Sonoco Products Co (SON) 2007 Q3 法說會逐字稿

Greeting, ladies and gentlemen, and welcome to the Sonoco Products Company third quarter 2007 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS).

As a reminder this conference is being recorded. is now my pleasure to introduce your host, Mr. Roger Schrum. Thank you. You may begin.

Thank you, Joe. Good morning, everyone, and welcome to Sonoco's 2007 third 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 third 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.

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

I will briefly review the highlights of our third quarter and then Charlie will provide a more detailed analysis before we open the call for your questions.

GAAP earnings for the third quarter of 2007 were $0.63 per diluted share versus $0.60 for the same period in 2006. Results for the third quarter benefited from a significantly lower effective tax rate partially offset by restructuring and asset impairment charges. Base earnings for the third quarter were $0.64 since per diluted share compared with $0.61 since in the same period last year. Base earnings is a non-GAAP financial measure that excludes certain non-recurring or infrequent and unusual items. Our third quarter base earnings exceeded the high end of revised guidance that we reported on September 18th due to the lower than expected effective tax rate.

Results from operations during the quarter were in line with our revised projections.

We announced in today's press release that we expect base earnings in the third -- in the fourth quarter of 2007 to be in the range of $0.52 to $0.55 per diluted share. In addition full year 2007 guidance was raised to $2.28 to $2.31 per share to reflect the favorable effect of the third quarter tax adjustments. Our fourth quarter guidance assumes an effective tax rate of 34% and the fourth quarter will have six fewer days than last year's final quarter.

With that introduction I will now turn over to Charlie.

Thank you Roger.

As was just mentioned, today we reported third quarter sales. Sales were $1.0298 billion and EPS of $0.63 a share. Base EPS $0.64 a share. Of course GAAP earnings include restructuring and other unusual items and the base earnings adjustment that we will make will take those items out. And I will go through that.

This particular quarter we have a number of elements that I will try to carefully discuss. First I will discuss the reconciling items between GAAP earnings and base earnings, especially the impairment charge and the tax credit, specifically what takes to get us from $0.63 GAAP EPS to $0.64 base EPS and what those different elements mean.

Then having clarified the makeup of base earnings I will discuss the impact of the lower effective tax rate on a comparison for the quarter and to our earlier guidance -- to last quarter and to our earlier guidance.

Then lastly, I will discuss operations in terms of the usual sales and EBIT bridges. I will talk about cash flows, the balance sheet and then some other items.

Let me start with the adjustments from GAAP earnings to base earnings. The first adjustment which is an addback is for restructuring. We took a $2.3 million pretax charge -- that's $1.6 million after-tax or $0.02 a share rounded. This represents miscellaneous costs associated with our prior year's plan.

Next we have an addback for environmental expenses of $1.1 million pretax. That's $600,000 after-tax or a rounded $0.01 a share. This charge relates to Sonoco's share of higher than budgeted costs to clean up the hot spot on the Fox River. That's the hot spot that is outside of our [Dupeer] plant.

Make a point here, we would not ordinarily include such a minimal amount, $1.1 million from base, but this is a true up to the original $12.5 million charge that we took in the fourth quarter of 2005. What resulted from was just more dredging than was originally expected when we got into it.

The next item -- and a big item here -- is an impairment charge totaling $15.1 million pretax. That is $9.9 million after-tax or $0.10 a share. The majority of this -- a little bless than $12 million -- relates to an impairment charge taken at our Brazilian metal end plant. And that represents a write-down of leasehold improvements and certain other assets at that plant which we have now decided to close.

Recognition this quarter represents the third quarter decision to relocate the equipment back to the U.S., given continued losses at that plant. Those losses are largely due to foreign exchange and the expiration of a steel supply contract in 2008 that we were put on notice would not be renewed.

Going forward -- this gets most of those costs out of the way -- going forward, we will have some dismantling and some severance costs that will probably be around $2 million and will be incurred in the fourth quarter.

