Sonoco Products Co (SON) 2008 Q3 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the Sonoco Products Company third-quarter 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. It is now my pleasure to introduce your host, Mr. Roger Schrum, Vice President of Investor Relations. Thank you, Mr. Schrum, you may begin.

Thank you, LaTanya. Good morning, everyone and welcome to Sonoco's 2008 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 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 Forms 10-K, 10-Q and 8-K filed with the SEC. With that brief introduction, I will now turn it over to Charlie Hupfer.

Thanks, Roger. Today, Sonoco reported third-quarter financial results. We reported that EPS on a GAAP basis was $0.57 a share and that base EPS was $0.60 a share. The base EPS at $0.60 a share was below our guidance of $0.63 to $0.65. We were not displeased with this quarter, but frankly September was a little weaker than we had expected, especially the last half of September.

Let me start by reconciling reported earnings to base earnings. In the third quarter, we took a $5.5 million pretax restructuring charge related to the closure of one papermill and one converting plant. The tax benefit on this charge was $2 million and there was a 2/10 million or $200,000 restructuring adjustment in the equity and affiliate section. The net effect of all that is that $3.3 million or $0.03 per share is added back to GAAP net income to arrive at base net income of $60.6 million and base EPS of $0.60 a share.

Reconciling the third quarter of 2007 GAAP to base is more complicated. Last year, GAAP earnings of $54.5 million or $0.63 a share included restructuring, asset impairment and an adjustment to the environmental reserve and all that totaled $18.5 million. The related tax benefit on the $18.5 million was $6.4 million, which means the net was $12.1 million that rounded to $0.13 a share.

In addition to that going in the other direction was a tax credit of $11.8 million or $0.12 a share. That is a tax credit that we brought into income when the statute expired on our 2003 tax year. The net of the pluses and the pluses were $0.13 a share and the minuses $0.12 a share was an add-back of $0.01 per share to arrive at base net income of $64.8 million and base EPS of $0.64 a share last year.

If you had trouble following that, let me read out the comparative base income statement for you. Starting at the top, sales were $1.0633 billion. That is up $33.5 million or 3.3% from last year's $1.0298 billion. EBIT, earnings before interest and tax, was $91.7 million. That is up $200,000 or 2/10 of 1% from last year's $91.5 million. Interest expense in this quarter was $10.6 million versus $14.1 million in last year's third quarter. That leaves us then with profit before tax of $81.1 million, which is up $3.6 million or 4.7% from 2007's $77.4 million. Taxes were $23.8 million versus last year's taxes $16.2 million.

Affiliate income was pretty much the same year-over-year -- $3.4 million this year compared with $3.5 million last year. So that leaves us with base net income, which was $60.6 million, down $4.2 million or down 6% from last year's $64.8 million. Base EPS of $0.60 per share compared with $0.64 per share last year.

Now let me comment on taxes and the effective tax rate. In the third quarter, we generally have adjustments to reserves, as well as true-ups to the tax accrual to reflect the filed federal and state tax return. In the third quarter of 2008, we had $3.8 million of what I will call discrete adjustments in the quarter. These adjustments brought the effective tax rate down to 29.4%. Last year, we had $10 million in discrete adjustments and the effective tax rate was brought down to 20.9%. That is a difference in dollar terms of about $6 million of discrete adjustments or $0.06 per share and that is why you see profit before tax is up year-over-year by 4.7%, but profit after tax and base EPS is down around 6% year-over-year.

In our segment reporting, it tells pretty much the same story as it did in the first and second quarters and that is a strong consumer segment offset weakness in the other segments.

Looking at the consumer segment first, sales were up 7.9% year-over-year. EBIT was up 21.8% year-over-year. Sales and profits were driven by good volume in our domestic can operations and our domestic metal end operations. Profits were 44% up year-over-year in the second quarter of last year as opposed to 21.8% in the third quarter of this year. The big difference between the third quarter and the second quarter is weakness in our European cans volume and lower productivity in the US.

Now, looking at the tube core and paper segment, sales were up 5/10 of 1%, EBIT was down 3.3%. By way of reference, EBIT in the first quarter was down year-over-year by 15% and it was down 6.8% in the second quarter year-over-year as compared with being down 3.3% in this year's third quarter. Volume has not changed much from the first and the second-quarter levels. We did see a better price cost picture in the third quarter due principally to energy surcharges. I will talk a little bit more about pricing in a minute.

