Sonoco Products Co (SON) 2008 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Sonoco Products Company first-quarter 2008 earnings conference call. At this time all participants are in a listen-only mode and a brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Roger Schrum, Vice President of Investor Relations for Sonoco Products Company. Thank you. Mr. Schrum, you may now begin.

Good morning, everyone, and welcome to our 2008 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 were released before the market opened today and are available on 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 Forms 10-K, 10-Q and 8-K, filed with the SEC.

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

Thank you, Roger. Today Sonoco reported first-quarter sales of $1.038 billion and net income of $13.3 million, or $0.13 a share. Actual GAAP results include some unusual adjustments that I'll discuss individually, and then I'll reconcile GAAP to base earnings.

Base earnings were $54 million or $0.54 a share compared with $0.57 last year. At $0.54, we were pleased with the quarter. Our guidance was $0.50 to $0.53, so we were $0.01 over the high side of the range.

The first reconciling item that I'll discuss is restructuring and impairment. During the quarter, we took a pre-tax write-off of $18.9 million. After tax and minority interest, the net income effect of that $18.9 million was a loss of $9.7 million, or $0.10 a share. About one-half of the pre-tax $18.9 million relates to closure costs at our Shanghai paper mill. These costs represent severance costs and an allowance for bad debt. The mill closed in November. We're in the process of selling the assets as well as the land and building. Given the expected proceeds, the settlement process is not likely to result in an impairment charge for the asset.

We had $4.8 million of restructuring and impairment related to the closure of our Brazil metal end plant with more than one-half of that amount being a loss due to foreign exchange. The next largest piece was $3.4 million, and that relates to our recent decision to close one of our two Spanish Tube and Core plants. This plant has been on the bubble for some time. We finally concluded that the market wouldn't support two plants, so the decision was made in the quarter.

The other major adjustment that I need to talk through is a write-off of $42.7 million subordinated note and preferred stock position. The after-tax impact of this transaction is $31 million or $0.31 a share. The note, which is deeply subordinated, and the preferred stock are the result of our 2003 sale of the high-density film plastic bag business. The note is actually due in 2013.

The accounting rules require that we periodically evaluate the net realizable position of the note and the preferred stock position. We did this at year end and concluded that, even though the Company was highly leveraged and in a highly competitive marketplace, that the long-term analysis supported the $42.7 million asset value. More recently, we've reexamined our position based on the latest financial information and given the deeply subordinated position of the note, and we have concluded now that we can no longer support the long-term recoverability of the asset position that we have on our books. So, as a result of that, the accounting analysis required us to write off the entire position. I do want to make it clear that the $42.7 million is a non-cash charge. I also want to point out that, obviously, Sonoco isn't in the financial services business, so any notes that we have on our books is a result of some type of asset transaction.

At quarter end, we have about $12 million on our books right now, after this write off position. We monitor these accounts regularly, and we feel that they are fully collectible. In fact, only about $4 million could even be arguably at risk, and to date all of them are performing, so just to give you an idea of where our position is after this write off.

So, with all that in mind, to arrive at base earnings, if we start with the $0.13, add $0.10 for restructuring and impairment and then add another $0.31 for the write-off, we arrive at $0.54 a share. This $0.54 compares with $0.57 last year, although I'll remind you that the $0.57 last year did include $0.04 worth of income related to the settlement of some prior-year benefit costs.

So, all in all, base earnings were above our guidance, and they were in-line or maybe even slightly ahead of last year, if you adjust out that $0.04 settlement income. So, with these adjustments in mind, a base earnings income statement on a comparable basis, and I've got a chart in front of me that I'll just run down; it's really got three columns -- one just the category, then the 2008 column and then 2007. So this is our income statement on a base earnings basis.

Starting with sales, sales are $1.038 billion; that's up 8.6% over last year's $955.7 million. EBIT -- earnings before interest and tax -- is $88.3 million. That's down 7.6% from last year's $95.5 million. Net interest is $13.2 million, and that compares with last year's $11.5 million. Taxes are $23.8 million, and that compares with last year's $28.6 million. And then affiliate income/minority interest is a positive $2.8 million, which compares with last year's $2.5 million.