The next item of impairment is approximately $3.5 million of the $5 million -- of the $15 million charge and that relates to the impairment of installation costs and certain special-purpose equipment at our [Warsaw] plastic bottle plant. Given the continued losses there and the likely redeployment over time of some or all of the blow molding equipment, we've taken an impairment charge to cover the write-off of those installation costs.

So if you add all those addbacks up, they add to $0.13 a share. In addition to that, GAAP net income includes $0.12 per share related to the release of tax reserves which we are subtracting to arrive at base earnings. The $0.12 is actually $11.8 million of tax credit relates to the release of tax reserves which we took into income when the statute expired on the 2003 year on our Federal return and on certain of our state returns.

The reserves related to items that were either large individual amounts that, secondly, were unusual in nature and that, third, went back to 2003 and are not expected to reoccur. So that is why we felt like was important to pull them out of base earnings.

So therefore the total subtraction is $0.12 and the net that we will add back is $0.01. $0.13 minus the $0.12 of tax reserves.

In 2006 we took a $1.1 million restructuring charge -- that's $600,000 after-tax or $0.01 -- which we add back to last year's actual EPS of $0.60 to arrive at base EPS of $0.61. So then the comparison that we are making is $0.64 versus $0.61. The income statement on a base earnings basis -- and I will readout some of these numbers to you -- sales unchanged at $1.0298 billion. That is up 10.5% from last year's $931.5 million. EBIT is $91.5 million. EBIT is down 1.4% from last year's $92.8 million. Profit before tax $77.4 million is down 5.6% to last year's $82.1 million and then net income, obviously because of taxes, is $64.8 million up 5.1% over last year's $61.7 million.

Taxes in these base numbers were $16.2 million -- that's in a dollar amount -- versus last year's $23.5 million. That works out to be an effective tax rate of 20.9% compared with last year's 28.7%.

During the third quarter we had approximately $10 million of favorable discrete tax adjustments that reduced the tax rate down to this 20.9%. Now I think it's important to know that at the time that we released our guidance when we took the guidance down to $0.52 to $0.55 we knew of and we built in $5 million of this discrete tax adjustment into our guidance. So out of the $0.10 per share we've built in $0.05 per share. What this means is that we had an additional $5 million or $0.05 per share that was favorable and had not been factored into the guidance.

So if you subtract that $0.05 from the $0.64 that we announced, you get the $0.59 and that supports Harris's quote and that quote was that we exceeded our guidance due to the tax rate and that results from operations were in line with our revised projections.

Now our normalized effective tax rate is 33.8%. So about half the difference to the 20.9% is due to the statute expiring on the year 2003. Now this in addition to what we pulled out of base earnings and relates to ordinary items that were charged to tax expense, in base earnings, when the reserve was set up in the first place, back in 2003.

So that is about half of that difference between, say, 34% and 21%. The remainder is just ordinary adjustments that are always heavier in the third quarter. For example this is a quarter when we true up the 2006 tax provision to the tax return that we filed in September of this year.

Turning to the segments, I'm going to report the segments on a base earnings basement. I believe you'll find that on the last page of the press release.

But the Consumer Packaging segment we did report sales of $369.5 million, up 12.4% over last year. Consumer Packaging reported EBIT of $23.7 million. That is down 15.4% compared with last year. So I will discuss volume and I will discuss price cost and all others when I get into that's your over your bridges.

But generally as relates to Consumer Packaging there are a couple of points I want to make here at this segment level. The first is the results include the settlement of a lawsuit related to a very specific product line that was resolved in this third quarter. Absent that claim, we would've been down 6% year-over-year as opposed to the 15% year-over-year. This settlement was factored into our guidance and so doesn't stand out as a difference compared to the guidance.

But like most other situations there is a confidentiality agreement here. So I'm not going to go in more details, but I will say that there will be no recurring amount in future quarters or years related to this.

In addition on the Consumer Packaging segment, we did experience very modest declines in composite can volume and no real financial turnaround in the Flexible division compared with the second quarter.

