Sonoco Products Co (SON) 2007 Q4 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to Sonoco Products Company fourth quarter 2007 investor conference call. (OPERATOR INSTRUCTIONS) This teleconference is being recorded. It is my pleasure to introduce your host, Mr. Schrum, Vice President Investor Relations for Sonoco Products Company. Thank you, Mr. Schrum, you may begin.

Thank you. Good afternoon, everyone. Welcome to Sonoco 2007 fourth quarter and annual 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 2007 fourth quarter and for the full-year were available before the market opened today and are accessible via our web site at sonoco.com. Let me begin by saying 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 forms 10-K, 10-Q and 8-K filed with the SEC. I will briefly review the highlights of our fourth quarter and full-year results and then Charlie will provide a more detailed analysis before we open the call for your questions. GAAP earnings for the fourth quarter of 2007 were $0.54 per diluted share versus $0.39 for the same period in 2006. As a result of a change in the company's accounting calendar the fourth quarter had six fewer days than last year. Overall, results for the fourth quarter benefited from a lower effective tax rate and lower restructuring charges.

Base earnings were $0.62 per diluted share compared with $0.56 in the same period last year. Base earnings is a non-GAAP financial measure that excludes certain nonrecurring or infrequent and unusual items. Our fourth quarter base earnings exceeded the high end of the previous guidance that we reported on December 7 due to the lower than anticipated effective tax rate. For the entire year of 2007, Sonoco achieved record sells and net income. Base earns for 2007 were $2.38 which was above our previous guidance, again due primarily to the lower effective tax rate. With that introduction, I will now turn it over to Charlie Hupfer for a review.

Thank you, Roger. Let me start with the income statement as reported under U.S. GAAP. We reported fourth quarter sales of 1.0601 billion and that is up 7.1% from 2006. EPS was $0.54 and that's up $0.15 from last year's $0.39. Both years include restructuring charges and we reported additional environmental charge in this year's fourth quarter. So, as usual, what I will do is adjust out restructuring and other one-time type of items to arrive at what we call base earnings which should represent a fair year-over-year comparison.

So, starting with the fourth quarter of '07, we took an impairment -- asset impairment/restructuring charge of $8.7 million after tax or that was after pretax. After tax was $6.1 million or $0.06 a share. About half of the pretax charge relates to our 2006 plan which was mostly international in nature. This charge relates primarily to two plant closings in Canada plus incremental plant closings costs at our Marquette paper mill. Roughly, the other one-half relates to the write off of equipment in our Wausau, Wisconsin, place plastic bottle plant. Also in the fourth quarter we took a 4.1 million incremental environmental charge related to the clean up just outside of our Dupier, Wisconsin plant. This charge estimates an cost overrun plus some unplanned work. After tax, the charge was 2.4 million or $0.02 a share. So, base earnings our base EPS after adjusting four restructuring and environmental charge is $0.62. That is, of course, $0.54 plus $0.06 plus $0.02.

In the fourth quarter of 2006 we took a $20 million restructuring charge, 17.4 million after tax or $0.17 a share. This charge related mostly to international operations and mostly to the closing of our Marquette paper mill in France. So based on EPS after restructuring is $0.56. That, of course, $0.39 plus $0.17. So I think the truer comparison is $0.62 versus $0.56 last year, but as I will discuss in just a minute, a favorable tax adjustment of $0.06 in the fourth quarter of 2007 improved the overall performance and comparison. So, in fact, if you adjust out the $0.06 favorable tax, just adjust that out of the $0.62, we arrive at $0.56 per share which is slightly ahead of our guidance of $0.52 to $0.55. In December, when we provided the guidance of $0.52 to $0.55 we didn't know about the extra $0.06 of income or reduced taxes, but we did predict the high end of the guidance. The quarter played out pretty much as we expected.

