Sonoco Products Co (SON) 0 Q0 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sonoco 2007 first quarter financial results conference call. My name is Latecia and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes.

At this time, I would turn the presentation over to Roger Schrum. Vice President of investor relations. Please proceed, sir.

Thank you, Latecia. Good morning, everyone, and welcome to Sonoco's 2007 first quarter earnings investor call. Joining me today are Harris DeLoach, Chairman, President and Chief Executive Officer, and Charlie Hupfer, Senior Vice President and Chief Financial Officer. Our financial results for the first quarter of 2007 were released before the market opened today and are available via our website at sonoco.com. Let me begin by stating that today's investor call may contain a number of forward-looking statements that are based on current expectations, estimates, and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties. Therefore, actual results may differ materially. Additionally, information about factors that could cause different results and about the use by the Company of non-GAAP financial measures is available on Forms 10-K, 10-Q, and 8-K filed with the SEC. I'll briefly review the highlights of our first quarter results and then Charlie will provide a more detailed analysis before we open the call for your questions.

GAAP earnings for the first quarter of 2007 were $0.52 per diluted share versus $0.44 for the same period in 2006. As we explained in our February 7th news release and conference call, results for the first quarter of 2007 included 91 days, which was six more than the same period in 2006, due to the Company's accounting calendar. Excluding the impact of restructuring charges, Sonoco's base earnings per diluted share, which is a non-GAAP financial measure, totalled $0.57 for the first quarter of 2007 compared with $0.46 for the same period in 2006, which also included some restructuring charges. A detailed reconciliation and explanation of base earnings is available on our news release.

I would point out that our results in the first quarter were well above our previously-announced earnings guidance and First Call consensus estimates. We announced in today's press release that we expect base earnings per share in the second quarter of 2007 to be in the range of $0.55 to $0.58 per share. In addition, we have increased our guidance for the full year of 2007 base earning to be in the range of $2.36 to $2.40 per share. We have previously provided full-year 2007 base earnings guidance in the range of $2.28 to $2.31 per share.

With that introduction, I'll now turn it over to Charlie Hupfer.

Okay, thanks, Roger. As Roger said, sales were $955.7 million, that's up $136.9 million or 16.7% over last year, and EPS as reported was $0.52 versus $0.44 last year. Obviously the earnings are in accordance with U.S. GAAP. That means it includes restructuring in both years. The restructuring that we took in the first quarter of 2007 relates to our October 2006 plan, which was largely international related. In the first quarter of 2007, we took a charge of $6.8 million, so that's a reduction at the EBIT line of $6.8 million. The tax benefit of that is $2 million, so the after-tax effect is a negative $4.8 million or $0.05 per share. So earnings without, or absent that restructuring charge would look like this. EBIT would be $95.5 million, taxes would be $28.6 million, after-tax earnings $57.9 million and EPS $0.57 per share.

Now in the first quarter of last year, we did have some restructuring charges, as well. These were residual costs related to our 2003 plan. We took a charge against EBIT of $2.4 million last year. The tax benefit attached to that, 0.9 or $900,000, so the after tax impact is a negative $1.4 million, and because of rounding the EPS effect is $0.02 a share. So, again, without that restructuring what we call base earnings, EBIT would be $74.8 million, tax $20.1 million, after-tax profit $46.5, and EPS $0.46 a share. So the comparison -- what we call base earnings -- on a base-earnings basis the comparison would be: Sales, the same sales $955.7 million, up 16.7% over last year's $818 million; EBIT $95.5 million, up 27.6% over last year's $74.8 million; taxes this year would be $28.6 million compared with $20.1 million last year; and net income $57.9 million, up 24.4% over last year's $46.5 million; and as I said earlier, EPS $0.57 compared with $0.46.

Now let me make a couple of points. First one is, as mentioned earlier, we did have six extra days in the quarter, and that's simply a function of how the quarter-end closing schedule fell, and that six days was factored into our guidance. We also had $55.5 million recovery of certain benefit and other costs from a third party, and after tax, that equates to $0.04 per share. That $0.04 per share was not included in our guidance. So even if you subtract the $0.04 from our base earnings of $0.57, you arrive at $0.53 for the quarter, which was well above our guidance of $0.47 to $0.50 and 15% higher than last year's $0.46. So all in all, this is what we consider a very good quarter. We were most pleased with having successfully managed the very significant run-up in OCC costs and I'll obviously be talking about OCC costs as I go through this part of the presentation.