And then in the packaging services segment, sales were up 2/10 -- I'm sorry -- 2% and EBIT was up 16.9%. This reflects the impact of lost volume and price due to last year's bidding activity by a major customer. We have started to grandfather all of the price impacts, but only some of the volume impact. And then all other, sales were down 6/10 of 1%, EBIT was down 12.3%. This segment is where our protected packaging and our Baker Reels businesses are reported and they service and they've clearly been affected by the housing slump.

Now let me turn to the sales bridge where we reconcile last year's sales of $1.0298 billion to this year's sales of $1.0633 billion. That is a positive difference of $35.5 million. That bridge consists of volume, which is negative $31.8 million; price, which is positive $30.4 million; acquisitions net of divestitures is a positive $8.1 million and foreign exchange is a positive $26.1 million. So to repeat, negative volume $31.8 million, positive price $30.4 million, acquisitions $8.8 million and foreign exchange $26.1 million and that should add up to the year-over-year difference, the $33.5 million.

Volume was generally weak in all of our tube and core markets and that is the US, it is Europe, it is Asia, in all markets except for South America where we did see year-over-year improvement. In the US and Canada, volume was down 5.5% year-over-year, which is pretty much in line with the second quarter where I reported that volume was down 5.3%. Textile volume in this third quarter was down year-over-year 20%. Papermill core volume was down 3.3%. Tape and specialty volume was generally flat year-over-year.

Volume in Europe, overall, was down 4.6%. It was down 4.8% in what we call Legacy Europe. That would be the UK, Italy, France, Spain, Finland. Volume, on the other hand, was up 5.3% in what we call Frontier Europe and there, Turkey was up 10.7% year-over-year.

Our domestic paper trade sales volume was down 7.7% and that is a result of closing a paper machine and some lost volume as we raised paper prices. Volume was down in Canada, around 8%, due to the closure of our Montreal papermill. On the other hand, volume was up 3% in composite cans with snack volume up 16%, refrigerated dough volume was up 8%, miscellaneous food volume was up 30% and that is due to coffee conversions that we have made and we are producing the Ensure plastic bottle this year, which we weren't producing last year.

Metal end volume and mix was positive and in line with the composite can growth. Our flexible volume was down around 2% and that is due to a combination of slow sales to two major customers and some business lost to a competitive bid.

Packaging services volume was weak. Again, that is largely at our CorrFlex operation and it is entirely due to a bid we have talked about before with a major customer where we gave up both volume and price. And volume was down in the all other category and that is a category, again, that sells into the housing and housing-related market.

Prices though added $30.4 million as a result of price increases that we have implemented through the year to offset higher raw material and energy costs. Most of the increase in prices was in the tube, core and paper segment and in the consumer segment.

Earlier in the year, we announced a $40 a ton paper increase and an 8% tube increase. In July, we announced a $40 a ton energy surcharge on paper. We announced a 10% increase in cartridges in August due to higher resin costs. On September 1, we announced a $50 a ton paper increase that replaced the July surcharge. And in mid-September, we announced a 5% tube increase. So a lot of pricing activity on the domestic front to offset higher material and energy and freight costs.

In addition, we had the usual contractual resets with our tube, core and paper, composite can and plastic customers. European pricing was up year-over-year due to a January price increase followed by selective increases throughout the year. On the other hand, as a negative, recovered paper prices were down year-over-year as the Southeast yellow sheet averaged $110 for the quarter versus $135 last year.

Acquisitions accounted for a net $8.8 million in sales. The majority of that increase came from our October 2007 purchase of Caraustar's composite can and cartridge business. And foreign exchange accounted for $26.1 million (technical difficulty) of increased sales. This just simply reflects the effect of the weak dollar in translating the euro, the Brazilian reais and the Polish zloty. All of this is translation, so the net income effect is just fairly marginal, probably around $0.02 per share.

Now let me turn to the EBIT bridge and this is where we reconcile last year's EBIT of $91.5 million with this year's $91.7 million. That is an increase of $200,000. Starting with the same components that we always do, volume and mix was a negative $14.5 million. Price cost and again, starting with the beginning of this year, price cost includes not only raw materials, but also energy and freight, is a positive $5.7 million. Productivity is a positive $8.1 million and all other is a positive $0.9 million. That should add up to a positive $0.2 million.