Now the tube scores and paper. Sales are $433.7 million. That is up 11.9%. EBIT is $43.4 million, up 1.5%. This reflects weak tube volume in the U.S. offset by strength in our paper operation and in our two Core and Paper operations in other regions. also reflects the jump in OCC, both pricing and cost, year-over-year.

Packaging Services sales are $132.4 million, up 8.5% over last year and EBIT $10.9 million up 15.9% over last year. That is mostly a result of volume and productivity. And then all other $94.2 million, up 1/10th of 1% and EBIT $13.4 million, up 7.1%.

Now let me turn to the bridges and here I will start with sales and here we are reconciling the $98.3 million year-over-year increase in sales. And is made up of these four categories -- volume is a negative $2.6 million. Price is a positive $19.2 million. Acquisitions a positive $53 million. Foreign exchange a positive $28.6 million.

Those numbers should add up to the year-over-year difference of $98.3 million.

Let me start with volume. Volume, as I said, was a -$2.6 million. We had a negative volume in Tube, Core/Paper and that's largely due to a 5 to 6% volume shortfall in the U.S. and Canada. Here we've experienced a slight share loss, especially in some low-end textile segments, but the majority of this decline is due to paper mill closures over the last 18 months, and we have -- obviously sell paper mill cores into the paper industry and then also just a general slowdown with our customers.

Volume was up in Europe 4.5%. About 1.2% of that was in our legacy operations. That would be Germany, France, the UK; and 18% in our Frontier operations. For example Poland was up 17%; Turkey was up 14%. So the blended rate between our legacy and our Frontier operations is 4.5% year-over-year.

Paper volume was up 4%. That is mostly outside sales of tissue and towel board and then on the consumer side, flexible volume was down. was down roughly 4%. That is due to a general slowdown plus some business that was lost due to competitive bids.

Also sticking with consumer, composite can volume was down around 1%. We did see increases in powdered instant formulas year-over-year and in plastic caulk, but there were declines in snacks, juice concentrate and powdered beverage.

Packaging Services volume was strong in both our pack centers and in our core -- and on the Core Plex side of our business.

Now turning to price. Price, as I said, was up $19.2 million. Most of the pricing is on the Tube, Core and Paper side and most of that is in the U.S. Where if you remember last March we initiated a $50 a ton paper increase and an 8% tube increase. We are seeing the benefit of that in this third quarter. A little less than 1/2 of the net increase comes from recovered paper where they are just simply passing on higher OCC costs.

In the Consumer Packaging and the Packaging Services side of our business, pricing is slightly negative, where we have granted some selective price concessions, due to bids.

Now to acquisitions. Total $53 million in sales incremental this quarter. That of course is Demolli, our Italian tube company, Clear Pack and the bulk of that would be Matrix that we acquired late in the second quarter.

And then Foreign Exchange, $28.6 million. Obviously that is the weak dollar versus almost all of the other currencies that we do business in. This is all translation, but when you go through translation all the way to the bottom line, I will point out here that there is only a modest net income effect.

Now let me turned to the EBIT bridge and here is where we are reconciling the negative $1.3 million year-over-year change. Volume and mix -- we will throw mix into this category. So volume mix is a negative $3.4 million.

Price cost -- throwing cost into the category now -- is a negative $5.9 million. Productivity is a positive 11.2 and then the all other category is a negative $3.2 million. So those four numbers should add up to a negative $1.3 million year-over-year.

Starting with volume. Volume is a negative $3.4 million. Obviously this represents the profit impact of the volume shortfalls that I discussed when I was talking about sales.

The biggest driver was the volume shortfall in the U.S. and that is offset in part by higher volume in paper U.S., paper Europe although in both cases the added volume was coming from lower margin boards. So there is a little bit of a mix decline. Plus we saw the impact of volume shortfalls in Flexible.

In terms of price cost is a negative $5.9 million although we saw pricing up [19.2] when I was talking about sales, costs are up $25.1 million. So that leaves us with a negative price cost of $5.9 million. The big driver here is OCC costs. Overall furnish costs in our domestic paper operations were up $32 or roughly 32% year-over-year.