Again when making comparisons against our guidance as a fair comparison of when we compare against last year, we have to bear in mind of the six fewer days in this year's fourth quarter. So with those adjustments in mind, our base income statement shows sales again 1.0601 billion and that's up 7.1% from last year's 989.5 million. At the EBIT line, we have 92 million, 92.0, and that is down 1.2% from last year's 93.1. Interest expense is 14 million, tax is 19.8 million, equity in earnings of affiliates and minority interest is 4.5 million, and that means net income is 62.7 million, which is up 10.2% from last year's 56.9 million.

The interest expense of 14 million is higher than 2006 and that is due to an increase in debt that was largely due to the acquisition through the year and the two stock buy back programs earlier in the year. And tax's of 19.8 million represent an effective tax rate of 25.4% and that compares with last year's 35. 8%. What happened is late in the year we learned of two statutory rate changes, one in Canada and the other in Italy. This caused us to recalculate and reduce tax reserves with the offset being a reduction in tax expense of $5.7 million. Absent this adjustment, the effective tax rate would have been a more normal 33%.

I would like to look at the segment reporting, and that is a part of the press release that you should have had available to you first thing this morning. I will just two over a couple of key numbers. Consumer packaging, sales are up 10.5% and EBIT is down or earnings before interest and tax, operating profits are down 2.5%. Sales increase is attributed to foreign exchange acquisitions which would include matrix and the Caraustar assets. Those are the items that accounted for most of the increase. The profit decline year-over-year besides this six day element reflects continued weakness in our flexible business.

In terms of the two core and paper segments, we see sales up 7.4%, EBIT up 2.7%. The sales increase and the EBIT increase are both attributed to FX as well as the year-over-year improvement in Europe which we have talked about in the previous quarters. Packaging services, that segment sales are up 7.5% and EBIT is down 12%. And again, in terms of sales, foreign exchange, plus a pretty good fourth quarter volume, especially out of our Gillette pack centers, account for that sales increase. On the profit side we were negatively affected by recent bidding activity at Core Flex. Then in the all other categories, sales were down 7% and EBIT was flat. Most of the sales shortfall was in our Baker Reels division. That division sales into the construction industry. EBIT was flat with improved profitability out of our molded plastics operation.

Now, let me turn to the sales bridge and what we will do is reconcile last year's sales of 989.5 million with this year's sales of 1.0601 billion. That's a difference of $70.6 million. Volume and the four categories are volume, price, acquisitions and foreign exchange. Volume is a negative $70 million. Most of that is due to the six fewer days in the quarter. In aggregate, if you just look at the $70 million that would represent a volume short fall of about 7% of the six days would account for roughly 6%. We did see volume decline but in the quarter over last year, but it is relatively modest and certainly not as big as it looks when you look at the absolute dollars, which is a negative $70 million.

In terms of price, price is positive $26 million, acquisitions positive 69 million and foreign exchange positive $46 million. Let me start with volume and make a couple of comments. Again, the starting point is $70 million. Our year-over-year volume was generally weak except for our European operations and our packaging services operations. In fact, Europe volume was up 2% after we adjust out the six days. Most of that was in our, what we call frontier Europe which was up a little bit less than 7% and Legacy, Europe, Germany, France, the U.K. was relatively flat year over year.

In terms of keeping core volume in the U.S. and Canada, we were down 6% with weakness across most of the segments that we sell into. And as I mentioned earlier, flexible volume was generally weak. It was down about 11% and that is despite continued good growth with the snack and seal product. Our overall composite can volume was flat with juice concentrate down and snack volume up. In terms of price, that's a positive $26 million. Most of the pricing activity is in the two core and paper segment. Roughly one-half is the pass through of higher OCC costs, that is recovered paper principally. We have experienced positive pricing into core and paper, especially in North America and in Europe.