So, summing up those numbers, net income in 2008 is $54 million; that's down 6.6% from last year's $57.9 million. EPS is $0.54 a share compared with last year's $0.57 a share.

The effective tax rate was 31.7% this year versus 34% last year. Taxes are slightly more favorable than I expected them, and that's due to mix. We had a higher proportion of low tax to foreign income in these base earnings results.

Let me now move to the bridges, but before I do that I'll comment on the segment analysis which is found in the back of the press release. We were very pleased with the performance of our Consumer Packaging segment. Sales were $387.4 million, and that's up 16.3% over last year. Operating profit was $36.3 million; that's up 22.7% over last year. We reported in this quarter a solid performance in our composite can and in our metal end business. We had modest cost recovery, and we had good productivity. In this particular segment our flexible operation was behind last year's first quarter. Last year's first quarter was very strong for them, but I need to point out that it was well ahead of the second, third and fourth quarter levels. So that suggests to us that the operating problems that we've talked about in the past are largely behind us.

In the Tubes, Core and Paper segment, results came in more or less as expected. Sales were $436.2 million; that's up 7.5%. Operating profits were $34.6 million; that's down 15.2%. The profit shortfall was built into our guidance and it reflects volume shortfalls in most of the regions in the world where we do business.

Packaging Services, sales were $124.4 million; that's up 0.5%. Operating profit was $6 million; that's down year over year 47.9%. The majority of this shortfall was in our CorrFlex business, and it reflects the outcome of last year's bidding process with a major customer in terms of both lost volume and reduced price.

The all other categories showed sales of $90 million, down 3.4% and operating profits of $11.4 million, down 16.4%. This largely reflects shortfalls at both our Baker Reels and our Protective Packaging businesses, both of which are reflected by declines in the housing market.

Now to the bridges. I'll start with the sales bridge, and this is where we reconcile last year's $955.7 million worth of sales with this year's $1.038 billion. That's a difference of $82.3 million year-over-year. The first element is volume. Volume is a negative $35.5 million. I'll go through and discuss a little bit more each of these categories. Price is a positive $34.6 million, acquisitions a positive $36.3 million, and foreign exchange a positive $46.9 million. So those numbers should add up to $82.3 million year-over-year difference.

Let we start with volume. As I said, it's a negative $35.5 million. This was a weak quarter year over year from a volume perspective. And it was made a little bit worse by the fact that last year was strong and that this year had one to two fewer billing days due to the Easter holiday in the first quarter.

Our Tube and Core volume in the US was down 8.7%. It was down roughly 7% if you adjust for those two fewer days, but it was still weak, especially in the Textile and in the Film segment. Tube and Core volume in Europe was down about 1.5% with legacy Europe down around 4% and frontier Europe up about 9%. Frontier Europe principally would be Turkey, Poland and Russia, which were all up in the 11% to 12% range. Due to the mix when it nets together, volume was down roughly 1.5% overall.

Paper volume was down in Europe but up roughly by the same amount in the US. We ran in our US paper mills at about 98.5% utilization in the first quarter.

Composite can volume was strong. It was up about 3% year over year, and that's led by powdered infant formula volume up 16%, snack volume was up 7%, dough was up 2%. Only coal cartridges selling into the housing market were week, so we had a very good performance in our composite can group. Flexible volume, on the other hand, was down roughly 11% due to some lost business in Canada.

I've already talked when I mentioned segment reporting about lost volume in CorrFlex due to the competitive bid situation, and in the all other category, Baker is down, largely selling into the housing market.

Turning now to price, sales price, $34.6 million -- about three quarters of the price is in the Tube, Core and Paper segment, and it reflects two things. One is the impact of contractual price resets, and the second is last year's price increases in both paper, tubes and cores. In the US, both our Paper and Tube and Core business announced price increases in the first quarter of 2008. Paper announced a $40 a ton increase, Tubes an 8% increase. That had very little, if any, impact on this quarter. Most of the effect on this quarter is the rollover from last year's price increase and contractual resets.