Net interest expense was $11.5 million; that's up slightly from last year. We did experience higher U.S. rates and higher debt balances in the U.S., but that was largely offset by lower debt balances outside the U.S. and the pay off of some high-interest foreign rate debt. All in all, interest was pretty much in line with last year. Taxes, as I said, were $28.6 million. That is an effective tax rate of 34% and that compares with last year's effective rate of 31.4%. So the effective rate's up a couple of percentage points over last year. Last year, if you recall, we had an adjustment to state taxes that pulled down the effective rate, and obviously no such adjustment this year. That 34% effective tax rate was right in line with our forecast.

Now when we look at the segments -- and that's of course in the press release -- all of our segments showed good year-over-year growth. If I look at the segments year over year in percentage terms, what I see is the Consumer segment sales were up 11.7% and EBIT was up 14.5%. In the Tube, Core and Paper segment, sales were up 19.8% and EBIT was up 48.1%. In Packaging Services segment, sales up 28% and EBIT up 25.8%. And then in the All Other category, sales were up 9.2% and EBIT was up 10.6%. So in total, again, sales were up 16.7% and EBIT was up 27.6%.

All of the segments obviously performed well year over year, but frankly, the one that stands out the most is Tube, Core and Paper. And the big driver there is our performance in Europe and it really stems from a couple of different things. Pricing was a positive. We initiated a number of price increases in 2006 and some of that impact is coming through in this first quarter. Volume was up, especially in what we call frontier Europe -- and I'll talk more about volume later -- but volume was up. We have the benefit of restructuring. We did close one of our paper mills in France last year, so our mills were running pretty much full in the quarter and that's a positive. And then, of course, we acquired Demolli and we had the full impact of that in the -- in this particular quarter. So all in all, those are the reasons -- part of the reasons why Europe is up, and Europe is a substantial part of why the Tube, Core and Paper segment is up.

Now, let me talk about the sales bridge, and with this bridge what we do is reconcile last year's sales of $818 million to this year's sales of $955 million. That's a difference of $137 million. In the categories that we usually use, volume was up $75 million. Price was up $19 million, acquisitions up $31 million, and foreign exchange $12 million. So those numbers, $75 million, $19 million, $31 million, and $12 million should add up to $137 million. Let me talk briefly about each of those categories.

Volume, as I said, $75 million. First point that needs to be made is that the six extra calendar days in the year was a big driver in that $75 million increase. There's no question about that. But we also had good volume through different parts of the business. Our Packaging Services volume was strong. It was up more than 20% in both of the segments -- or the categories that are inside Packaging Services. One is our Pack Centers in the U.S, where we service Gillette and Hewlett-Packard, and their volume was strong through the whole quarter. That's largely pass=through sales and it doesn't contribute as much to profitability. The other strong performer was CorrFlex, and that's a result of generally good volume in CorrFlex plus a product launch that we had in this quarter, and we know how much product launch's influenced their sales. So Packaging Services as a segment was strong in terms of volume.

In the Consumer segment, our Phoenix metal-end volume was up around 10% and that's largely led by a significant year-over-year increase in Brazil, where we're continuing to fill up that plant with new business. Our flexible volume was up around 8%. A lot of that's coming from snack and seal volume, which was up substantially. Composite can volume was up year over year, but frankly probably down on a per-day basis. In the U.S., powdered infant formula was strong, refrigerated dough was strong. In Europe the new single-wrap canister contributed to volume. But in both the U.S. and Europe, snacks were down year over -year on a per-day basis.

In Tube, Core and Paper, volume was up year over year, but frankly it was probably flat on a same-day basis. Volume's pretty much hanging in with fourth-quarter levels. We did see good strength in Europe, especially in frontier Europe, where volume is up around 30% and that's especially out of Poland and Turkey. And we generally saw good volume in Germany, in Finland and in Spain. And in the U.S. we saw good volume increases in paper mill cores and in film cores, but volume, at least on a per-day basis, was a little bit weak in textiles and in some selected other markets. And frankly, we've probably given up a little bit of share as we pursue the price increases that we announced and are in the process of implementing. So all in all, volume was generally good through the quarter.

In terms of price, price was up $19 million. A significant part of that price increase, that $19 million, actually a little more than half, relates to our recovered paper operation. This is where I need to talk a little bit about OCC and really some of the other costs. But OCC started the year at $65 a ton. It was up $5 in January to $70, and then it went up $25 in February and then it went up $50 in March, so we saw an $80 increase through the quarter. And we saw similar kinds of increases in other grades. So as a result of those cost increases, the selling price of our waste paper that we buy and then resell through our recovered paper division went up. The blended selling price increases about 46% from the beginning of the year and so that's a big part of this $19 million. But in addition to that, we had -- in addition to the recovered paper, we did see increases that probably ranged in the 2.5% to 4% range year over year in the U.S. and in Europe in tubes and cores and in paper and in composite cans, and that's all largely due to the 2006 announced price increases.