The volume mix variance of $14.5 million reflects the profit impact of the sales shortfall of $31.8 million. The majority of that shortfall was in the tube, core and paper segment and much of that is in the US.

There are really three elements to the profit shortfall that I need to sort of walk you through. The first, obviously, is just the profit loss on the external sales. That is profit loss on the $31.8 million.

The second point is the profit that is lost on our intercompany sales. For example, during the third quarter, intercompany sales from our paper division, our domestic paper division to our domestic tube and core division was down around 5% and this is year-over-year. You don't see that sales shortfall because all intercompany sales are eliminated in consolidation, but the profit impact falls to the paper division's earnings all the way to the bottom line.

And then the third element is mix. High-strength tube and core board is generally higher-margin business than our tissue and tile and edge board that replaced it. So those are the three elements that will add up to the profit impact.

The packaging services volume variance was negative due to volume lost due to bidding activity last year and all other was negative as well.

Now turning to price cost, which includes energy and freight, that is a positive $5.7 million. This compares very favorably to the second quarter where we had a negative $8.7 million. The price increases, especially the surcharges, helped us catch back up in the third quarter. As I said earlier, prices increased $30 million. Offsetting that was material cost increases of roughly $15 million, much of which was steel and resin. Also energy and freight were $9.6 million higher year-over-year.

Because of the drop in OCC prices that I mentioned earlier, our average raw material costs going into our entire US papermill system declined around $7.50 a ton.

Turning to productivity, the productivity year-over-year variance was $8.1 million. That is a little less than the second quarter, but generally good productivity across all segments. Comparing though to the second quarter, second quarter was $12.6 million and in this number, this quarter, we did experience roughly a $2 million quality claim in our metal ends business that calculates out as negative productivity. And then other was a positive $900,000. Other is our catch-all category that includes wage increases, benefits and other general inflationary increases. In this quarter, other included $1.4 million in bad debt due to bankruptcies. Other also includes the favorable translation impacts of foreign exchange and it includes about $5 million in reduced S&H spending and plant overhead savings. And these savings are a direct effect of our tight controls over discretionary spending.

So that is basically the income statement. Let me turn to the cash flow for a minute. Our cash flow for the quarter was very strong. Operating cash was $[166.3] million and that compares favorably to $131.1 million last year, for a difference of $35.2 million.

CapEx was $28.6 million versus $49.4 million, so that compares favorably to the tune of $20.8 million. Dividends were not much different, $26.9 million in this quarter compared with $26.4 million last year. That is $500,000 unfavorable. So free cash flow, if we are calculating that, and we would calculate it as the net of operating cash, minus CapEx, minus dividends, was $110.5 million in the third quarter versus $55.3 million in last year's third quarter. So that would be an increase of $55.5 million.

Now, again, the principal drivers are reduced capital spending. That is $20.8 million. We did receive insurance proceeds of $26 million related to the settlement of the Fox River claim and that is up and operating cash. And then net working capital was $16.8 million favorable year-over-year.

I don't usually talk about the year-to-date cash flow, but I will because liquidity is on people's minds today. Our operating cash flow year-to-date is $310.2 million and that compares with $257.9 million last year. So that is a favorable difference of $52.3 million. CapEx is $91.5 million. That compares favorably to last year's $135 million. That is a favorable difference of $43.8 million.

Dividends weren't much different, $79.6 million compared with $76.6 million last year. That is an increase and use of cash of $3 million. So again, if I'm calculating free cash flow and defining it as operating cash, minus CapEx, minus dividends, free cash flow was $139.1 million versus $46 million last year. So free cash flow was up $93.1 million. Now $40 million of that comes from insurance settlements year-to-date. The rest of it is from reduced capital expenditures and improved earnings. Excluding the insurance proceeds of $40 million, which is already in, I still expect operating cash flow in the $400 million to $425 million range for the full year.

Let me talk about the balance sheet for the same reasons about liquidity. Our balance sheet is as strong as it has ever been. Debt to total capital as we calculated at quarter-end was 33.6% versus 35.8% at the end of last year and 34.2% at the end of June. Again, that is the lowest level since the early 1990s. We have paid down debt to the tune of $63 million this year.

