Sonoco Products Co (SON) 2008 Q4 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the fourth-quarter 2008 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 call 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.

Thank you, Shea, and good morning, everyone. Welcome to Sonoco's 2008 fourth-quarter and annual financial results investor call. This call is being conducted on February 5, 2009. 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 fourth quarter and the full year were released before the market open 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 information about the use by the Company of non-GAAP financial measures is available in our annual report and on the Company's website.

With that, I will now turn it over to Charlie Hupfer.

Okay. Thank you, Roger. Today Sonoco reported fourth-quarter EPS of $0.36 a share and base EPS of $0.49 per share. Base EPS of $0.49 per share excludes restructuring and asset impairment charges and is inside our revised guidance of $0.48 to $0.52. The quarter was a little weaker than we expected when we revised our guidance on December 5. Industrial volume was especially weak in November and December and frankly, that seems to have carried over into 2009 and it is reflected in our 2009 guidance that I will talk about a little bit later.

Let me begin by reconciling GAAP net income and EPS to base net income and EPS. In the fourth quarter 2008, we took a restructuring/impairment charge of $22 million pretax. After tax that is $13.1 million or $0.13 a share. The majority of the restructuring charge and impairment charge represents restructurings that we announced on December 5. The big items were the closure of two paper mills and an asset impairment charge in Brazil. If we add the $0.13 to the as reported EPS of $0.36, we arrive at base EPS of $0.49 a share.

Last year in the fourth quarter we had $8.7 million in restructuring and we added $4.1 million to environmental reserves related to the Fox River for a grand total of $12.8 million. After tax that's $8.5 million or $0.08 a share. If we add the $0.08 to the as reported $0.54, we arrive at $0.62 EPS for the fourth quarter of 2007.

So with those adjustments in mind, I will read out to you a comparative base income statement starting with net sales which were $934.6 million, down 11.8% from last year's $1,060.1 million. Base EBIT is $75.9 million, down 17.5% from last year's $92 million. Net interest expense was $11.2 million this year versus $14 million last year.

Taxes were $18.6 million this year versus $19.8 million last year and equity and affiliates, which includes minority interest, was $3 million versus $4.5 million last year. That's leaves us with base net income of $49.1 million in the fourth quarter of 2008 versus $62.7 million in the fourth quarter of 2007. That is a decrease of 21.7%. Base EPS was $0.49 a share versus $0.62 a share last year. Again, that's a decrease of 21.7%.

First let me comment on interest expense which was favorable to last year by $2.8 million. The majority of the year-over-year difference is due to debt reduction. Our balance sheet shows a year-over-year reduction of $160 million in total debt. On our commercial paper, interest rates averaged 2.96 in the fourth quarter of 2008 and that compares with 4.98 in the fourth quarter of 2007. Our CP balance at year-end was only $95 million and our CP borrowing rate now is in the 1% range.

Now with the tax expense, our effective tax rate for the fourth quarter of 2008 was 28.7%. The effective tax rate benefited from a $2.5 million adjustment to reserves at our Greek subsidiary. Otherwise the rate would have been a more normal 32% to 33%. Last year's effective tax rate was 25.4%. Last year we adjusted tax reserves in the fourth quarter for fourth-quarter statutory rate reductions in Canada and in Italy.

Now let me turn to the segment reporting. Our segment reporting basically tells the same story that it did in the first, second, and third quarters, and that is a solid performance in the consumer segment offset by weakness in the other segments.

So let me just walk down through the segments briefly. The consumer segment saw sales down 0.2%, but profits were up 13.8%. Volume held up very well in our US composite can business across most product lines. For example, snacks, dough, concentrate, miscellaneous food, those volumes were all up in the 6% to 13% range. We did see a 22% decline in caulk and adhesives and we also saw lower nut sales in the quarter.

Our Phoenix metal end business was adversely affected by steel surcharges, however, in this particular segment the big year-over-year difference was the improvement in our flexible packaging operations.

Now the Tube and Core and Paper. Sales were down 21.7%. Profits were down 29.9%. The real story in this segment is volume in the Tube and Core part of our business and that drives volume in our Paper operations in the US and in Europe. In fact, only South America showed any real year-over-year strength in Tube, Core and Paper.

Packaging Services, sales were down 15% and profits were down 51.9%. The year-over-year shortfall was at our Corrflex operation and that's in the fulfillment side of our business, which just simply reflects a slowdown in point-of-purchase advertising. Then all other sales were down 8% and profits were down 19.5%. Businesses like our baker reels business and protective packaging have clearly been affected by the construction and housing market.

Now let me turn to the sales bridge, and this is where we reconcile last year's $1,060.1 million to this year's $934 million. That is a difference of $125.5 million. And the makeup of that $125.5 million is volume. Volume was negative $88 million. Price, this would be price increases at the sales line, price was positive $14.2 million. Acquisitions were slightly negative, $1.7 million and foreign exchange was negative by $50 million. So negative $88 million, $14.2 million price and negative acquisitions of negative $1.7 million and negative foreign exchange of negative $50 million should add up to an overall negative $125.5 million.