In Europe we have seen similar increases. OCC has moved up over the last two quarters from EUR100 per metric ton to about EUR140 per metric ton.

On the Consumer side of our business we have seen some very modest increases in line or in [tin].

Productivity, the third category is a positive $11.2 million. Generally good productivity across all of our operations. This number is in line with our previous quarter.

And then all other, that is a negative $3.2 million. This is our catchall category. includes wages, energy freight. also includes the profitability from the acquisitions and in this quarter includes the settlement of that product claim that I talked about earlier.

Let me turn now to cash flow. Cash flow from operations for the third quarter was $131 million. That compares with $166 million last year. That is a difference of $35.2 million. The entire difference can be explained by the change in networking capital. Last year we freed up $38 million of networking capital. This year working capital consumed $3 million, but that is a year-over-year difference of $41 million in terms of networking capital. And so that more than explains the year-over-year difference in cash flow from operations.

Let me stress here, like I did in the second quarter, that our 2007 working capital program is on track. Accounts Receivable days are 1.2 days better than they were last year. In September our inventory days are one day better than they were last year. Our Accounts Payable days are 8/10 of a day better than last year.

So the issue isn't that our working capital program isn't on track. It's that we are not improving at the same rate as we did last year and last year, of course, was the first year of the working capital program.

Capital Expenditures are $49.4 million. That is up from last year's $28.4 million. Our most recent reforecast shows operating cash has been revised now to be between $375 and $400 million. Capital spending, though, is running at a higher rate than expected. is running at an annual rate of around $165 million. We have seen increased spending due to a couple of things. One is the Columbus, Ohio plastic bottle plant. The two [Flexo] presses that were introduced earlier in the year; a new Matrix facility that we are working on and also some protective packaging line.

So we do expect and have revised our operating cash to be up versus our previous projections. We are also seeing capital spending up as a result of some of these major projects.

Our balance sheet remains strong. Debt to total capital as we calculate is 41.2%. That is down from 41.7% at the end of the second quarter. During the quarter we bought back 1.5 million shares for $51 million and our total debt really is unchanged from the beginning of the year.

The reforecast for the full year is $2.28 to $2.31. This is really unchanged from our September 18th guidance. Except for adding the incremental third quarter tax benefit of the full year, we really haven't made any change. So the effect here is to leave a fourth quarter the same and that's at a $0.52 to $0.55 rate.

I will point out -- actually Roger did earlier -- last year's fourth quarter had six extra days in it. And was $0.56 a share.

And then my last comment, we always comment on new products. So I will do that here. We had new products in the quarter that totaled $26.9 million. That is compared with $29 million last year. $29.1 million. So a little bit behind last year. Most of the new products are on the consumer side. $19.6 million. $7.3 million is on the industrial side of our business. So that is a total of $26.9 million.

The biggest increases on flex -- is coming from the Flexible division and is the second generation of the Snack 'n Seal product. And then I will point out to that our [Sonopop] displays had been grandfathered off after the two years and that principally reflects the decline year-over-year.

So those are my standard comments. I will leave at that and I guess now, Roger, turn over to questions.

Joe, we will go ahead and take questions.

(OPERATOR INSTRUCTIONS) Ghansham Panjabi with Wachovia Securities.

This is actually Phil Rueppel calling for Ghansham. Quick question on the pricing front. I mean, in the past you guys have had a positive price cost spread for as long as I remember but with OCC prices up do you guys have any price increases on tap for the rest of '07, early '08?

I fully expect the year to be a positive price call. So the quarter was down, we expect the year to be the positive price cost.

Actually as you know, a good bit of our business is under contract and we actually raised prices under those contracts on the 1st of October. And we have in the other business raising prices on many of our paper-based products throughout the last month or so. But we're actively doing that. We have not made an announcement, but we will sort of play that by year year over the coming 30, 45 days or so.

Are you seeing a more difficult environment in terms of pricing power just because the economy is obviously slowing down in more (inaudible) ?