Now specifically the liquidity. Our total debt on the balance sheet is $786 million. $554 million of that, or 70%, is fixed rate debt. Our next maturity is $100 million and that is in 2010. After that, we have maturities in 2013 and 2016. So our maturities are pretty spaced apart and pretty far off.

$232 million, or 30%, of our debt is floating rate debt. $180 million of that is commercial paper and $53 million is offshore bank loans. Our commercial paper and bank debt is supported by a $500 million backstop credit facility that runs until May of 2011. 12 banks comprise that group and the only financial covenant of any consequence is a minimum net worth test that had $400 million worth of room in the calculation. We have had no difficulties placing our commercial paper, but obviously rates have spiked over the last several months.

For years, we have managed our commercial paper program as a part of our daily cash management and we have rolled our commercial paper overnight. And what I think that means is that we have a steady and pretty reliable group of buyers that see our name everyday. Yesterday, we sold $183 million worth of commercial paper at 4%.

And then to cash. At quarter-end, we had $147 million worth of cash on the balance sheet compared with $80 million at last September quarter-end.

Now let me go to the re-forecast. Our guidance for the year is $2.36 compared to a range of $2.36 to $2.40, which means our fourth-quarter guidance is $0.60 to $0.64. This means that based on third-quarter actual results and our third-quarter re-forecast, we have dropped our guidance from the previously announced $2.44 to $2.47.

There is a lot more uncertainty in this re-forecast than usual. I think this means that there is probably more downside risk in this forecast than upside potential. So the re-forecast that we pulled together in late September, since then, we have seen composite can volume a little bit stronger than we expected. This is the period of time when we fill up the pipeline for the holiday season, so the question in front of us is -- will it hold up in November and December or will the consumer dramatically reduce spending.

On the other hand, October volume is weak in our paper division. If that continues, there's a downside risk to the re-forecast. Although the impact would probably be buffered a little bit by further reductions in OCC. So the real key to this re-forecast is how well volume holds up in the fourth quarter and right now, that is a bit of a question mark.

And lastly, new products. I always comment on new products. During the quarter, we had $29 million in new products compared with $27 million last year. So with those comments, I will turn it over now for questions.

(Operator Instructions). George Staphos, Banc of America.

Thanks. Hi, everyone. Good morning. First question I had, and perhaps you have covered it, Charlie, but a little bit more detail perhaps or a review would be helpful from our standpoint. You mentioned that tubes and core volumes were not that dissimilar in terms of the change versus the second-quarter experience that you had. I mean round numbers, I think you are looking at minus 5%. What, therefore, was the, as you think about it, the biggest one or two sources of negative variance relative to your guidance in the quarter? Did the volume start out better than expected in July and August and then fall off much more quickly and hurt your overhead absorption in tubes and core or --? Give us a bit more detail, if you don't mind. Thanks. And then I had a follow-on.

Okay, I think that is exactly right. When we looked at our volume, overall, it wasn't too dissimilar from the second quarter or the first quarter. As I look at monthly results, I see a drop in January that has more or less been level since that point in time. But clearly, we saw a fall-off in this last half of September. How much of that was due to the customer slowing down, how much of that was due perhaps to the Hurricane Ike that affected us and shut down some plants? I really don't know, but we did see some volume shortfalls as we got into the latter part of the quarter.

Charlie, what was the run rate coming out of September into October for tubes and core? Was it, therefore, more like a minus 6, a minus 7?

In the last half, it might have been in the minus 7, minus 8 range, so the real question is how much of that may have come back in early October.

And you don't know that at this time?

Well, we haven't seen a lot of it in the first part of October. I think it may be picking up here in the second half.

Okay. The other question I have, same topic, if within your consumer business, you have seen any signs of the consumer further retrenching, which productlines have been weakest as a result? You mentioned composite cans in Europe have been a little bit slow. It sounds like composite cans, you've had in the US perhaps varying rates of volume change over the last quarter. Fill us in on what you have seen there.

There is a story to the European volume. That was largely a customer that changed locations and shut down for a period of time and for a month. So that is a part of the story. And then I think a part of it is just weak volume there out of our -- especially our UK operation. But as I look at the volume, clearly a major -- besides this one major customer that effectively shut down for a month, we saw weak volume coming out of another customer and also in the UK, as well as EuroDough, which is one of our big customers out of our French plant. So I think it was a combination of some unique circumstances, plus some weakness with some customers.

