last year fourth quarter where we had good volumes of snacks and nuts and other things and this quarter we didn't have that. We didn't lose any market share. We didn't have any conversion out of the composites to the best of my knowledge to other products. And you also had at least we saw a downturn in concentrate connected pretty closely with the increase in juice prices. So I'm not overly concerned about the fourth quarter in composites, George.

Fair enough. One last housekeeping question, then. Is the swing in days quarter-to-quarter on your traditional convention in terms of reporting quarters -- was that the reason why the fourth quarter or this fourth quarter would tend to have more in the way of earnings per share relative to third quarter even though volumes seasonally were lower? In other words you got a few extra days. And whether or not that's the case -- if you're getting the 6 extra days in the first quarter year-on-year, should we expect that it will be a minus 5 or minus 6 in the fourth quarter year-on-year?

No, I don't think -- actually we don't quite look at it that way. And we've rolled up our budgets. We've spread them, that really forms the basis for our guidance. And we would expect to see growth through the year. So we would expect to see a typical fashion where probably the third quarter is the highest EPS growth and the fourth quarter's a little bit lower than that. I'm not sure that the day swing makes that much of a difference.

But Charlie, just in general, when do you have the days. If you have a positive day's comparison this first quarter, when do those days swing, which quarter --

It swings out of the fourth quarter. No question. All the other quarters are on a typical 5-4-4 basis.

Thanks, guys. I'll be back.

Your next question from the line of Claudia Shank of JPMorgan. You may proceed.

Thanks very much, good afternoon.

Hey, Claudia.

Hi, just a couple of questions -- if I look back at the Investor Day in December, you talked about EBIT margins in the 10 to 11% over the next several years. They're a little bit below that in '06. As we look to 2007, any sense as sort of the potential for improvement there?

Well, we would expect to see some improvement. Actually I think our margins have been improving each of the last three years. For the year it's about 9.5% and built into the numbers that are built into our projections of $2.28 to $2.31. That gets right at the 10% EBIT margin.

Okay. Great. And then just on operating cash flow. It was a really strong year, obviously. And I think, again, at the Investor Day, you talked a little bit about $350- to $400 million in operating cash flow as working capital improvements -- I guess were about $50 million. Given the strong '06 cash from operations number, is that still sort of a realistic number for '07?

Yes, we would still stand by that number.

Okay. Great. Thank you.

Thank you, Claudia.

[OPERATOR INSTRUCTIONS] And your next question's from the line of Edings Thibault of Morgan Stanley. You may proceed.

Thanks very much and good afternoon, gentlemen.

Hi, Edings.

Just a couple questions. I don't want to rehash too much. But Harris, you said you weren't concerned about comps on cans. Can you just give us some idea of maybe how important the nut market is to that segment? As I understand it some of the leading nut producers are actually losing share to specialty nuts, which probably are not carried in the comps of canned products. Is that something we should be worried about in the context of your total volumes?

Edings, it isn't at all because we're picking up some significant volume on the independent folks -- is that other customer [inaudible] is lost to market share.

Okay. Great. And then following up on that. I think one of your initiatives that you talked about at your analyst day was second generation Snack'n Seal. And can you perhaps talk about what's driving that? I know one of the drivers on the snack and seal may be lower total cost to your customer. Would you anticipate any impact in your margins as you move into the second generation?

No, actually. We see improved margins as we move to that, Edings. And it is on track and going well -- the conversion to the second generation.

Great. Good to hear. And then one final question. I noticed, thanks to Charlie's detail, that your true price realization actually matched up very well against your total cost, not just your materials, but including your energy and freight. I think it was $9.7 million versus energy and freight and materials up about $8.1 if my math is correct, and my notetaking on Charlie's commentary. Would it be fair to say your pricing actions, barring any further changes in the energy situation, really are going to an attempt to stay on top of the OCC situation and not catch -- caught behind there?

We're not going to fall too far behind the OCC. But like everybody else, we're incurring costs other than just raw material costs. Energy costs, freight costs, and others. And our pricing actions and all of our businesses and our contract escalators are designed to capture not only just the raw material cost, but the total cost increase as much of it as we can. What we can't, we're offsetting by productivity improvements.

Great. And then, I know you didn't put this up for a vote, but if there comes a choice between price and volume, we'll come down on the price side.

I think that was my answer, wasn't it. Thank you, Ed.

Thank you.

Your next question's from the line of Chris Manuel of KeyBanc Capital Markets. You may proceed.

Good morning, gentlemen. And congratulations, Allan, on a good career.

Thank you, Chris.

A couple questions for you. First of all, can you talk a little bit about what you're seeing within the reels and as well as with Sonopost in relation to what appears to be some significantly slowing housing demand? And has that had much impact on you yet?

First, let me talk about reels. I think Charlie said we saw some downturn in volume in the fourth quarter in reels. It was primarily tied to the building wire. That's a very small segment of that business. But -- and probably has the lowest margin in the business. But clearly housing starts has driven that piece down. On the other side, what we're hearing is more transmission cable, upgrades as the power companies upgrade the grids in this country. And so I would say the outlook for that business continues to be very positive despite the housing downturn. Sonopost is obviously -- a good portion of that is tied to the appliance side. We have not seen much downturn there to date.

We introduced the --

We've introduced some new products in it. But even on the appliance side we haven't seen that much of a downturn. And that business is projecting nice growth into 2007 as a result of Sonopost, the new products Charlie mentioned, and just new products in that segment.