Acquisitions accounted for $31 million, that's Demolli in Europe, it's [ThinMade] and Clear Pack in the U.S. And foreign exchange, $12 million. I'll point out again, as I usually do, that's just translation, so that has a negligible effect on profit. Now in terms of EBIT, and here what we're doing is reconciling last year's $74.8 million to this year's $95.5 million, that's a difference of $20.7 million. Our volume was $15 million, price cost was a positive $5 million, productivity $12 million, and then All Other was a negative $12 million. And that should add -- I think it adds to $20 million of the $20.7 million and it's just a rounding.

Let me talk about each of the categories very briefly. Volume $15 million, that's just the profit impact of the $75 million worth of volume that I talked about in the sales bridge. Price cost is a positive $5 million. As I said earlier, when I talked about sales, pricing's up $19 million, costs are up $14 million, so positive price costs of $5 million. Clearly the major cost here is that $80 per ton run-up in OCC. We saw roughly a 50 some percent increase in the average cost to our mills quarter over quarter, so that's the big increase in cost. In the U.S., our price cost in Tubes, Cores, and Paper is largely flat, so we managed to mitigate that cost increase. And we did it with a couple different things. One of them is, it was a build through the quarter, so it was $5, $25, and then $50, so it built through the quarter from a low number to a high number. There's an inventory impact as the lower-cost inventory would roll into a cost of sales. We have the profitability coming from our recovered paper operation that buys and sells waste material. And then we had some of the pricing impact. So when you put all of that together in the U.S., price cost was really pretty flat. In Europe, we had approximately $2 million positive price cost as a result of several 2006 and early 2007 price increases. And at least through the first quarter, there was very little increase in waste paper cost. Didn't see in Europe anywhere near the run-up that we saw in the U.S.

And then on the Consumer side, we were positive price cost, as well. We saw some modest increases in steel and aluminum, but we had some reduction in some of our material costs. So all in all, we were very, very pleased with the fact that with this kind of volatility we had a $5 million positive price cost. In terms of manufacturing productivity, that's a positive $12 million. Generally good productivity across all of our operating units. And then All Other. This is our catch=all category. Here's where the $5.5 million of recovery of benefit and other costs is reported That $5.5 million was largely offset by higher wages year over year. Energy, thankfully, wasn't a real big factor in this first quarter. So the big driver of the negative $12 million is just simply the six-day impact. It's the spreading of fixed cost, overhead, spreading of depreciation and S&A costs over those additional six days.

Now, let me switch gears, talk a little bit about cash flow. Operating cash was $58 million versus $69 million last year, so that's a shortfall of $11 million. But frankly, we're still very pleased with our cash performance. Last year, if you recall, we had an outstanding performance. That's when we kicked off that new working capital program, and so we knew we had a difficult comparison in this first quarter. And so -- and we did. But just by way of reference, the first quarter of 2005 operating cash was only $23 million, so at $58 million, we're pleased with those results.

In operating cash, the biggest change was the change in net working capital year over year. What typically happens in the fourth quarter is our working capital declines in the slow November and December period and then it builds in the first quarter, so that's the typical pattern. Last year we saw net working capital increase $16 million. This year we saw it increase $37 million. So that $21 million difference is a big part of the change year over year. Most of that $21 million difference is in accounts receivable, and our accounts receivable days are actually down three days, but the dollars are up, and that's just simply a function of the higher sales. So that's a part of why we don't feel at all bad about the being a little bit behind in operating cash compared to last year. We're not concerned at all and we actually think that the $50 million program that we've talked about is easily -- well it's achievable and it will be met; maybe not easily achievable, but it will be met.

Capital spending was $37 million this year versus $28 million last year, so CapEx was $9 million higher. I think that's just timing. I don't know any reason to think that the capital spending is higher, and I would still expect spending to be consistent with 2005 and 2006, which is roughly in the $130 million range. Our balance sheet -- turning to that, our balance sheet remains strong. Current assets are up, but that's because of accounts receivable, which I've already talked about. Debt is up $40 million. That's due entirely to the $57 million stock repurchase program that we put in place and completed in February. We bought back 1.5 million shares. Our debt to total capital is 38.7%; that's just up slightly from year-end's 37.5%.