So US held in then pretty well on composite --?

The US held in real well; no question about that. I think I cited some numbers like snack volume up 16%, refrigerated dough up 8%. The only negative was caulk cartridges was down 7.5%. I didn't mention that. My recollection is that that was even improved from the second quarter. My recollection is that was down 12%, 13%. So volume overall on the composite can side held up well.

Okay. Thanks. I will turn it over. I will be back.

Claudia Hueston, JPMorgan.

Thank you very much. Good morning. I was hoping you could talk a little bit more about the tubes and core business in Europe. I think last quarter, maybe you talked about some weakness in southern France and Italy. I just wondered sort of specifically how the trends are in Europe, did it get worse over the quarter, are there --? You mentioned sort of the strength in Frontier Europe, but are there any sort of particular pockets of weakness in the Western part of Europe? And then I know you have a price initiative that you have unveiled for Europe. Just wondering sort of how that has been received in light of the weaker demand environment.

Claudia, let me take the last question first. I think it is probably too early to tell how the pricing movement is taking place with this recent price increase in Europe. You are absolutely correct. We talked at the last meeting about Southern France and Italy and Spain showing some weakness and that continues, but we have seen more spread of weakness in Europe about the same timing as the US. Normally, July and August are weaker times in Europe because it's a holiday vacation period in both those months and we normally see coming back in the September timeframe a nice rebound in Europe. We did not see that and they saw particularly weak almost all over Western Europe in the September timeframe, particularly the latter half of the timeframe. It, like the US, has shown a little improvement in October over that September run rate, but I think it is anybody's guess what is going to happen there.

And to put some numbers to that, in the second quarter, we said, what we call, Legacy Europe was down 3.4% and this quarter, it was down 4.8%, so a little bit of weakness. Some of that may be just reflecting the fact that we also closed our Spanish plant and that would account for some little bit of that, but generally some weakness.

That's really helpful. Thanks. And then I was just hoping you could maybe just comment on, implicit in your guidance, what your assumptions are for OCC prices. They have pulled back an awful lot lately and then if you have any thoughts on the trajectory of OCC in 2009.

Claudia, I believe Charlie can correct me that, in our guidance, we are factoring in current OCC prices of $95 through the balance of the year. If there is any upside in the guidance, it would be that OCC continues to fall. I think you will see OCC prices continue to decline over the balance of the year. I think the pricing into '09 is going to be determined almost entirely by two things and that is the economy in North America and exports to China. If I were guessing, I think you will see a fairly weak OCC market, at least for the next six to eight months.

Great, thank you very much, guys.

Mark Wilde, Deutsche Bank.

Good morning. I would like to just follow up on the cost side. I mean it seems to me the other places you may be seeing some relief now are kind of things like energy and resin. Can you just comment on that?

We clearly have seen natural gas fall, but we are hedged on about 75% of our natural gas into any given year, Mark, so we are not going to benefit to that to the extent perhaps some others might. We certainly would benefit as diesel fuel comes down on our freight side. We have not seen quite the relief that we anticipated on the resin side. It spiked up pretty high in June and July and we thought we would start seeing some decline in August, but the hurricanes at least affected us and we have had difficulty getting resin now. I think it will continue to decline over the balance of the year and that will be some benefit to us.

All right, and just sort of back on the OCC issue, if prices stay where they are at or they go down further, how is that going to effect do you think the paperboard pricing over the next three to six months? Do you wind up having to kind of give some of that back?

Well, if I look at our tube pricing, Mark, probably about 55% or 60% of that is tied to an OCC indicator that resets itself at the beginning of the quarter based on the last month in the quarter. So obviously, we have locked in on the price [tag] for the balance of this year. It will be adjusted in the first part of the year.

The paper industry, as you well know as well as any of us, has seen significant costs other than just raw materials and I am talking about energy costs and others. So I would hope that we would be able to maintain the pricing that is out there.

Okay and then just switching gears a little bit, Harris, can you talk to us a little bit about what you think we may see in terms of kind of packaging services over the next few quarters? How do you expect that business to perform in an economic slowdown? Do you actually see more promotional activity, less promotional activity, use at point of purchase (inaudible)?