In terms of acquisition, $69 million positive, that's largely Demolli on the two core paper sides and on the consumer side, it would be Matrix, Clear Pack and Caraustar assets. Foreign exchange accounts for $46 million of positive sales. That's obviously the weak dollar against almost all the currencies that we do business in. Because this is all translation exposure, there's very little profit impact as a result of the $46 million. We calculate that the net income effect is probably about a $1.5 million or roughly $0.015 per share. Now, going to the EBIT bridge, and here we are reconciling last year's EBIT of $93.1 million with this year's $92 million. That's a negative 1.1 million.

Volume and mix, that category accounts for negative $23 million, price cost a negative $6 million, productivity positive $14 million and then the other category a positive $14 million. Let me talk about each of those four. In terms of volume, this is the loss profit on the 70 million sales short fall that I talked about just a moment ago. Now, mixed did play a role in this because we traded some higher value added paper sales in both the U.S. and in Europe for some lower margin business, but primarily it would just be the profit margin on the sales short fall. In terms of price cost, it is a negative $6 million. Here we have 32 million of cost increases that more than offset the 26 million of price increases that I talked about with sales.

The biggest driver is furnished costs, that is the raw material for the paper mills, that's mostly OCC and that is up 48% year-over-year in the U.S. and roughly 30% in Europe. Then productivity is a positive 14 million, that is we generally had good productivity across all of our divisions and that is due to continued focus on things like material substitution, scrap reduction, freight and energy utilization. In total, 14 million. Then in the other categories and other is our catch-all category, it includes the foreign exchange that I talked about it. It includes wage increases, energy increases, general inflation, and it includes the profits from the acquisitions that we made. That is a positive $14 million.

And here we do see the benefit of those six fewer days, in terms of allocated cost. This positive number also reflects our tightened control over discretionary spending. For example, selling and administrative costs, the way we capture it on our books, are 9.2% of sales and that compares with last year's 10% of sales. So, some part of a positive other is the good cost control.

Now, let me turn to the cash flow statement. For the quarter, operating cash flow was 187.2 million, and that is 28.4 million better than last year. 34.6 million of the increase came from networking capital which, for this purpose, I am narrowly defining as accounts receivable and accounts payable. Last year, our working capital program freed up $66 million worth of cash. In this year's fourth quarter it freed up $101million worth of cash and most of that improvement in the fourth quarter came from accounts receivable. So increased net income and this improvement in working capital quarter-over-quarter is what accounts for the overall improvement in operating cash flow.

Capital expenditures were in line with last year, in fact it was 34.2 million versus 35.8 last year and the dividends was up slightly from last year. Let me comment for just a minute on cash flow for the whole year. Here we see operating cash flow of 445 million versus 482.6 million last year. So, cash flow came a little bit higher than I had earlier projected. But the different year-over-year difference is a the short fall of 37.4 million from last year. All of that difference relates to networking capital. This is, these numbers are for the whole year but for the whole year we have freed up in 2006, $104 million worth of working capital into cash. This year, 49 million was freed up. Last year was the first year of our very aggressive working capital program and we saw some big gains in 2006 over 2005.

While we continue to see improvement in 2007, the gains weren't as significant. In fact, the gain this year was, the way we make these calculation, an improvement for better set of reduction of 2.9 days, so we are continuing to see improvements but not at the same rate we saw in the first year of the program. Capital spending for the whole year was higher, 169 million versus 123 million last year. This year we had some increased spending with things like our higher bottle plants, St. Louis Bottle Plant, two new [flexo presses]. Our projection for 2008 is to have operating cash in the $420 million range and for capital spending, to move back into what for us would be a more normal $130 million range. So, we are indeed looking for another good year in cash flow in 2008.

A comment on the guidance. Our first quarter guidance is $0.50 to $0.53 per share and our annual guidance is unchanged from our New York analyst meeting at $2.44 to $2.47 a share. Our first quarter last year was $0.57 a share, but I will remind you that included $0.04 of income related to the recovery of prior year benefit costs from a third party provider. We talked about that in the first quarter. So, a better comparison would be comparing our $0.50 to $0.53 range with last year's adjusted $0.53. So the top end of our range is where we were at the end of our last, last year's first quarter.