Consumer Packaging pricing accounted for roughly the other one-quarter of the year-over-year price increase, and this reflected pricing in our composite can business and that was due to both contractual resets and a general price announcement at the beginning of the year.

Acquisitions accounted for $36.3 million of the sales increase. This is a net number that reflects the acquisition of Matrix and Caraustar's can assets, minus the closure of the Chinese paper mill and minus the closure of some selected European can operations.

Lastly, foreign exchange, $46.9 million. That's simply the effect of the weak dollar. This is just a translation number. The EPS impact of that is probably only about $0.01 per-share.

Now turning to the EBIT bridge, and here's where we're reconciling last year's $95.5 million of EBIT to this year's $88.3 million, that's a negative difference of $7.2 million. And the components there are volume, volume mix, and that's a negative $16.8 million; price, net of material cost, freight and energy is a positive $2.1 million; productivity, a positive $8.7 million; and then all other, a negative $1.2 million. So, those should add up to a negative $7.2 million.

Let me start with volume and mix. Again, I said it was a negative $16.8 million. This represents the profit impact on the volume year-over-year shortfall the I mentioned with sales, so it's the profit impact of the sales shortfall of $35 million. It also represents the mix difference. For example, to keep our US paper mills full, we've produced some lower-margin tissue and tileboard and some lower-margin chipboard that we exported to Europe.

Price, cost is, as I said, a positive $2.1 million. You'll notice that, in addition to material costs, we've included our best estimate of energy and freight cost. We've done this because recent pricing activity is designed to cover the significant run-up we've seen recently in energy and in freight.

So, given the run-up of all these costs, we were more than pleased to have a positive price cost, even a small one of just $2.1 million.

In our paper mills, wastepaper costs were up roughly $22, or 20% year over year. Film costs were up in the 3.5% range. Resin was up, depending upon the type, 20% to 40%. Adhesives were up 8%. So we took some significant cost increases during the quarter.

Productivity was at $8.7 million, which was generally good in all of our segments. And in the other category, a negative $1.2 million, that's the catch-all category that includes wages, fringes, acquisition income, fixed cost savings. This is where we did have last year's $5.5 million of benefit recovery, so that looks like a negative year-over-year in this variance comparison.

But I will point out that, buried in these numbers, wages were up roughly $7.5 million, but we had a more or less offset of roughly the same amount with fixed cost reductions year over year. This is also the category where you see the impact of our control over discretionary spending. So, in fact, S&A spending as we monitor it internally was 9.3% of sales versus 10% of sales last year, which tells you a whole lot about how we've clamped down on discretionary spending in the first quarter.

Now, let me turn to cash flow. Cash flow was good during the quarter. Operating cash flow was $64 million, which was $6 million better than last year's $58 million. The change in net working capital was $7.3 million better than last year, which reflects continued progress in our working capital program. Capital expenditures were $34.1 million, which was slightly less than last year's $36.9 million, and dividends in the quarter were $25.9 million, which was a little bit greater than last year's $24 million. All in all, we were very pleased with the cash flow generation in the first quarter, and especially pleased with the continued performance of our working capital management program.

As a result of that, our balance sheet remains strong. Debt was reduced by $10 million from year-end. Debt to total capital as we calculate it was 35.2%. I made the point yesterday that you have to go back to 1991-1992 to find a lower number. So to say that our balance sheet is strong is almost an understatement.

Our forecast for the second quarter is $0.58 to $0.61, and for the year we've left it unchanged at $2.44 to $2.47. This re-forecast was redone in late March, so it reflects our best thinking at the time, which is no significant change in the level of business activity, but it does assume that we'll see an ordinary second-quarter uplift in our Tube and Core volume.

The effective tax rate that's built into the last three quarters is approximately 31.5%, which is about the same that we had in this year's first quarter.