I think I was asked this question at either the April conference call or either the July conference call and my answer was we have not been in this business before doing an economic recession, but my folks told me that normally during an economic recession, particularly in 2000 and 2001, that they saw increased volume as people were continuing to advertise more. We clearly have not seen that. In fact, we have seen weakness in that business and it is being attributed to the customers telling our folks that they are basically holding on to their advertising dollars and their promotional dollars right now. So if they are doing it right now, I guess I have to anticipate that we are going to continue to see that phenomenon working certainly through the next couple of quarters.

Okay. Then last question for Charlie. If the euro stays where it is at, to the $1.34 today, any idea what that will mean for you as we look out into '09?

Well, the impact that we have and of course, in this quarter, it is $26 million of sales, a lot of that is the euro, it is all translation and then, of course, you have to then translate sales, cost of sales, all the way down to net income and our calculations showed that it was about $2 million or $0.02 a share. So it is just a calculation, so if you didn't have that top-line calculation effect, you wouldn't have it on the bottom line. It doesn't really -- because we buy and sell for the most part locally, we don't do a lot of cross-border transactions, it doesn't affect us economically. It really just affects the reported results as they come through the translation process. So I would expect, if you just said if we didn't have -- if we had a flat dollar in the third quarter, we would probably have $0.02 less per share.

Okay, very good. Thanks.

Ghansham Panjabi, Wachovia.

Hey, guys, good morning. Looking at the consumer packaging business more specifically, Harris, I was wondering if you could just break out the different niches -- composite cans, flexible packaging, etc. -- and just talk about what has happened on the competitive side. Margins in this business have seen quite a bit of erosion over the last couple of quarters and some of this probably is inflation-driven, but I am just curious on the competitive side. Thanks.

I don't know that we have seen a lot more competitive activity there, Ghansham, than normal. Charlie mentioned we lost a little business in the flexibles to a bid, but, overall, I think no more competitive activity than normal.

On the composite can side, we continue to see good opportunity of conversions because metal prices, and we saw conversions of coffee and anticipate that continuing. When I look at the consumer side, I think the consumer side is operating pretty much the way I would expect it to be operating. And you look at the margins, and EBIT margins in this quarter, basically they were affected by two or three things. And one, Charlie mentioned the customer in the UK that was down for the better part of a month as they moved their filling equipment and that is our largest customer. They built some inventory and obviously, you worked out of inventory. They are now back up and running.

The quality claim that Charlie mentioned, we don't have many of these and I am pleased at that, but this was an international customer and PIF had asked us to strengthen the end because they were having some issues in transit and we strengthened the end, but we strengthened it to the point that it was hard for anybody to open. So we, obviously, took back about 1.7 million of ends, which obviously affected it.

Charlie mentioned we have had several bankruptcies of customers. We had one customer in the rigid plastics that we took about a $700,000 hit on in the quarter. So if you factor those things out, our margins are about where they have been for the last couple of quarters.

On talking about bankruptcies, I would say that we are keeping a very close eye on all of our accounts receivable and I believe that, at the end of the quarter, we had more than 100% accrual reserves set aside for any customers over 90 days or more. So it is a concern to us, but I think we are on top of that.

Okay and in terms of the phenomenal free cash flow you generated, your balance sheet being in the best shape that, at least since I have covered the Company, clearly the competitive environment is also going to go through a distressed phase as the credit cycle has lasted a little bit longer than anyone would have thought. What do you do in the interim? Do you just kind of wait it out, build cash on the balance sheet or do you start getting a little bit more offensive?

Ghansham, I think what you do right now is you just wait it out and read the signs and the signals and at the right time, hopefully you hit the right time and you move it. But I think, at least from our perspective at Sonoco, with the credit crisis that we have out there right now and the ability of people that need to borrow money, being what it is, we will be very prudent and conserve our cash and look for opportunities.

Okay, sounds good. Thanks so much.

Chris Manuel, KeyBanc Capital Markets.

Good afternoon, gentlemen or I guess still good morning. A couple questions for you. First of all, if I could dissect a little further into maybe in the composite can business where you saw a bit of a bifurcation with -- you mentioned some European dough customers that were softer, but in North America doing better. Is there any -- I think you gave some explanation of why the European business is a bit slow in general with the customer with some other products, but is there anything in particular that is happening to affect the competitiveness of the product?