The effective tax rate last year was 34%. We have assumed 33.5% effective tax rate in this year's first quarter. We assumed a approximate 32% rate for the whole year. We're expecting for that usual sort of trend in effective tax rate for the higher effective tax rate in the first quarter. Compared with last year's first quarter, we expect core and paper EBIT to be relatively flat year-over-year. We expect the consumer packaging segment to show year-over-year growth, some of that will be coming from acquisitions like Matrix and the Caraustar container assets. Some of that will be improvement in our plastics and our metal end operations.

In terms of packaging services, that segment is expected to show a year-over-year short fall in the first quarter compared with last year's first quarter and that due principally to the recent bid activity which I have already talked about. The all other category is expected to be relatively flat year-over-year. So, with that in mind, if you adjust out the 5.5 million pretax recovery from last year's EBIT, then we show a modest year-over-year increase in this year's first quarter forecast versus last year's actual results for the first quarter at the EBIT line. The first quarter of 2008 we forecast obviously was put together as you would expect based on the level of activity that we have seen in the fourth quarter and, in fact, the EBIT we are forecasting for the first quarter is relatively flat with EBIT in the fourth quarter as well.

Our estimate for the year remains $2.44 to $2.47 which represents a 10% increase at the EBIT line year-over-year. It does, and I have mentioned this in New York, only represent a 3% increase at the EPS line, but the difference is the higher taxes in 2008 or maybe better said the less tax benefit in 2008 compared with 2007. Now let me wrap up as I usually do with a mention of our new product development was.

We had new products in the fourth quarter that total 29.3 million, that is versus 33.6 million last year. Again, remember that our definition of a new product is a product that has been commercialized two years or less. So we continue to feel very good about our new product development program. Since last year, about $10 million Core Flexes bottle pop displays have grandfathered off. That accounts for the decline year-over-year. Sonoco's new snack and seal product, which we call Smart Seal and powdered infant formula conversion continue to make up the bulk of new product sales. Those are our, that's the end of my prepared remarks. I guess we will turn it over to the group for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Ghansham Panjabi with Wachovia Securities. Please proceed with your question.

Hey, guys, good afternoon. Charlie, I know you gave us parameters on this, but can you break down the price volume aspects by the different segments, please?

In terms of sales?

Yes, in terms of sales, right.

I can -- again, we are talking about for the quarter?

Yes.

I can generally do that. In terms of volume, it is a $70.4 million I mentioned in total. Really, almost all of that is coming out of two core and paper and to a lesser degree consumer packaging. So probably a little, almost, actually a little more than half of that is out of tube core and paper, consumer packaging would make up most of the rest of it. We did see a decline in the other category which is where our Baker Reels business is. So, it is really in those two major areas. Embedded in that $70.4 million, 70.4 million, they are packaging services and they did show an increase year-over-year. So, three of our four categories or segments show a decline. Which of course you would expect with this 6%, 6% day difference.

Okay. And, Harris, how does this current slow down compare with what you saw back in 2001? Clearly your company is much better positioned, but in terms of the various operating segments including tubes, cores, and consumers, are there any sort of parallels between the two?

I think it is a little different than what we saw in 2001 in that we are seeing more pressure on the consumer side this time than I think we saw at that time, I would say this is probably more reflective to what we saw in the 1990, 1991 time frame when consumer spending sort of dropped off. So the short answer is we are seeing more pressure on the consumer side, particularly on snacks and things of that nature. And in Europe, are you seeing any sort of sequential weakness or is it too early to tell? Europe continues to run as it has all of last year. So we don't see.

Okay. Great. Thank you.

Thank you.

Thank you. Our next question comes from Chris Manwell with Keybanc Capital Market. Please proceed with your question.

Good afternoon, gentlemen.

Hi, Chris, how are you?