Let me report on new products. New products as we define them, that is, products that have been introduced over the past two years, were $27.9 million in the first quarter versus $20.2 million in last year's first quarter. The new generation of Snack n' Seal and the Ultra-Peel retort end were among the biggest year-over-year contributors.

Then lastly, let me comment about Fox River. During the quarter, the Company's subsidiary, US Paper Mills, recorded a $15 million income related to insurance recovery for the Fox River environmental claim. This represents cash that we received and settlements that were agreed to with some selected insurance carriers. The Board of US Paper Mills agreed to increase its settlement offer for the remediation of the river by $15 million, and that brings our total offer to $35 million. So, the income and the expense, income of $15 million and expense of $15 million offset during the quarter, and that's why you don't see any effect on the bottom line. The Company has other insurance carriers that it's currently negotiating with to see if we can reach a settlement with them.

Then I said lastly that the last point that I do want to make is on the dividend increase. On Wednesday, the Board voted to increase the quarterly dividend from $0.26 to $0.27 per share. This takes the annual dividend to $1.08 per share, which is a payout in the low 40% range, which is where we generally tend to keep it.

So, with those comments in mind, I guess now it's time to turn it over to the group for questions.

(OPERATOR INSTRUCTIONS) Ghansham Panjabi, Wachovia Securities.

Adjusting for the number of days in each quarter, 1Q '08 versus last year, Harris, I was just wondering if you could comment on what you're seeing sequentially in terms of just the macro environment. Have you seen any sort of degeneration incrementally to where you were late last year, and certainly when you gave guidance in the middle of January? Just some flavor on the economy would be helpful. Thanks.

Charlie obviously mentioned that we're down on the tubing -- I'm going to take them separately -- Tube and Core. If you looked at the Tube and Core sector, I think Charlie said we're down some 6% over first quarter of last year. But we were down about that in the second quarter, the third quarter and the fourth quarter. So we have not seen any further deterioration in that business, I'm pleased to say. It hasn't improved, but it certainly hasn't deteriorated.

The composite can business, or the consumer side -- obviously, we've seen improvement year over year, and Charlie talked about sectors in the composite can market. I think that reflects what we have seen traditionally in other recessions, particularly consumer-led recessions, where the consumer tends to stay home and eat more and consume more of our products. Certainly, we've seen that. I think, an indication of that -- Charlie, I don't think, mentioned it -- but actually, concentrate was up in this quarter by some 2.6%. And I don't think since I've been CEO, have we seen concentrate up quarter over quarter.

So it says to us at least that the consumer is obviously watching his spending dollar. He's now buying -- he or she are now buying concentrate, rather than ready-mix, to conserve money. So we're consciously optimistic, Ghansham.

Okay, so some of the weakness that you saw late last year in consumer, was that likely inventory drawdown at the customer level, do you think?

I would think it was. We certainly saw a pickup in the January time frame, and talking to our customers, particularly our food customers, their business is up on the food-related side. So I think we're certainly seeing that.

George Staphos, Banc of America Securities.

A question maybe on high-density films to begin. What are the -- perhaps you can't really comment on this call. But should we totally write this off? Is there a chance, perhaps, that you're able to get some of these funds that are due you right now? Other than the write-off, there's no other potential outcome, from this; right? It's not as if you might wind up with this business back again.

We will not end up with this business back again, so let me clarify that very, very clearly. George, I hate to say that we never -- our best judgment is, as Charlie said, that this note is likely unrecoverable. From an accounting standpoint, we were compelled to take this write-down. Is it a possibility that it could be recoverable or something could be recovered from it? There's always a remote possibility of that.

If I could ask, what changed in three months where it became (inaudible) likely to recover versus not likely to recover? What happened to that company, if I could ask?

Not very much, frankly. We did the analysis of that at the end of the year for the fourth quarter. We were sort of on the bubble at that time. We expanded a disclosure in the 10-K; and then, as we saw more recent results and a little softer volume, it just sort of took it over to the other side. This is a pretty deeply subordinated note and not due until 2013 and a preferred stock position. So it just became the right thing to do from an accounting and perhaps a little bit of a conservative perspective.