I will comment, for the accountants out there, that we did implement FIN 48. FIN 48 clarifies the accounting for income taxes. Specifically what it does is it -- specifically it clarifies when a tax position can be recorded as a benefit and then how to calculate that benefit. FIN 48 became effective January 1st, with retroactive application through retained earnings. If you read through our 10-K last year, we estimated that the impact of implementing FIN 48 would be an adjustment to retained earnings of some where between $2 million and $5 million. The actual adjustment was a charge to retained earnings of $5.2 million.

As to our forecast, Roger mentioned that, in the second quarter, we're forecasting $0.55 to $0.58; for the year, $2.36 to $2.40. If you adjust out that $0.04 per share benefit recovery, you see that we really haven't changed the forecast much for the second, third, or fourth quarter. And obviously the biggest uncertainty here is OCC. In April, OCC dropped $25 to $120, so it went from $145 to $120 a ton. But that's still well above our forecast at the beginning of the year and it's still well above the $65 beginning of the year price. And of course, we have some $145 inventory that'll roll into cost of sales in the second quarter, so OCC is clearly the biggest uncertainty. Our forecast here assumes that we will continue to get recovery of costs in the U.S. in the second quarter and on into the third and fourth.

As to new products -- we always comment on new products -- we had $22 million worth of new products in the first quarter. That's compared with $24 million last year. We did have some products grandfather off after two years of being defined as a new product. The biggest contributors to the $22 million were in our flexibles group. It's snack and seal, stick pack and laser score. In our plastics groups, some new automotive parts. And in composite cans, powdered instant formula. So $22 million of new products.

And my very last comment is just on dividends. It wasn't a part of this press release, it was announced on Wednesday. We raised our dividend by $0.02 a share by $0.24 to $0.26 and that's just generally with keeping our policy of raising the dividend as earnings grow. So that's the extent of my comments. I'll turn it over now for questions and answers.

[OPERATOR INSTRUCTIONS] And your first question comes from the line of Edings Thibault with Morgan Stanley. Please proceed.

Thanks very much. Let me say congratulations on a very strong quarter. It's a nice start to the year.

Thanks very much.

But, Charlie, just wanted to drill down a little bit more in the six days as we look at what was the clear driver here, which was strong volume. And then I was wondering if you could give us -- since you gave us the percentage numbers of volume we can back into that, what the six days represents as a percentage number? And then, perhaps as a follow-up for Harris, if you can talk about what you saw -- I mean, clearly that was expected in your guidance, but can you talk about the up-side surprises that you saw? It sounds like it's on the volume side and you can talk about what you're seeing and what the trends are entering the second quarter, as well?

Charlie, you want to get that first --

The first part's fairly easy in that the volume number would just calculate out to be about 7%, six days, but I'm not entirely sure of it. And we have done that. We've looked at it and tried to isolate that effect. So just as a ballpark number, say 6% to 7% would be the days -- the potential days impact.

Right, thank you.

It's sort of hard for me to say it's the actual days impact, but it certainly represents the potential days impact.

Okay.

I guess it surprises me during the quarter. Most of them were pleasant surprises. We -- we've obviously managed the cost price as I thought we would and managed it well, which is all the credit, I guess, to our integrated structure from recovered paper all the way through converted. Also pretty aggressive pricing on part of the global team. And I think just the way we've managed that business, so that was obviously a pleasant surprise. I said it, I think in December at our analyst meeting in New York, that I expected '07 to be a break out year for Europe. And certainly, if anything it exceeded my expectations in the first quarter in terms of volume, in terms of managing the price cost. I think through the Ahlstrom acquisition and Demolli and the restructuring we took several years ago, we changed not only the structure of the industry in Europe, we certainly changed our cost structure. The economy in Europe is -- has been somewhat stronger in the last four to six months, which -- so a combination of all of that, and as I look forward, I expect that to continue and frankly expect it to continue to accelerate.

As I look at volumes through the quarter, overall we were not aggressive about volumes and our budget more or less running at the rates that we saw in the -- probably in the fourth quarter of last year and they came in about where we expected. So, our forecast, as Charlie said, is sort of getting back to what our plan was. We saw some puts and takes. We saw -- Charlie mention a paper mill core on the industrial side was strong. But we also saw some of our areas of businesses that are tied to housing, such as protective packaging and others in those particular segments were weak. I will say, however, that we saw some come back of that volume in -- improvement of that volume in March. So hopefully that'll give you some color.