A couple of questions for you. First, to follow up on Ghansham's question about the impact of a recession. I think embedded in your guidance was no material slow down from what you have seen. But if I remember from your analysts day, you will assume some pieces of the business. I think the all other would be down, tax services down, but the consumer and tube and core up. Is that I guess consistent with what we have seen here in the fourth quarter or coming out of the fourth quarter continuing?

Chris, I would say the fourth quarter is about what we expected. There are always puts and takes. I look across the market segments, it was about what we expected in early December. And our outlook going into 2008 frankly hasn't changed. We saw more strength in the early part of the fourth quarter, the first, third of the quarter than we did the remaining two-thirds. In early January we saw its weakness, but I would say that the levels have come back to basically where they were in October. So, there's really been no change in where we were when we talked with you in December.

Okay. And I realize the business was probably quite a bit different back in the '90, '91 recession time given you have added so much more to plastics and flexibles. If we did go into a modest consumer-led recession here in the first half of the year, do you think that, how do you think your volumes may react? In other words, I can see things happening two ways. You could see consumer spending or some of your pack services businesses pick up as folks want to do more special promotions, but at the same time overall levels down. I guess my question is how would you rectify that across your whole business as to what you think could happen?

Chris, it is a little different company than it was in 1990, '91. International exposure is certainly greater than it was in '90, '91 particularly in Europe which as I said in response to Ghansham's comments, seems to be sailing along well. That's primarily tubes and cores and the structure there has changed dramatically in the last several years. We also have on the consumer side Phoenix Packaging which is (inaudible- low voice) the business, that business volumes are pretty good. As you might expect, people are eating at home more. You have got that piece of it. You have other parts of the business. I don't know that you will see appreciable change in what we saw in '90, '91. We will see some slow down in certain consumer segments but I think the difference has been this time, at least the last 9 to 10 months, we have seen more of a slow down in what I would call discretionary consumer spending. That would be certain snacks and things of that nature. I don't know if it is going to be totally different. I think the balance of the company is we are positioned reasonably well.

Okay. And the last question, Charlie, as you look through 2008, are there, I know there were accounting days that got shifted around in '07. Is there any adjustment in days as we look into '08?

We should have a, I hate to say this, but a straightforward year.

I think it is 365 at as again.

I like it. Thank you.

Our next question comes from Claudia Westin with JPMorgan. Please proceed with your question.

Hi, thanks very much.

Hi, Claudia.

Just a couple of questions. One on the packaging services side of the business. The margins obviously came down a little bit and you guided for lower profitability in '08, I guess because of the pricing pressure. Is this the kind of operating margin we should expect in the near term or do you expect sort of more downward pressure on this?

I don't know that we will see more downward pressure on the margins. These are the kinds you should expect or either, actually improving I would say. What Charlie was talking obviously was the effects of the mega bid which we talked about, I guess, in the July and October time frame. We have seen some impact in the last half of this year as to that. What you are seeing is the full-year impact of that growing into our numbers for next year based on the guidance we have given.

Okay. Great. That's helpful. And then on the consumer packaging side, the margin was down year-over-year but obviously up from sort of the second and third quarter, 6.5% kind of level. Is that sort of the reflection of some of the recoup of the margin you lost due to operating problems and where do you stand on the operating side of things?

There's are two things, there was some start ups and some plastic operations last year that obviously impacted those. That plant is clearly behind us at this point in time. Wausau, Wisconsin, plant because we moved those assets into a Phoenix plant in I guess Jefferson City, Missouri, if I recall correctly. And the other is the flexibles piece which did have operating issues last year as we have all talked about. We have seen operating improvements in flexibles that continues to improve. They have clearly been impacted, particularly in Canada, with lower volumes and currency, but operationally I am very comfortable saying that the operations have improved.

Okay. And then just finally, in terms of your debt, can you just remind me how much is fixed and how much is floating? Thanks.