I don't think we have seen any more difficulty than we have normally seen, Phil. Thank you.

George Staphos with Banc of America Securities.

Harris, I just want to follow up on the pricing question. So if you are negative on price costs in the third quarter -- which you were -- notwithstanding the positive you are seeing in prior years and quarters and the market itself is no more difficult to raise pricing in than past quarters, why would you not come out with a general price increase? Why would you need to look out the next 30 to 40 days?

I think what we have said and what we've done is we have been (inaudible) with inside the business's targeting price increases and going out with those rather than making a general announcement. Clearly the paper industry that we compete in, the capacity utilization is lower than we would like and -- but we have seen increases in OCC. We've also seen increases of other commodities such as adhesives and starch and we have gone out pretty aggressively in recovering those.

I would not be surprised to see us announce something between now and year-end or shortly after the first of the year. I really don't want to get into a lot more than that at this point. But we will continue to aggressively raise prices. We are doing that as we speak.

And the recent tin plate price hikes, my guess is that will also be something you need to consider as you look out to 2008 for pricing and have you had any discussions initially with your customers there?

Most of that business is, obviously, as you know on the consumer side of the business. We have seen the tin plate increases that have been announced. We are talking to customers and most of those are passed through through our contracts that we have in place. generally changed January 1st on the consumer side although some of them, I think, March 1st, and then, one or two of them are June 1st. We are having discussions and I do anticipate pushing those through.

Switching gears, in Flexible packaging, the pace of improvement would appear to be -- given our research, given your comments -- coming at us lower pace perhaps a much slower pace than I think you had hoped for in the second quarter. A, if that is correct, great. If not, please correct me, but if is correct why is that the case?

Fair question. I think I answered in response to one of your questions that I expected to see the turnaround in the fourth quarter in that business in the last conference call. We have in fact seen nice -- and I use that word loosely -- nice operating improvement in the third quarter in the Flexibles business as compared to the first and second quarter, typically second quarter where we were having some customer issues.

So the operating plan, the operating performance in that business is on track with what we anticipated. And I expect to see that continue to continue through the balance of the year and into next year.

As Charlie said, we saw volumes down in that business in this quarter year-over-year, reflecting two things. One, just frankly softness in the market and that obviously affected the financial performance. In addition, as Charlie said, we had some bids in the latter part of last year and early this year where we actually lowered some pricing and that affected the financial performance.

What I wanted to get under control first was the operating performance which I think we have. And I expect the financial performance will follow behind that.

I know is perhaps hard to say, but you'd expect maybe '08 to be comparable to '06 for Flexible in terms of EBIT or is too early to call that? We are too optimistic to expect that?

It's probably too early to call that. I do expect certainly a nice improvement over '07. We are early into our budgeting process right now and to be quite honest I haven't seen the projections for '08.

Chris Manuel with KeyBank Capital Markets.

Couple of questions for you. First, if we could talk a little bit about the volume trajectory as you went through the quarter. I think in some of your preannouncement, you talked about how volumes were soft through the -- at that point through July and through August.

Did you begin to see any pickup at all from those levels in September or in August --? I'm sorry, in September and thus far into October or can you give us a little more color there?

I would be happy to. I would say that -- let me break out by business segment if I might. If I looked at the industrial side of the business was pretty much the status quo in September; and I would have to say status quo in October with what we saw in if I took an average of July and August. On the consumer side, we saw composite cans improve in September. We saw the services business improve in September and we are seeing those trends continue into October. So that is what we've seen.

And that was built into our guidance at the September 18th guidance.

was.

So still somewhat sluggish, but improving. Would that be a fair way to characterize or should we anticipate, let's say, as we rolled through the fourth quarter built into your guidance is overall flattish? Or how can we rectify that?

I would say sluggish not declining, but not improving other than those two areas that I said and Charlie talked and they were in our guidance. So I would say sluggish status quo. And that is pretty much -- that is built into our guidance.