Yes, thanks.

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

Morning, guys. This is actually Phil calling in for Ghansham. First off, just some housekeeping questions. How much did -- how did the recovery from the benefit costs flow through the P&L as well as the restructuring? Was that all on the Tubes and Core business?

I'm sorry, recovery from -- recovery from what?

The benefit costs I think was a good $5.5 million.

No, that was across the entire of all the businesses. It was put back into the business on a -- I guess a head count basis.

Okay, and then that's a one time thing, right?

That's correct.

And then the restructuring charges, is that primarily from Tube and Cores?

No, that would be back into the businesses that were affected by it. Europe -- it would have been in Europe. What would have been in Consumer would have been there, as well.

Okay. And then from an FX standpoint, obviously it was a big boost from translation, but what about the bottom line? How much did that contribute?

It had basically no impact on the bottom line.

Okay. And then from -- lastly on the price cost, obviously OCC's prices spiked during the quarter, and the cheaper inventory from previous months helped. But should we continue to expect a positive price cost for Q2 if OCC prices track at current levels?

Yes, I expect -- it's going to be -- I think second quarter is going to be a little more difficult for the balance of the year, but we're clearly expecting positive price [inaudible] in each of the following quarters, Phil.

Okay. Thank you so much.

You're welcome.

And your next question comes from the line of George Staphos with Banc of America Securities. Please proceed.

Thanks. Hi, guys, good morning.

Hey, George, how are you?

Doing well, doing well. I just wanted to piggy back on the pricing question to the extent that you can go through some of the color on a form. It didn't appear to me that you got that much from your more recent price hikes, the one that began in the first quarter. Could you remind us, one, what's on the -- one, whether you agree with that? Two, what's on the table at the present time?

George, I would agree with that. We raised prices effective March the 1st, and again, I think March the 15th were the effective days of those. So theoretically, the best we would've gotten would've been a month on the first one and a half a month on the second one. Also, you recall about 65 -- about 50% or 60% of the industrial bus -- I guess about 50% of our industrial business is on contracts and those reset at the end -- at the beginning of each quarter. So we didn't recover any of that and would not have until the first of April.

The percentages on both of those were in 8% range as I recall?

I think that's right, George. 6% to 8% if I recall correctly in North America.

Right.

So we have certainly more price to come, that's a fair observation.

Okay, fair enough. And you mentioned productivity specifically both in your comments here and also in the press release in Europe. And certainly Parkview's been a big part of your overall story the last several years, are there any other highlight across the regions that you would point to? Is there anything else that we should expect on productivity, perhaps some acceleration into other regions? What could you share at this juncture?

George, I don't really look at it on a region basis, because I look at all of the businesses and their productivity more on a business basis. I think we said publicly that we had about $100 million of productivity year over year in '06, and that our budget for '07 was a similar amount. I frankly was a little disappointed in the productivity in the first quarter of the year. And when I dig into it, I find our North American paper business was below what I would have anticipated them being, and it was primarily as a result of they run -- they ran, very, very strong throughout the year last year. So normally, we are putting capital in and we know when those things are going to kick in the productivity improvements. And they were delayed somewhat because we were delayed on those projects. So I expected productivity to accelerate through the year and I expect us to be year over year close to that -- if not on that number the $100 million, close to the number. If I had to talk about a little bit of a disappointment in the quarter, it would be that I don't think productivity was as strong as it should have been. But the process is in place and I'm sure we will be on track by the end of the year.

Okay. And the delays were more attributal to Sonoco, they were not -- or were they attributal to lead times on machinery or what was it attributal to?

I would like to blame it on lead times on machinery, but I think we look in the mirror we would see it's probably going on in our camp.

Okay. Well, to some degree I guess that's better. At least you can control it.

Exactly.

One question for now and I'll turn it over to the other folks. Charlie, can you just go back through your discussion on the progression of working capital, fourth quarter, first quarter, and the days versus the overall level? I missed it in your commentary. Thanks.

Sure, I'll be glad to. And what I was commenting on really was this overall net working capital and -- let's see. find my note here. Last year net working capital increased $16 million, right at $16 million. And what that is is that's a use of cash, so we used cash to build working capital $16 million. This year we used cash to build working capital by $37 million, so that's a $21 million difference. And my point was that almost all of that is in accounts receivable and yet the accounts receivable days were down. Our working capital program actually measures performance in days terms. Days were down and we were showing nice year-over-year improvement in that category, which I think is particularly important, because last year's working capital program, where we got about eight days or $80 million out of working capital, was largely around accounts payable and inventory. And this particular year, to get this $50 million or roughly five days -- because we've gotten a lot of the goody out of accounts payable -- had to focus more on inventory and receivables. So we were pleased to see that the days of receivables had come down, but the overall dollars are up. And so that's why I was of the opinion that working capital and operating cash in general is going to come in fine and be in line with our expectation.