Alright, we'll talk in five years. In terms of the guidance, let's say you don't see the normal seasonal uptick into Tube, Core and Paper. What would that do to your guidance overall? And, have you seen sequentially a normal uptick -- obviously, from a reduced base -- thus far in 2Q?

George, as you well know, we tend to see the second quarter better than the first, the third quarter better than the second, and generally in the fourth quarter a little down. But we normally see that seasonality. If we did not see it, obviously, it would have a negative effect on our guidance. I will say that in April, we have seen thus far the uptick that we normally would expect.

So if it didn't materialize, would that be $0.02, $0.10? I'm just trying to get a round parameter here.

George, I don't know that I can clarify that. I don't know that I could clarify that.

Can you give us a bit more detail in terms of flexible packaging and what seems to be, at least, some stability to sequentially improvement in the operation? Can you also give us some color in terms of why -- I thought you said volume was down 11%, which seems to be high even with a relatively higher [end] number than I would have expected, even with the tough comparison? Thanks.

As Charlie said, the first quarter of last year in flexible was the best quarter we had last year, and then we had the issues that we've talked about a lot in the second quarter, and third quarter, fourth quarter. We saw improvement in the third quarter, we saw improvement in the fourth quarter, and we saw even better improvement this quarter.

We have seen some volume issues in some of our larger candy and confection customers that are high single-digits, where we have the same business that we had year over year. So I conclude from that that that market is a little softer than we would have anticipated. But from an operating perspective, and that's sort of where I judge it, we continue to see the improvement that I talked about last year and anticipated seeing.

We gave up a piece of business at the end of 2006, which would have still been in the first quarter of 2007 numbers, in Canada, which would make a big part of that year-over-year difference.

That's correct.

Have your customers seen some sequential uptick in their business more recently? We've actually been seeing that some from the [scanner] data. I don't know if you've seen it from your customers, in flexibles?

Well, once again, it's a sort of a mixed bag. We have some that are certainly up and some that are down. We have two or three major pieces, candy, that are down.

Claudia Hueston, JP Morgan Chase & Company.

Just a couple of questions on cost. One is just on OCC. Prices have pulled back in the export market over last month or so. Can you just comment on your outlook there for both maybe the second quarter and then just the 2008 period as a whole?

OCC is at $125 a ton right now. I think our forecast holds it at basically that level for the balance of the year. Clearly, as you mentioned, the export has declined a little bit, and a lot of that is due to a shortage of containers and has driven that down. Claudia, I've said that I think, given the economic conditions here in this country, I believe there will be more downward pressure on OCC over the balance of the year than there will be upward pressure. But --

But in terms of your guidance, you're looking --

It has not tempered -- we have not put that into our guidance.

Just on the energy side, energy reduction has been a priority at Sonoco over the past couple of years, and you've done a pretty good job reducing your natural gas exposure. But can you just comment now, in terms of where you are now in terms of total natural gas usage and if there's more room to go in terms of energy efficiency? Then, if you have any hedges in place, if you could just comment on that as well?

Well, as you certainly know because you've asked me the question in the past, we've seen our energy cost per ton of paper that we produce go down nicely over the last four or five years as we have invested fairly significantly in our mills and more energy-efficient motors and other things. So obviously, that has been a real benefit to us.

We have a hedging program on natural gas not to really beat the market, but to make some certainty for our cost as well as our customers'. And at any given time, as we are this year, we are fully hedged; we're hedged to about 75% for the balance of 2008.

Charlie, help me -- I guess we're probably 60% hedged into '09?

More like about 50%. Generally, we'll be about 75% over the next year. That builds in half-year increments, 50% and then roughly a third. There's been a big change in our natural gas balance sheet position, almost a $10 million asset that was created between the December quarter and the first quarter. Obviously, the offset of that is still on the balance sheet, but the hedging program seems to be providing some nice benefit for us right now.