Perfect. Then the second question I wanted to ask was you specifically called out in your press release some point of purchase displays where you had lost some business and you -- last quarter I think we asked you about how you were coming with winning back some other business. Can you give us an update on how you are progression progressing their? Do you anticipate that '08 can be similar to back -- I guess refill the business that you potentially lost?

I assume you are talking about our announcement last quarter when we talked about the POP business because I don't think there is anything in this one this quarter.

That was, we were talking about in the second quarter, the mega bid. Actually I think that situation has probably improved a little bit from what we talked about at the end of the second quarter conference call. I would really have to respond to that sort of the same way I responded to George about Flex because I haven't seen the roll up yet of '08.

So would be a bit premature to talk about but I certainly reviewed the plants 60 days ago and they anticipate business coming in, the performance in the quarter was good year-over-year. And I expect continued good performance out of that business.

Then the last question actually goes back to the volume issue for a moment and could we talk a little bit about you gave me a trajectory as a whole company and by a few of the product segments. Could we look at geographically? I think you indicated most of the weakness was here in North America.

The European piece and the other pieces of the world, have they been generally pretty steady this whole time and was the fall off principally North America? And then now starting to pick back up a little in North America? Is that fair?

I think what I said was is North America is the principal one and I think what I said, as to why we have seen as a pickup in composite cans and services business, CorrFlex, in particular in the quarter, I would still say the status quo of what we have seen is what I expect for the balance of the year.

Europe, I think Charlie said Tubes and Cores and Papers in Europe up about 4 or 4.5%. So we are seeing a pretty good economy in Europe. Asia is up, South America is up with the exception of Brazil which is feeling the effects of a pretty strong currency. So I would say it's -- if I were looking for a place to place the slowness is in North America.

David Leibowitz with Burnham Securities.

A couple of unrelated items. First question, in terms of the new products for the second half of the year, we have already had the third quarter. Are fourth quarter shipments of new product as robust as you had originally budgeted?

I think this is certainly in the ballpark with what we had planned for the year. And the fourth quarter will be similar to the third quarter, I would guess.

And so much of is coming from the second generation of the Snack 'n Seal product which really was coming on the third quarter. And so I would expect that, overall, if just focused on new products would be a stronger quarter.

Great. And how much of that product is holiday-related so you do not have that product continuing into the first quarter? [Next] I'm looking is there a slippage factor here which may boost the first quarter at the expense of the fourth quarter?

I don't think that any of these new products would be holiday-related so I think would be a continuation in the first quarter, David.

Excellent. The second question is in terms of topline growth is there any reason to believe, given the vicissitudes of the economy right now, that next year we will see definitely an uptick based on programs we have put in place or products we have developed, and now it's simply a matter of shipping to a contract that will be signed as soon as the customer has a timeframe for delivery?

I would expect with the projects we have in place for this year and the new -- the investments we've made that I would expect to see certainly an improved topline next year or year-over-year.

And the last question [Shaw] has been doing yeoman's service working over time for each of these quarterly conference call's because of all the onetime events. Do we have any timeframe in mind where Charlie can get back to being just the overworked CFO rather than all the extra labors he has to put in for one-time charges?

You know Charlie is so overworked I'm going to ask him to answer that.

I think, clearly, we have the two big restructurings in '01 and '03 and a smaller restructuring last year. I think the big restructurings as I've said previously are behind us. We will continue to have, from time to time, things that it's just a phenomenon of operating 325 plants. Many of them are dedicated to customers around the world and as the customers change we will move that equipment from one place to another.

So I think it's all the nature of our business but the big ones are behind us.

But in other words think you are going to have to be burning the midnight oil for each quarter upcoming for the foreseeable future?

You know I expect, David, Charlie would be burning the midnight oil whether he had those or not.

That's a fine deal with me if his wife doesn't mind.

I don't know that.

Appreciate the compliment.

(OPERATOR INSTRUCTIONS) George Staphos with Banc of America Securities.