And you still think $50 million is achievable this year, you said?

Absolutely.

I think Charlie said it was going to be easy. I'm not sure I agree with him.

Yes, I wrote that down. That's going in my notes.

I thought you might.

Thanks, I'll see you later. I'll come back.

And your next question comes from the line of Chris Manuel with KeyBanc Capital Markets. Please proceed.

Good morning, gentlemen.

Good morning, Chris. How are you?

And congratulations on a fantastic quarter.

Thank you very much.

A couple questions for your. First in your Pack Service business, two thinks here. One, can you give us an update on -- there's some -- a large contract out for bid right now. Can you give us any sense of how you faired with -- pick up any business? Kind of neutral or where you are with that, number one? And then two, are there any new launches coming in the second quarter that you're aware of?

Chris, let me take the first one first and say to you that no decision's been made as of 10:00 last night on that bid that you're referring to, so it is still hanging out. I'm not sure about launches in the second quarter being perfectly honest, but I do know the other day I was talking with those folks and their design projects are up significantly year over year. But I'm -- we'll have to get back to you on launches in the second quarter, because I really don't know.

I just was tying to get a sense of if we have a difficult quarter or lapping?

I don't think we have a difficult quarter in the second quarter that we're matching against last year.

No, we didn't have any launch --

We didn't any launches in the first half of the year, so anything would be better.

There are some plans, I'm not sure if their rollout is the second quarter or later.

Okay, thank you, Charlie. And then the second question I had was, Harris, as you think about OCC, are you anticipating that this will slowly drift back down or are we going to end up a little bit elevated all year, and could that pose some risk then with quarterly reset and such on the price cost?

Chris, I think that we're going to see a further decline in OCC pricing in April, or the end of April, the first of May. I don't know where it'll come back to. I think you're going to see OCC settle in for the year somewhere around the $95, $100 range, and I don't think any kind of reset's going to create any issues for us for the year.

Okay. Thank you very much, gentlemen.

Thank you, Chris.

And your next question comes from the line of David Lebowitz with [Bernham]. Please proceed.

Good morning.

Morning, David.

A few quickies, totally unrelated. Number one, in the balance of the year, do we expect any one-time items on the income statement quarter two, three, or four?

David, not any that we have in our guidance at this point in time and not any that I see out there.

Okay. And in terms of the guidance and the change of earnings for the year, how much of that is coming from cost reductions and how much of that is coming from pricing, and how much of that is coming from unit sales?

Boy, I really don't know that. Charlie may have a clue.

And I don't know that either. Our forecast really is built up from the division, sort of like our budgeting process, and so we don't go through and get a bridge like we would whenever we analyze historical results. So I think that it certainly assumes that we'll be able to continue to get pricing to offset the furnish cost. And it would not expect, as we go into the -- especially the third and fourth quarters, it sort of has built into it a relatively neutral price cost position. I'm sure that volume is expected to probably tick up as the year goes on, but that would be more the -- in the ordinary course of events. So I think I'd say that this -- the forecast that we've given is largely with pricing initiatives followed through on this sort of business [inaudible] as we had forecasted at the beginning of the year.

And in terms of new product sales as a percentage of total revenue, do you have any reason to suspect it might be higher or lower than that which you discussed at the December meeting in New York?

No, I think it ought to be in line with that. We're slightly behind the first quarter, but I know why we're behind because of a couple of -- well, one particular launch that's a couple of -- probably months late, but It will come on, so I think we'll be on target for the year, David.

Excellent. And the last question, if I may. Again looking at new products, is there any one product that you're viewing right now based on customer demand, which will not only be good this year but might very well become a major seller for you next year?

Well, snack and seal is one that Charlie mentioned, and there will be more launches in snack and seal as the year goes on and accelerate continually into next year. The other flexible products that Charlie mentioned, stick pack and laser scoring, are accelerating. And there are a couple of more that I really can't talk about today that I think will have a nice impact over second half of the year and going into '08.

Excellent. Thank you very much.

Thank you, David.

And your next question comes from the line of Tyler Langton with JPMorgan. Please proceed.

Hey, good morning, it's Tyler in for Claudia.