Let me start with volume. The volume shortfall is principally in two segments. It is in our Tube, Core and Paper segment and our Packaging Services segment. Tube and Core volume in the US and Canada was down 15% overall and when we look back behind that into the segments that we fell into, textile volume was down 34%. Film volume was down 22% and we did see papermill core volume down 5%.

Our internal reports that we prepare show that we did see a modest overall share gain in the quarter, so we think this shortfall is all economy-driven. Tube, Core and Paper in Europe was down 14% and we saw weakness there in both our legacy operations and in our frontier operations. Paper trade sales were down 13% in the US and they were down 7% in Europe. And as I mentioned earlier, our Corrflex point-of-purchase and fulfillment business, our (inaudible) fulfillment volume was well behind last year, approximately 25% down from last year.

Now to price. Price added $14.2 million to our sales. We experienced positive pricing in all parts of our business. I don't think this represents pricing activity in the quarter as much as just a carryover from prior quarters activities.

Sonoco recycling pricing was down however. OCC averaged $55 a ton this quarter versus $125 a ton in the fourth quarter of last year, so that is an overall difference of $70 a ton and that is reflected in the pricing of OCC -- basically in the pricing of OCC as we sell it to the outside market. So what we saw there was OCC and this would be [Southeast Yellow] sheet in September was $110. In October, it dropped to $95, in November $45, and in December, it dropped to $25 a ton. So that is what gives you the average of roughly $50 a ton.

In terms of acquisitions, acquisition was a negative $1.7 million. All significant acquisition activity has been grandfathered so this slight negative is largely related to the sale and closure of our operation in China, our Chinese papermill. Then foreign exchange is a negative $50 million and that represents the stronger dollar year-over-year versus the euro, which is up 10% to the euro; the pound 30%; and the Canadian dollar 20-some%.

As I mentioned at the outset, fourth-quarter dollar sales were down 11.8%. When we look behind that, October sales were down 8% year-over-year. November sales were then down 16% year-over-year and December sales were down 13% year-over-year. So there's no question that volume weakened during the quarter. The question for 2009 is how fast will it bounce back?

Now let me turn to the EBIT bridge where we reconcile last year's $92 million with this year's $75.9 million. That's a negative $16.1 million and the makeup of that is volume is negative $33 million, negative $33.8 million. Price cost is a positive $11.9 million. Productivity is a negative $2.2 million and all other is a positive $7.9 million. So that's those four numbers, $33.8 million negative; $11.9 million positive; $2.2 million negative; and $7.95 million positive should add to a negative $16.1 million year-over-year difference.

The profit impact of the volume shortfall as I said was $33.8 million. The biggest shortfall was in the Tube, Core and Paper segment, where global trade sales were down year-over-year by 12%. Our intercompany paper sales were down by a similar amount and that compounds the profit impact for the Tube, Core and Paper segment.

The other significant shortfall year-over-year was in the Packaging Services segment, and again, that related to the volume shortfall at our Corrflex operation.

Price cost is a positive $11.9 million. I mentioned earlier when I talked about sales that prices were up $[14.2] million, which would imply that costs -- and that includes freight and energy -- were only up $2.3 million.

That is certainly not the entire story when we get into the details because embedded in the fourth quarter year-over-year cost is a favorable material variance due to our lower furnished cost of approximately $50 a ton. So offsetting that lower OCC cost then which is reflected in this price cost number were higher metal and film costs in our consumer segment.

Productivity was a negative $2.2 million and that was not unexpected, but it was still a bit of a disappointment for us. We had negative productivity in the Tube, Core and Paper segment and it's due entirely to our paper operations. There's basically no productivity when machines are taking downtime and to give you an example of that, utilization in our US paper mills was only 81% in the fourth quarter of 2008 and that compares with 95.7% in the fourth quarter of 2007. Corrflex also had negative productivity due to the underutilization of their fulfillment operations.

And then lastly all other, that's a positive of $7.9 million and that basically comes from a couple of things. One of them is lower fixed costs due to plant closings. A second would just simply be tight control over discretionary spending. For example, our selling and administrative spending was down $5 million year-over-year.

Now I'm not going to go into any details on the year-to-date results, but let me read out a couple of figures for you. For the whole year, net sales were $4.122 billion and that is up 2% over last year's $4.040 billion. Net income was $226.4 million and that is down 6.6% or $16 million from last year's $242.4 million.

EPS was $2.24 (technical difficulty) and that is down $0.14 or 5.8%. That EPS of $2.24 is within our revised guidance of $2.23 to $2.27.