I just wanted to come back to the theme that Chris was hitting on and maybe it's overdoing or overreading it, but just to make sure. You said in your press release something to the effect that either volumes were slow or down most notably in North America. That wording could suggest that while North America was the biggest component, that other markets might have slowed.

For the record, you haven't seen any other big markets slow for you right now within 3Q or early into 4Q. is just North America?

That is correct.

Okay. Now on productivity I am guessing is too early to call; you haven't seen the rollup. But can you give us -- maybe not and if so could you give us some direction in terms of what productivity might look like next year? What areas you are looking to improve upon?

is probably too early and I suspect that some of my general managers may be on this phone call, but my expectation for productivity has not changed. It's -- we are trying to drive 3.5% cost reduction year-over-year and we made some investments this year which we would anticipate driving that productivity into the first half and into next year. And they are putting their budgets together, but I think those are the kind of expectations that we have at this point in time.

Fair enough. On capital spending as we look out to next year and also consider some of the dislocations or less than anticipated performance that you have had in some areas where you have been investing, like Flexibles or Plastic Bottles, are you using an even more critical analysis of capital budgets or capital requests that are coming to you, to Charlie -- bottom line, tougher year than you expected. CapEx is going up. A couple of your growth areas have not been performing well.

Should we expect reduced CapEx or reduced ex -- projects for next year?

I would think the answer to that is yes. We spent as Charlie said a little more than we were anticipating this time last year because some opportunities actually presented themselves with Matrix and some others. So I would think until we digest those, that CapEx will be down. I would think we would probably be in that $130 million -- $25, $30 million range going out into next year.

Two last ones, I will turn over to -- . One, so what's happened at Warsaw that it's likely you are moving back business because strikes me that you have only recently gotten into that facility. If you could refresh my memory there, and then just the reforecast on cash from operation. Where is the pickup coming?

Fair question. I think we opened Warsaw three or four years ago. I don't remember the exact time. We have three blow molders up there and two of the blow molders, the acquisition of Matrix and their plant configuration, the major customers of these blow molders are actually very close to the Matrix plants. So we made the decision that we could consolidate that plant into the Matrix operation. Cut good bit of cost side of the operation and obviously enhance earnings.

That leaves one blow molder up there that we will work out of and do something with as we shut that plant down. But that was basically the driver of it.

Charlie, do you want to get -- ?

Yes, and as relates to cash flow, cash flow from operations, I said our estimate is now between $375 million and $400 million, but there is really not any significant year-over-year change. Where we are looking at the year-to-date number it's $257 million, almost $260 million and our fourth quarter is generally our highly generation quarter.

And so I think it's just a combination of where we are right now projected into the fourth quarter, with a little bit more improvement in networking capital that we would expect to see. So there is no -- there's nothing magic and there is certainly nothing that stands out relative to the fourth quarter or the whole year from where we are right now.

Thanks. Good luck in the quarter.

Chris Manuel with KeyBank Capital Markets.

Just a couple of quick follow-ups. First actually for you, Charlie, what were some of the adjustments in taxes and things of that nature, or tax rates and such that have gone on globally now, what would you anticipate going forward, aside from I think you said 34% in the fourth quarter? What would you anticipate being a normalized rate beyond that?

That's an interesting question. And a normalized rate that we have right now is 33.8%. And that is where the 34 came from. But if you go back and look at our effective tax rates over the last couple of years has been less than that.

So I would hope that would certainly come in less than that, but we you make the calculations comes in as 33.8%. Where we have seen adjustments is just things as I just described that are in this quarter like freeing up of some reserves as we true up tax accruals.

So perhaps we are a little bit on the conservative side when we make -- when we set up these reserves. And I would hope they'd come in less than 33.8 but the number calculates out to 33.8, let's say 34%. So I really am not answering your question. The answer is that that is the number. If you went to the Tax Department, that is what they would tell you is.

I am hoping that comes in less than that and, frankly, over the last couple of years with these adjustments, has.