Good morning, Tyler, how are you?

Good. Can you just talk about uses for cash for this year? Thoughts about M&A or share repurchases?

It really hasn't changed at all, Tyler. We will -- our priorities are going to be to continue to try to grow the business, obviously through organic funding through M&A. If we don't find what we need, we're not opposed to buying back stock. We have this five million share authorize sitting out there, and if we get closer to the end of the year and we haven't found the right usage, we'll probably use some of that.

Okay. And then just with regards to packaging service -- and I know the service centers revenues are up a lot and those are lower margin -- is it going to be difficult to expand margins in the segment this year because of that or can that be offset?

No, I think -- we have said, I think publicly and to many of you, that our goal is to drive back to our margins in the 10% to 11% range and we think we certainly have the productivity, the other issues -- or the other opportunities to do that, so I think we will achieve that.

Okay. Great. Thanks a lot.

Thank you, Tyler.

And your next question comes from the line of.Stuart Benway with Standard & Poor's. Please proceed.

Thanks for taking my call. I'm assuming that if the first quarter was six days longer than either one or more of the quarter's going to be six days shorter or it's going to be distributed throughout the other quarters, can you tell me where those other six days are going to be made up in the year?

Yes, it's at fourth quarter.

Okay, so falls in the fourth quarter?

That's right. And it's obviously built into our guidance that we'll have that impact in the fourth quarter; it's just the flip side of what we had in the first.

Thank you.

You're welcome.

and your next question comes as a follow up from the line of Edings Thibault with Morgan Stanley, please proceed.

Thanks very much. Two questions just as we think about second quarter, and I think you addressed it a little bit when you talked about price, Harris. But you talked about, obviously, some of the contractual price capacitors or contractual price clauses on your industrial business in the Tube and Core. Can you perhaps give us a little bit more guidance? Does that March 15th price increase to the extent it's successful, does that then qualify for the second quarter?

Certainly, it would. And there will be some carryover from the March 1st price increase, Edings. And variably some of these get delayed from time to time. So I think we will clearly see more impact on price in the second quarter than we've seen in the first quarter.

Okay. And I guess I'm a little bit confused by some of the FX impacts. I know, Charlie, you said it was net neutral gut in -- can you just remind us how you think about that? With the big change in the euro and so much of your business -- or a little bit more of you business now being euro denominated versus dollar denominated, I guess I would have expected a translation benefit of profit, as well, from FX?

And there is, but it's relatively modest, negligible in fact. It was about $12 million on the top line, but this is all translation. So sales are $12 million higher, but cost of sales are higher, selling and administrative, all the way down through interest and tax. And the calculation that I have shows it's less than $0.5 million is the bottom line effect when you get all the way down the bottom. There probably is a transaction impact, but it would be indirect. It would our U.S. customers becoming more competitive and sales higher. That -- there may be some indirect impacts of the weak dollar that we can't capture, but the translation is what I was referring to. And once you get all the way to the bottom line, after interest, after tax, after everything, it just becomes a pretty small number.

Okay. Should we then look at that -- as you look at Europe now, a bigger part of that is just about $600 million in sales, is that an accurate assessment of what you're doing in the euro zone?

That's probably on the high side.

We would think that's on the high side.

Okay.

We'll pull it up and I'll get back to you before we end the conversation.

Closer to $550 million. And just a very detailed question on interest income, Charlie. It seemed like a high number relative to perhaps what you'd see in the past and not really -- no big change in the cash balance, so I was hoping you could just walk through what might have been the biggest impact there?

Yes, I think -- that's a good question. I know stat and I think that when I looked at that the answer that came to my mind was that we need to think of those together. And it really has more to do with the way that we pool cash now and show balances in some place and deficits in others. And so I think that -- I think that that should just be looked on as a net number.

As a net number, okay.

Yes.

Because I was going to say I'm going to move my cash to Hartsville. [LAUGHTER]

We'll be glad to take that, as well.

We've introduced -- and I don't need to get into our pooling arrangements -- but we've introduced some new efficiencies that does effectively allow us to borrow better globally, but you get that little bit of imbalance that I think you're seeing there.

Got it. All right, thanks very much. Good luck in the second quarter.

Thank you, Ed. Do you have that number?

Yes, it's probably about $400 million.

Oh, okay.

And that's not -- that wouldn't be our whole business. That would just be the Tube, Core, and Paper part of the business.

But that's all of Europe, so we're not --

No, we've got [multiple speakers] Outside the U.S., we're predominantly Tube, Core, and Paper, but we do have operations -- so let's -- let's say $500 million, $550 million would be a better overall number that that would include the Consumer side.