Chris, not that I -- there is nothing that is on my radar screen. It is still -- I think it is probably just a slowness in the season for dough.

And that is a [through-the-wall] operation, so that is a --.

We haven't lost anything.

Haven't lost anything.

Okay. All right, that's helpful. Here, picking up and they are slowing down, I didn't know if it was a difference in trend.

The second is, as you look at the last couple of quarters, I know your tube core volumes have been off a bit in Europe, but if memory serves, the piece you referred to as Frontier Europe had normally been up more double-digit-ish. Anything more recently in a change in trajectory in developing regions, not only in tube and core, but in any of your products as you think of developing regions?

Charlie is looking at his notes.

And I will give you the numbers and then we can put some color to it. But you are absolutely right. We said that, in the Frontier at the end of the second quarter, it was up 9%. Russia was up, Turkey was up 10% and here, I've said, in the third quarter, that it was up 5.3% and Turkey was up 10.7%. These are pretty small numbers, so I don't think there is any significant change that I have heard of in our what we call the Frontier Europe businesses in terms of major shifts.

How about any of the other productlines as you look into Brazil, as you look into Asia, as you look into -- whether it is consumer, whether it is -- any of your productlines?

Well, I think Charlie mentioned, Chris, that we have seen slowing in tube and coil in Europe and Asia as well. So we, obviously, have seen some slowing there. On the consumer side, the composite can side, the opportunities in Asia continue to be very strong and there are certainly international opportunities that we are working on now on the private and [performance] side moving folks from tin into composites. So it still seems to be a very, very good opportunity.

Two last questions. The first is, every few years, you typically take a step back and review the footprint to kind of right-size it with tube and core for end markets and migration, etc. With some of the continued slowing volumes here in North America and some further shift in Europe, is there -- what is the appetite or do you feel there is a need to review the footprint again for any potential restructuring type activity?

Chris, we are always looking at the footprint and that is not necessarily something that we do when times slow down. We look at it at all times as I think you do know. But clearly, as we see these volume slow down around the world and in some of our businesses, we are questioning what the footprint would be and what is the affordable fixed cost that we have to have to maintain the kind of margins that we want to generate the value for our shareholders. And we are looking at that affordable fixed cost as we speak and I would anticipate something to, in fact, come out of that.

Okay, that's helpful. And then the last question I had is, as we -- it kind of comes back to Ghansham's last question with free cash flow and on one hand, you have indicated to us that the acquisition pipeline is -- you're looking at lots of different things. And separately, you have told us that if you didn't find anything by year-end, you may look at a share repurchase. How do you -- has the credit situation changed that, i.e. make you more inclined to hold the cash as opposed to do a share repurchase this year?

I don't want to speculate on what we might do from an acquisition standpoint or buying back shares, but I will say and I think I did that right now in our opinion, it is not a bad time to have cash sitting around. So you can read what you need to into that.

Okay, fair enough. Thank you, gentlemen.

[Tim Burns], Cranial Capital.

Hey, Harris and Charlie. Nice to hear your voices. I missed part of the call. I apologize. The question -- one of the questions I had was do you see the composite can in the States picking up any volume based on the environment and the green footprint type of thing?

Tim, absolutely. We have converted two of Kraft's coffee kind of metal into composite and one of the things they wanted was proof that this was totally recyclable and green and they actually use that advertisement on the label. So we have seen a lot of opportunities in the composites, A, because of sustained [loyalty] and B, which probably drives the cost differential, which continues to widen between the composites and the metal.

Got you. Got you. And the other question I had was if you guys could get the Cinnabon account, I have got a feeling your volumes would rise. It's a joke.

Okay.

I mean that is like a dinner, it's like a steak. I don't know if you guys have had one, but --.

I must admit, I haven't.

Well, you have got to try one.

I will do that for you, Tim.

You can call home to your wife and tell her not to cook dinner tonight.

Can I do it tomorrow night?

Absolutely. The other question I had was -- you have got this one face to the customer strategy and I have seen you get into like personal care containers. What I have read about your strategy is we are willing to provide services and products of a wide range that benefit our customers. How far does that go? Are you willing to go even deeper or further afield to make one of your many, many blue-chip customers happy?