We have actually on the balance sheet, it would be almost all categorized as fixed rate debt but we do finance ourselves with commercial paper. At the end of the quarter there was about $170 million worth of commercial paper that is called long-term debt. Then we probably have another $50 million or so. So something, I would be inclined to think. I don't have that break down. I do have the total debt. The total debt was up just a little bit from last year, total debt is $850 million up 86 million. I didn't make the point on the call, but with that increase we had something like $236 million worth of acquisitions and something like $109 million worth of stock buy back. So cash flow was very, very solid and pay down debt, the debt is $850 million and our debt to total capital at the end of last year was 37.5%. Yes, 37.5, and at the end of this December 31 it was 35. 6. So we paid down some debt, we brought total capital down a couple more percentage points. I would guess in the 850, probably about 200 million is the commercial paper and short-term debt.

Okay. Thanks very much.

Thank you.

Thank you. Our next question comes from George Staphos with Banc of America Securities. Please proceed with your question.

Good afternoon. This is Michael for George who is traveling.

Hello, Michael, how are you?

Doing well. Thank you. Harris, first question, given sort of customer comments and discussions, does the company see any encouraging finds at the retail level with trends improving or flattening out?

Michael, I would have to say the conversations that I have had in the recent weeks, and I'm talking about the last two or three weeks, would indicate that they're expecting at least for our foreseeable future, which I will say the next quarter, volume staying at pretty much current levels.

Okay. So that would be, that would imply down?

No, not necessarily. By current levels I am talking about what we are seeing right now which is, as I said earlier, consistent to what we saw at the beginning of the fourth quarter and clearly if you were to look back a year ago, there are, they are down from where they were a year ago. So I guess it's your frame a reference that I am talking about.

Okay. I appreciate that clarification. My other question is on the consumer flex side. Given the sluggish margin trends we have been seeing in the segment, would it be fair to assume that Sonoco would be focused on the operating or the margin perse versus doing another expansion acquisition? Can you help us think through the strategy on the consumers side?

I think maybe you talked about flexibles just a second. I was going say your assumption about flexibles is correct. Focus is clearly on the operating side and margin expansion of that. If you talk about the whole consumers sector, our productivity efforts, Michael, are always driven at improving our margins towards our goal of getting to that 11% that we talked about operating level in December. But we have significant growth opportunities on the consumer side as well. As we look at the matrix operations, we look at conversions of composite cans found in infant formula, and other opportunities that are coming along as a result of increasing steel prices. Yes, we always look at the operating side, always trying to improve margins across that. It is particularly particular in flexibles, but a lot of emphasis on growth as well.

Okay. And then on just speaking in terms of specifically on the flexible business, you had mentioned the currency effect from Canada. Can you give us a degree of magnitude in terms of this quarter what the negative impact on profit was versus long versus the set back versus other issues that we should be thinking about?

I really can't because the impact of currency hits us in two ways and obviously it is a translation effect. But we had a lot of customers that in Canada, that frankly were moving manufacturing into the U.S. and also taking product and shipped into the U.S. Now when we ship it into the U.S., we have got the currency effect. But we also had the effect of just sales being slower in Canada as well.

One thing we were able to do, part of the reason I certainly can't help answer that question. We can capture the translation effect, and as I said, that has a modest impact on the bottom line. Whenever flexibles makes a sale out of the Canadian plants dominated in U.S. dollars, we hedge that transaction so we have no exposure there. So the real issue is that you can't count the macro economic effect. It is the sale that you didn't make, and so I don't know how to answer that part of the question.

Okay. No, that's fine. I appreciate the color there. It is just one last question, if I may. On the price cost, could you help us understand, in terms of the negative 6 million, is that more on the consumer side and also, in thinking about your '08 guidance price cost, is it fair to say given the timing of your price increases, that price cost would progressively improve as we move forward in the year?