In terms of your guidance for the year, you didn't really comment on the cash flow side of things. Do you still expect operating cash to be about $420 million and the CapEx of $130 million or so?

I would say that's a fair estimate at this point, Claudia.

Dan Khoshaba, KSA Capital Partners.

Good quarter. Charlie, what is your FX assumption for the year -- dollar/euro? If you have that; if not, I can get it offline, I guess.

It's basically just flat, just where we were. So we didn't build in any significant change as a result of that.

And is that lower than where it is now? In other words, is that --?

It would be.

It would be?

It would be, because it's --

It's more of a conservative number?

With the lower being that the dollar would have been stronger against the prior year's quarters, the second, third and fourth quarters. So you would have some of that just naturally built-in, so we're not doing any real forecasting here. (multiple speakers) has very little bottom-line impact on our overall earnings.

As I look at the various components of EBIT, volume took a pretty big hit but it looks like volumes may stabilize. Maybe they get a little worse, but obviously the catalysts that are causing weaker volumes look relatively stable. But pricing was only up a little bit. Would we expect pricing component to actually improve in the second quarter? I know that you've raised the selling price about 8% in tubes, for instance. How would the various components -- volume, price, productivity -- maybe change a little bit over the next couple of quarters?

Actually, I would have argued that pricing was up a good bit, and so are costs. So we did have -- and again, we threw the energy and freight into that category, which was an incremental $2 million for both pieces. So I think, as we look into the second, third and fourth quarters, we actually, holding things -- and Harris' comment about the OCC assumptions -- we probably have a slight negative in price/cost built into the re-forecasted numbers.

But I would expect, I guess -- and I don't know the answer to this, but I would think that price/cost should be at least modestly better in the second quarter. But does that sound right?

It probably should be, Dan.

Chris Manuel, KeyBanc Capital Markets.

I'd like to follow up on Dan's question. From the time you put together your original -- it looks like your full-year forecast essentially stays the same. But from the time that you've put your assumptions together, clearly, there have been some changes. The economy's certainly a little weaker now than it looked back in December. Could you help us [foot] -- what some of the pluses and minuses were within your forecast? Clearly, one of the ones I think you just mentioned was that price/cost may be a little negative is what you are baking in the back half of the year. Can you help us a little on what your volume assumptions may have changed?

Dan, I would say that, as we look at -- Chris, I'm sorry -- as we look at it, we look at Tube and Core volume, and price pressures in Tube and Core probably being a little more severe than they were when we put the original forecast together, back in December. The composite can side, the consumer side is probably a little more positive than it was when we put it together. So it's obviously a mix.

At this point, you're embedding into your assumptions continued softness in Tube and Core, but not to the extent of what we saw in the first quarter, since we're going to start to lap?

Well, as I said, basically the last three quarters have been basically flat. So we are saying that what -- our current running conditions will probably continue for the balance of this year. If it improves, obviously, we've got upside. If it deteriorates, there's downside. We have certainly seen better consumer spending for our products on our consumer side of our business than we anticipated when we put the budget together last year, particularly in composite cans. We're assuming that that's going to continue, and we will see the seasonal effect of both of these sectors.

That's helpful. When you think about the acquisition environment, you've got some other pretty large or fairly large tube and core competitors out there that are struggling. Do you feel that the acquisition environment is getting more favorable or less favorable? And with your balance sheet, I think, as you pointed out, at one of the strongest points it's been in the last, oh, multiple, many years, would you be more likely to be looking in the consumer side, as you have been the last couple years? Or, would you be more likely to consider opportunistic -- or opportunities in the industrial business as well?

Chris, all of the above. We're always looking. We weren't looking in Europe four years ago, particularly, when opportunities presented themselves with Alstrom and, ultimately, with Demolli. But those were opportunities that presented themselves, and obviously they were consolidation opportunities that we, in fact, took advantage of.