Okay, and just -- I don't mean to pick this to death, but make sure I'm clear on that. That's all of Europe, that's not euro zone, so that's geographic not current?

Correct.

Correct.

Thank you very much.

And your next question comes as a follow up from the line of George Staphos with Banc of America Securities. Please proceed.

Thank, hi, guys. I just wondered if I could hear from you -- if you didn't mention already -- what was your average waste paper or OCC costs in 1Q?

I didn't say what our average was. I said it was up looking at the -- at the mills, it was up 53% from last year's first quarter.

Okay. Without having 1Q in front of me, what would that equate to? You're running around $100 to $110 in the quarter, do you think, Charlie?

$133, George.

Okay. Fair enough. Thanks. Now piggy backing on an earlier question and I think maybe the question behind the question is how much do you think in earnings did you get from the extra shipping days? Obviously it was in your guidance, so we're not trying to penalize you for it, but I'm just trying to figure out what I should think about in terms of the offset in the fourth quarter. Is is $0.05, $0.06, $0.10? My rough math is somewhere in the mid to high single-digits. Would that be fair?

George, I was listening to something else. The question was what would be the offset in earnings in the fourth quarter?

From the shipping days.

From the shipping days --

Gosh. Yes, I certainly don't have an answer to that. When we -- because we didn't look at it on a per day basis. I think whenever you listen to the bridge analysis, it sort of works its way out too, because we'll have less depreciation, less S&A, so I think it's going to be a couple cents a share would be my guess.

Okay, so --

But it's clearly built into the reforecast. sales higher.

Oh, understand that, understand that.

Yes, clearly sales higher, but so -- all the way down, but then you've got the fixed cost and fixed costs offset there too.

Sure. No, it's just helpful in terms of modeling out the rest to have the year and the comparisons. Harris, as you --

George, I gave you a wrong answer a minute ago --

Okay.

-- on the OCC cost. Someone gave it to me. Our average delivery cost in the quarter was $121 a ton versus $83 a ton last year.

Got it. Thank you very much.

You're welcome.

In terms of getting to consumer margins -- I think you were answering Tyler's question before -- did I hear you say that hopefully -- this is my recollection -- you're hoping to get to something in the high single-digits, perhaps 10%, on a run-rate basis in operating margins in Consumer. Did I hear that right?

No, I was talking about the Company itself, George.

Okay.

Talking about the EBIT margins.

What about Consumer, though, getting to a double-digit margin, which has been a long-time goal but it's not achieved in a while?

Well, I think we can get there. I think if you look at the first quarter -- I can't bridge you from where we are to where we would like to have been in the quarter, but there are a couple things that were in our -- frankly in our plan that affected the Consumer margins for the year. And we had a start-up in the loss -- insure bottle program contract at our Warsaw plant that certainly negatively impacted the earnings of the business in the first quarter. That's largely behind us and I expect that in the second quarter to have turned around. We also have had some cost that have been impacted -- impacted the business as a result of a move in Mexico City of a can plant. And then we've had some mix issues in the first quarter. Charlie mentioned that snacks were down, powdered infant formula was up, and then -- What you don't see is the margin impact of the high-strength board that goes back into the paper division. But to answer your question, I think it's achievable and we're on the road to get there.

Okay. One of the larger snack customers has -- from our data and apparently in your numbers this quarter -- been suffering a little bit or a little bit slower this year as they're down. Any sense for what's happening there and how that might progress over the next couple quarters? Or are we really looking at '08 as a recovery for them?

George, I know that we're probably talking about the same large snack customer that's been down. What they tell us in business reviews that we have two weeks ago that they are seeing some improvements and that they expect improvements before that fiscal year ends the end of -- I guess at the end of June, so we wait patiently and we'll see.

Okay.

That's what they tell us.

Okay. And where are you in the productivity planning process right now for 2008?

The businesses would be starting to put together their project list and their capital needs, which would roll off without budget process through the summer and into the fall.

Okay. Fair enough. Thanks, guys, good luck on the quarter.

Thank you, George.

Thanks.

There are no further questions. At this time, I will now turn the call over to Mr. Schrum for closing remarks.

Let me again thank all of you for joining us today. We certainly appreciate your interest in the Company and look forward to talking to you at our next conference call. With that, we'll conclude.

Thank you for your participation in today's conference. Ladies and gentlemen, this concludes the presentation. You may all disconnect and have a good day.