Michael, you can always pick and choose where you want to price cost. If I looked at $6 million and I looked at the the run off of OCC last year, the dramatic run off of that and how aggressive we were on price recovery and that piece, I would have to say some of that was on the industrial side if not all of that on the industrial side. You can also look at the cool flex side and say there was price concessions that were given in the mega bid. So to pinpoint that it came from one side or the other would be really very difficult to do because we had price pressures on both sides, we have recovery on both sides. I am not hedging the answer, but I don't really know.

When I look out into the '08, we obviously have some price increases in the market today. They were effective June 1, I mean February 1. And the feedback I am getting is that it is going reasonably well. OCC is the real unknown at this point. OCC is att $115 a ton normally in this environment, arguably low economic times, maybe a recession, you would expect OCC to be considerably lower than that. It is being driven by obviously Asian demand and also I believe by export line of out of this country and pretty high running rates to the extent that both of those things continue, I would expect to see OCC where it is or even higher to the extent that either of those things obviously modified and you have got the other effects. So I think what we said in our guidance is we were, baked into the guidance was neutral price costs for the year and obviously that's what is still in the guidance. As we see raw materials increase, we will be aggressive with price recovery as we normally are.

Thank you very much. Good luck in the quarter.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) We have a follow up question from Chris Manwell with Keybanc Capital Markets. Please proceed with your question.

Good afternoon, again, just one quick follow up. As you look through 2008, Charlie you laid out the scenario where you are going to have just a shade under 300 or so million of free cash flow. With the balance sheet in very solid shape, should we anticipate continued metered share repurchases throughout the year. What's your primary focus for cash?

Chris, I would expect most of that is going to be used to grow the business. My experience when you see the kind of economic environment that we are operating in, growth opportunities present themselves in our markets around the world. We will be aggressive to take advantage of those. As always, that's our first priority on free cash after paying dividends and obviously CapEx. To the extent those might not materialize, we have shown a willingness in the past to certainly buy back stock. We would consider that the first priority is on try to aggressively try to grow the business.

Okay. Thank you.

Thank you, Chris.

Thank you. Our next question comes from the Dan (inaudible) with KFA Capital Advisors. Please proceed with your question.

Good afternoon, guys.

Hello, Dan. We are doing great.

Good to hear you guys today. Harris, did you say your longer term goal for the consumer business was 11% margin?

The answer to that is yes.

Okay.

What we said, Dan, is the company EBIT margins we laid out in December was to be 11%. I want to get the consumer back the 10 before I do that.

Sure. Okay. So you want to get the consumer margins to 10 and the end the year about 7.9, I believe.

That's correct.

Now, Harris, what time frame is this goal? Is it a couple of years or when do you think you can achieve this 10% or what's the goal?

Well, what we said is that was in your five-year plan.

Okay.

Our consumer group would say a little more pressure on them to get there sooner than that.

Okay. Do you think that, you guys are very good at productivity, you make a lot of gains there. I think you would probably agree productivity by itself might not be enough to get the margins to that kind of double digit range, my guess is anyway, in consumers, it is probably takes a mix as well. How do you think about how you get to that higher level of margin, Harris, in that business? Is it going to be a combination of mix? If it is, what segments do you have to see grow? Is there a restructuring component to it as well?

Dan, that's a wonderful question. Clearly, productivity will take you so far. Some looking at structural changes in the business, and by structural changes I mean trying to better utilize the footprint that we have around the world of putting some different businesses in some other plants, but the mix is going to be, be critical to it. Some of our product lines enjoy better margins than others.

Right.

You know as well as I do where they are.

Yes.

So we will emphasize the growth on those and try to improve the margins on ones that need to in fact come up.

Okay. Well, great. Thank you.

Thank you, Dan.

(OPERATOR INSTRUCTIONS) Mr. Schrum, we have no further questions in the queue at this time.

Thank you, I appreciate that. Let me thank all of you for joining us today. We certainly appreciate your interest in Sonoco and look forward to talking with you in the near future. Thank you again.

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