No, I think we have the portfolio, Tim, that we need at this point and it is working quite well. I have a chart that I've used on many presentations that shows how we have grown the business through this strategy across the numerous portfolios. And I will be happy to share it with you, but it is going quite well and I don't see the need right now to extend the value offering.

Okay. And I heard -- again, I may have missed this, so I apologize, but I heard there was a loss of flexibles in a bidding process. But generally speaking, how do you feel about flexibles? Has it made more progress, is it closer to your targets?

It is certainly performing much better from an operational standpoint and from a P&L bottom-line standpoint than it was over the past year and there has been basically nothing but improving conditions there. I frankly don't even recall who the bidding contest was with, but I think we will continue to see flexibles improve as it has this year. I think there will be some exciting new business that I can talk about in December that I cannot talk about today. But basically, we feel very good about it.

Great. One more piece of advice, when you have that Cinnabon, make sure you are sitting down.

I will certainly follow your good advice, Tim.

All right, Harris and Charlie, have a good one.

George Staphos, Banc of America.

Thanks. Hi, everyone. As far as flexible packaging goes, and obviously you have improved the performance relative to last year, which was, obviously, a very tough year for the business, Harris. Do you see a need to invest anymore within the business or invest at a higher run rate than what you have seen in 2008? Can you give us some idea in terms of the level of invested capital you have in the business currently and are you happy with the return on capital within flexible packaging?

Well, George, you asked me about four questions as you normally do, which is fine. First of all, I do not see the need to invest significant amounts of capital in that business right now. We have improved the efficiency of the equipment and the changeover times and so we have basically created the capacity that I think we need, particularly on the flexible side, for the next several years. So the answer to that is no. I don't want to just keep repeating myself. We have seen improved performance over there. Is it returning the kind of returns on that capital that I expect them to get? No, it is not. Am I satisfied with the returns today? No, I am not.

Is it earning cost of capital, Harris?

It is slightly under cost of capital, George.

Okay. Now switching to the bottle business. We have been hearing in some of the earlier earnings reports discussion about customers pushing back orders and taking inventory down and certainly not -- [I need] a [bolt] from the heavens given what has been going on the last several weeks and months. Have you seen any kind of similar developments within your business and with some of your bigger customers. If you had mentioned it earlier, I had missed it.

George, I think we have only seen that with one customer and it is not widespread, but they have -- I think there has been some destocking at that particular customer.

Is it a big customer?

It is not a small customer. It is not a small customer. But that is one of the things that I think gives Charlie and I both pause in our forecast for the month or for the quarter and that is I think Charlie said the consumer side right now, the run rate, particularly in composites, is what we would expect it to be. And normally, we see that run rate continue up until the second week of December. We are more cautious this year because I think there is going to be a reluctance on people's part to build a lot of the inventory for the holiday season in anticipation that the consumer might not buy as much. So that is the real question for us in this quarter, as Charlie said, one of [volume].

I know we will talk about this in December, but as you think out to 2009, what do you think will be the levers at your disposal to -- or just trend wise -- that will help you grow earnings or EBIT next year or is that perhaps, and understandably so, not necessarily on the horizon?

I guess we are going into -- we haven't started our budget process for 2009 and we will start that in a couple of weeks, but clearly I think volume next year is going to be an issue and the economy is going to be an issue. I think the levers that we will pull will be on the productivity side, which I anticipate our productivity numbers to be as good next year as they have been the last several years and we will look at the cost side. We will prudently use cash as appropriate to improve those numbers either from acquisition or otherwise. But I think those are the kind of levers that we will pull next year, George.

Well, that should set you up relatively well I would think. Thanks. I will turn it over.

Thank you, George.

There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

Well, thank you very much and again, let me, again, thank all of you for joining us today. We certainly appreciate your interest in the Company. Please reserve the date of Friday, December 5 to attend Sonoco's annual breakfast meeting with the financial community in New York. You are invited to join our senior management team for an operating and financial update, including a review of new products like Harris alluded to. The breakfast meeting will begin at 7:30 a.m. in the Grand Hyatt Hotel Manhattan ballroom. Our presentation will begin at 7:50 a.m. followed by your questions. Invitations will be sent out next week and we ask that you RSVP in advance so that we have an idea of how many people will be attending and we certainly look forward to meeting with you in New York on December 5. As always, if you have any questions, please don't hesitate to give us a call and thank you for attending.

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