I was just thinking with -- Germany has got a tax rate that is moving down I think the first of the year or sometime soon. And with more of your income coming from Frontier Europe or some of these other places that presumably have a lower tax rate than we in the U.S. now seem to have the highest tax rate in the world that that may be moving down, but okay. That's fair.

But some of that stuff is already built. was certainly built into these numbers now. If the mix changes. But the profitability that is coming out of Europe has had a tendency to modestly reduce the overall effective tax rate, especially when it's coming in countries like Germany and France for us. But what's our sales are what? 15% out of Europe so the mix effect gets back that to be a fairly modest number on the overall effective rate.

And then a question for you, Harris, is I saw you had increased -- or the Board had increased the authorization for share repurchase. Is that something that traditionally you usually buy enough shares to offset options options and some other related activity? Is that something that with cash flow remaining a good [here] the rest of the year that you would consider stepping up?

We've traditionally kept a 5 million share authorization in our pocket for I don't know back for years and years. So was simply bumping back up to that. We bought back, I think, 5.5 million shares of stock in the last beginning of last year. Cash flow, if we can't find other opportunities, we certainly would consider an additional stock buy back.

Alan [Zwiegler] with First Manhattan.

Going back to the second quarter you mentioned some problems, production problems, by virtue of that you maybe had to move some people around. Could you just give us an update about whether you've seen the end of that and notwithstanding how what business conditions are? That's just a problem that we could put in the past?

I think you can put that in the past. As I responded I think to George Staphos's question operationally in Flexibles and that is the business you are referring to. We have seen nice improvement in the quarter operationally. And so I think -- as I said I think you can put that in the past.

And secondarily, just from a volume standpoint if you -- when you talk about the Americas, the high-stakes -- excuse me, not the Americas, America being weak would be fair to assume that if you have a customer say that's in America and also say in other parts of the world, that is possible that in other parts of the world, they are just -- they may be doing more business? And it's just sort of U.S.-based weakness, based on maybe the retailers in the U.S.? Just to kind of differentiate that you do so much business with the same clients in different territories?

I think it's U.S. based and probably Canadian based.

So then theoretically if you are doing business with a Consumer Packaging company also in Europe or in Asia, business there hasn't been as affected as is in the U.S.? Is that a fair statement?

Yes I think that's a fair statement. It's probably not necessarily such a good comparison, but clearly the U.S. economy -- at least in our business -- is generally where the weakness is right now.

Lastly just in terms of the tubes and paper, again, I know you mentioned about the U.S., but in terms of the textile business, are you continuing to see some of those same customers that may not be giving you business in the U.S.? Are you picking up some of that business, say, in China or in other parts of the world?

Our business in China continues to grow, particularly in the textile area but also in Turkey and some of the Eastern Bloc countries as well. Our textile volume -- generally, you are not picking up with the same customers over there. You are picking up with someone different.

Mark [Masters] with J.P. Morgan.

I wonder if you could just talk a little bit about the current acquisition environment and if you are seeing any potential opportunities there?

We always have a lookout at acquisitions. I think I saw something the other day that we made 35 or 36 acquisitions over the last five years. So at any given time, we have always got the net out, if you will. is being cast.

I guess what you are talking about are we seeing more opportunity perhaps because of private equity folks are not as engaged. And the answer to that is the private equity guys are probably not as engaged as they were six months ago. And so we are not seeing those issues, but I think it would be probably inappropriate for me to talk a lot more about acquisitions, other than to say we always are looking and you shouldn't be surprised to see us do something.

Gentlemen, at this time I had no further questions in queue. I would like to turn back to you for closing comments.

Let me again thank all of you for joining us today. I do want to remind you to please reserve the date of Friday, December 7th, to attend our Annual Investor Conference at the Grand Hyatt hotel located at Park Avenue and Grand Central in New York.

We will begin with a breakfast that day at 7:30 AM and presentations will start about 7:50 AM. You will receive an imitation with details next week and if you have any questions please don't hesitate to contact myself or my group and you can contact us at 843-383-7794.

Again we appreciate your interest in the Company and look forward to talking with you in New York on December 7th. Thank you again.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.