At any given time, we're looking on both sides of the business, and it has been my experience that generally when you have economic downturns like we're in today, that opportunities present themselves, and that's the reason we keep the balance sheet that we have, so we can take advantage of those opportunities. Should those opportunities present themselves, and we'll be proactively looking for those opportunities -- but should they present themselves, we will certainly take advantage of them to the extent that we can, if they meet our criteria. That, obviously, being accretiveness and return on capital.

I know we've talked a this bit in the past, but I just want to kind of re-gauge your interest is, you guys have been aggressive at different times with the share repurchase. Even in spite of stock that's doing pretty well today, it's still relatively or on a relative basis rather cheap. What would your appetite be, should you not find an acquisition through the balance of the year, to become more aggressive on the share repurchase?

Chris, first of all, I'll agree with you that it's cheap. Secondly, if we still continue to throw off an awful lot of cash and to the extent that we got to the balance, towards the end of the year and had not found an acquisition that we wanted to do that met our criteria, a stock repurchase, certainly we had a history of buying back at least our dilution from stock options and other equity, that would be something we would have to give some strong consideration to.

David Leibowitz, Burnham Securities, Inc.

Briefly, I have a lot of confusion with restructuring charges, only in the sense that it seems a quarter doesn't go by that there aren't additional restructuring charges. Do we have a time limit on this where we will no longer be restructuring or we're down to the core business that need not be restructured? Or, is there a program in place that has a time out that we get to halftime in 2009 and we get to complete the project by 2011, or what have you?

David, I think that's a good question. Clearly, this quarter was more than we would have expected and it was driven primarily by two things. One, as Charlie mentioned, the paper mill in Shanghai, in China, that actually we've been looking at for some period of time. And, very frankly, the land value of that mill got more valuable than it was as a paper mill. And we have been negotiating with the government to sell them the land back, and I think we are in the final throes of that. The mill was actually shut down in November.

I'll let Charlie deal with the accounting issues, but in my simple [issues], we have to take the severance now, and we can't take the other positives to that mill until we actually either receive the cash or sign the contract. So that was as much a timing issue as anything, and that was about half of, I think, half of the charge.

The other was in Resende, in Brazil, where we had, as Charlie said, some catch up. But the nature of our business, with 334 plants around the world, there is a fair chance that we're going to always have some one-offs, particularly with (inaudible) of these plants that are set up to supply a particular customer, and when the customer actually shuts down or does something, then we obviously -- that plant is going to be affected.

But I think we have, certainly, no large restructuring plan. I don't anticipate anything this year or going into next year.

In terms of impairment, since we do this on a quarterly basis, as we sit here today, are we toeing the line, or do we have other areas of concern that, whether it's three months, six months, nine months down the road, we might have to again take another charge in a different part of the business?

Obviously, as you said, we look at this on a quarterly basis and I don't think there's anything today that is on the bubble or anything that I would anticipate seeing next quarter, the next quarter or on and on. But we do look at this on a quarterly basis, as we are required to do by accounting standards.

That's right. Actually, I think answer is, if there were, we'd have to book it. Set we are really sort of clean up to this point in time. But obviously, it's a fluid marketplace, and things like the Spanish plant that I talked about -- that's been looked at for some period of time. It wasn't deemed to be impaired, and then that decision was finally taken, that there just wasn't enough volume there.

So, as Harris said, there's going to be those kinds of events. But clearly, there's no triggering event that's out there right now that has not been accounted for.

I not suggesting there are.

I know you're not.

I know you're not.

What I'm saying simply is -- how close to the line are we in other parts of the business where you say we might have an oops moment if X, Y or Z were to transpire? And, is there any way to quantify where you have a high degree of confidence versus where you're saying, you know, we have another three months of whatever at this particular facility or in this particular business or whatever it might be, and we're going to be back with some more impairment charges?

There's not anything that I'm aware of that's of any size that would fall into that category, David. The one thing that we do, because that impairment is something that we would look at any time there is a triggering event, and then -- and more specifically, we do look at the impairment of goodwill absent triggering events on an annual basis, and we tend to do that in the third quarter. And we've talked and disclosed that we've got goodwill on the books. Some of that is in our Flexibles operation, that has to be supported by their continued improvement and growth. So absent that, it's sort of just one of those things that's out there. I can't think of anything.