Okay. And then the second question I had concerned acquisition outlook. You guys had a pretty busy 2006 in particularly the last quarter or so. As you look into '07, do you anticipate -- do the markets still remain good to you? Do they look good to you? Do you feel that from a debt capacity standpoint you would be comfortable continuing to add?

Chris, as Charlie said, I will -- our balance sheet is in as good a condition as it's ever been in, we've got excellent cash flow and we will continue to look as aggressively as we did in the fourth quarter of the year. And we will continue to stick by our criteria of the right kind of acquisition at the right price. It gives returns to our shareholders. But with that you can assume that we will be fairly aggressive.

Okay. Thank you, gentlemen.

Thank you, Chris.

Your next question is a follow-up question from Claudia Shank of JPMorgan. You may proceed.

Hi. Thanks. Just two more little things. One, I was just curious on the change in the tax rate guidance for '07 and what drove that?

It's really the -- not projecting some of the changes that we saw in 2006. The tax rate, especially in the third quarter of 2006, we released a number of reserves following the period whenever basically some tax years lapsed. And if I recall correctly, it was in the $7 million range. And we have not projected that we would have that same kind of phenomena in this year's -- well, any quarter this year, this year's third quarter. That's the big year-over-year difference. We've done, actually a lot of tax planning around things like the acquisitions of the Ahlstrom shares, the Demolli shares, and we feel like we've done some pretty good things. But the effective tax rate will still rise because we won't have some of those unusual adjustments.

Okay. That's helpful, thank you. And then I was just hoping you could put a little more color around the packaging services segment. Your volumes improved quite a bit in 2006. Maybe how do things look for 2007? How are they shaping up?

Claudia, things look to continue to improve in the packaging service sector. CorrFlex -- no one's asked a question on Corrflex -- fourth quarter was better than the fourth quarter of '05. And as we look into this year, we see nice growth opportunities in CorrFlex compared to '06 as we have discussed previously.

Okay. Great. Thank you very much.

Thank you.

Your next question is a follow-up question from George Staphos, Banc of America Securities. You may proceed.

Thanks. Harris, I was wondering if you could adjust for days here early in first quarter. How are volume trends for you in your key businesses? Are you up year on year? What's the tone from the customer as you see again some of your key markets?

We really at this point have not gotten any results. So let me say that. But in talking to our people and talking to our customers, the volumes in January appear to be good, actually.

Okay. And Charlie, maybe you mentioned it earlier or maybe it would be a refresher from the December meeting, but do you think you can keep putting up the same types of the productivity numbers that you have been the last couple of years in 2007> Would we expect the numbers to be skewed at all or pretty smooth throughout the quarters?

I think you can expect them to be fairly smooth throughout the quarters, but growing through the quarters. We actually expect more productivity in 2007 than we had in 2006. Just summing up that productivity line that I give on the bridge for the whole year would be $44 million. And we would expect it to be more than that going forward. And we have a good deal of confidence in that. In large part, this is a part of a program. All the divisions have individual projects in place. They basically have a technology funnel for productivity just like we do for sales. These projects get measured in a whole lot of what's -- we will see as productivity in 2007 really is on the board in mid to late 2006.

Right.

So we're fairly confident that we'll see the same kind of numbers, but even more so in 2007. It is a big part of our profitability and we're mindful of that. And we have to keep focusing on it.

Charlie, adjusting for scale of business, do you expect you would see -- how would you frame it for us geographically? Will you see proportionally more out of Europe or less or across your businesses, say, Flexible versus Composites versus Tube and Core?

Well, the one thing that does jump to mind is in Europe with the -- a lot of that restructuring, taking out that paper mill in Europe. There's -- we would expect a pretty significant turnaround and it would be a productivity induced turnaround there.

Okay.

In fact, we saw some of that already in this year's fourth quarter related to some of the changes that we made in 2005.

Would Tube and Core North America be about as productive as it could be? I know it's maybe a little bit of a soft question, but it would be hard for me to see that getting any more productive? What do you think?

They actually had good productivity in the fourth quarter. They did a couple of things. Two that just jump to mind. One is they brought in house some adhesive manufacturing. That saved them. they also did something with automatic packers at some of the plants, so some of our capital's going into productivity enhancement. And then if I recall, their material usage was just favorable year-over-year. So the scrap reduction program still seems to be kicking in. So I don't think anybody would believe that there's not still more to get out of even our domestic old line businesses.

Okay. Last question and I'll turn it over. Would it be -- I know it's not your intention, and certainly the last few years have shown you've been very successful at offsetting cost pressure, but could the ramp that you've seen in OCC to start the year mean that maybe you're a little bit behind in the first quarter and then catching up 2Q and thereafter?

George, that could happen depending on what March does to OCC. But our intent with this announcement and any other announcements that might come out would be to try to shorten that time frame between the actual implementation of announcement implementation. So we're comfortable at this point with the guidance we've given for certainly the first quarter and certainly comfortable for the year. And then the recovery will -- I think will accomplish that.

Okay. Great. Thanks, guys. Good luck in the quarter.

Thank you, George.

There are no questions at this time.

Well, thank you very much for joining us today. We certainly appreciate your interest in Sonoco. And we look forward to talking with you at the next quarterly conference call. Thank you again.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.