My last question, and this is a follow-up to something I asked earlier, but this is slightly different phrasing on it. The game plan in the five-year plan is to move the consumer side of the business up to 60% from the current 55%. In light of current market conditions, is there any reason to want to change that guidance?

David, I wouldn't change it, but I've also said, I think on these conference calls and certainly in some presentations, that that is not a hard and fast rule. Our intent when we laid out that guidance in 2002 was to move to 60/40 in consumer by the end of '07. We saw the opportunities in Europe in the Tube and Core business, and we obviously took advantage of those. We sold off the high-density film business in 2003 that George and I talked about earlier. Absent those, we would have made the 60/40.

As I look out, that's certainly the intent of where we're going to go. But I guess, to Chris' question, if we saw an opportunity -- to Chris Manuel's question -- if we saw an opportunity to further consolidate some Tube and Core opportunities around the world that were attractive from a shareholder value standpoint, we would not let the 60% consumer stand in the way of making the right acquisitions.

If we just add to that, then, in terms of your R&D efforts as we sit here today, how much of your new product development is being directed by a customer coming to you saying, we have a need for X, Y or Z? And, how much of it is that you're creating the product and then going out to sell it?

That's hard to define, but I would say that probably 90% of what we're doing is being worked on with a customer in mind. I would have to say, of the total amount, probably 75% of it is working with a customer on an end market application, such as the cereal box that we introduced yesterday at our annual meeting as a new product that's on the shelf with Target as we speak.

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

On the acquisition question, which has been asked many times and quite well; maybe one last quick one. Would it be fair to assume that, given the current economic environment, that you're getting increasing industrial types of opportunities showing up at your desk, or not necessarily, and it's really evenly split between consumer and industrial opportunities?

George, I think we're getting the same amount of opportunities on both the industrial and the consumer that we were getting a year ago, percentage-wise.

Given your end business, you have a pretty, I think, interesting view into both peelable ends and traditional easy-open ends. Are you seeing any kind of move one way or another from your customers and what they are hearing in the market these days?

George, no, I don't think so.

I'll follow up with you offline on that.

Okay, that would be fine.

The decremental margin on the lost volume was -- I mean, in round numbers, 40-50%. Obviously, you've got some very profitable businesses. But, could you give us a bit more color in terms of where you really did see the reduction in profitability in the quarter?

Well, I think you have to look at the integrated margins of this business.

Got it.

And I would say that's where it is, George. You're looking at -- it may be a tube, but it's -- it backs into the paper and adhesives (multiple speakers) on that.

To follow up on that just a minute, obviously we're reporting trade sales and then we eliminate intercompany transactions. So whenever we have a decline in volume on our Tube and Core businesses, then that results in a decline in the intercompany sales from our Paper group to that group and some reduced profitability there. The sale gets eliminated so you don't see it, but the production of the lower-margin board falls through. So some part of it is just simply the mix of outside sales, and some of it is the lack of, or the slowdown on some of those intercompany sales that get eliminated in consolidation but still have a profit impact.

Packaging Services -- should we expect that, given the bidding effect from last year and the macro environment, to be tough slogging the rest of this year? One would expect, perhaps -- I don't know if you'd agree with this -- that, given the environment, your customers would be less likely to do in-store display, or maybe they would use the opportunity to try to brandish their newer products.

And then, what do you expect to get out of the Chinese mill when you ultimately do sell it, if you have that number?

George, I think, clearly, the balance of this year there will be tough comparisons in the services business because of the business, the lost business, as well as the pricing. We have picked up a good portion of new business in the first quarter of the year and we have some that we're working on that we expect will come on. But I think there will be difficult comparisons the balance of the year.

The Chinese mill is -- boy, that's a moving target. I would say the mid single-digit number of millions.

There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

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

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