Let me just mention the bridges for the whole year and I won't make any further comment but sales overall were up $82 million. When I look behind that, volume was a negative $161 million. Price was a positive $103 million. Acquisitions added $71 million and foreign exchange added $69 million.

When I look at the EBIT bridge, EBIT is down $19 million and the volume shortfall is a negative $75 million. Price cost was a positive $12 million. Productivity a positive $33 million, and all other a positive $11 million. So when you look at the year-to-date results, just like the fourth quarter, you can see that the issue is volume. That's at the sales and at the EBIT line.

Now let me talk about cash flow. Our operating cash flow for the quarter was $69.2 million versus $187.2 million last year. That's a difference of $118 million year-over-year. There were really two big drivers. Networking capital was one of the -- net working capital provided $42.7 million of cash flow versus last year networking capital provided $100.9 million. So even though we had positive cash flow coming from working capital, it was still $58.2 million unfavorable to last year's change.

Last year talking about 2007, a lot of our working capital benefit came from managing accounts payable. This year we knew that the year-over-year improvement would have to come not from payables but from accounts receivable and from inventory. When we look at our internal measures of cash GAAP days, and cash GAAP days are accounts receivable plus inventory minus accounts payable, but those internal measures that we use showed a significant year-over-year improvement until we got to November. I will give you some examples of that.

Just looking at the month of September, our cash GAAP days will calculate out to be 39.5 days. That moved up a little bit in October to 39.7 days and then it jumped in November to 43.1 days and that it jumped again in December to 47.4 days. So the difference between September and December is 7.9 days and that's a pretty significant increase.

Some of that increase was to be expected at year-end. For example in 2007, we saw a two-day increase so just the way the calculation works and the slowdown of business in the fourth quarter, that number is going to go up, but it went up almost eight days in this year's fourth quarter compared with just two days in last year's fourth quarter. A lot of that was just simply our own ability to reduce inventories fast enough to match the slowing business conditions.

The other big driver in cash flow is the all other category, which is largely made up of prepays and accruals. A lot of the negatives there just simply had to do with the way the calendar fell. For example, with regard to payroll accruals and also the fact that accruals for incentives and long-term plans were reduced this year compared with last year.

Now our balance sheet. Our balance sheet remains strong. Debt was reduced year-over-year as I mentioned earlier by $160 million. I will talk about pension in a minute, but as it relates to the balance sheet, our unfunded -- our underfunded pension position at 12/31 resulted in roughly a $200 million charge to equity. As a result of that, our debt to total capital increased to 37.2% compared with 37.1% last year.

Now I will take a minute and mention that we have changed the calculation of debt to total capital to include only debt and equity just make it a more straightforward calculation. In other words, we are not using deferred taxes in the calculation as we've used them in the past. So on this revised method, it would have caused our debt to total capital to go up, but debt to total capital as I said is 37.2% at the end of December 31, 2008. Without the pension adjustment that I mentioned to take into account the underfunded pension plan, debt to total capital would have been 33.6%.

At year-end, we had $95 million worth of CP outstanding out of a total debt of $690 million. Our fixed/floating ratio is 80% fixed 20% floating right now. We have two CP deals and we have had no trouble selling CP. As I said earlier, the rates have settled into the 1% range.

Now let me take a minute and talk about pension performance. Our US plan had a negative return this year -- this year being 2008 -- of 24.3% for the year. This drove us from an overfunded position last year of $40 million to an underfunded position in our US plan of $266 million. That's a change year-over-year of $306 million and this $306 million is what drove the $200 million after-tax charge to equity. So we put that underfunded position on the books as a liability and the after-tax impact of that is a charge into the OCI section of the equity.

If you take all of our plans together and that's our SURF plan, our foreign plans, the year-over-year change in funded status was $324 million, so it's clear that the US plan at $306 million was the big driver in the year-over-year change.

The 2008 pension plan performance has a significant impact on our 2009 expense. Our calculations show that incremental expense will be $59 million this year compared with last year. That is 2009 compared with 2008 and the increase is coming from two categories. The one category was just return on assets. The second one is the amortization of actuarial losses.

Our 2009 projected return, and that is a credit to the expense calculation, is $29 million less than 2008's number. And this is nothing more than 8.5% times a much lower investment balance.

The second category is amortization and here we expect expense to increase by almost $34 million and this is simply actuarial losses -- most of those are coming from the investment loss -- spread over approximately 11 years. We are in the process of making some changes to the US plan that will reduce expense over the long-term and reduce volatility. But these changes won't have -- will have very little effect on our 2009 expense. So as a result of that, pension expense will increase by approximately $35 million or $0.35 a share in 2009 over 2008 levels and the first-quarter impact will be $0.10 per share.

Our calculations -- actually the actuarial's calculation show that there are no cash funding will be required in 2009 and that's because we have some carryover credits from prior funding. Now at the December 5 analyst meeting we said the pension expense would be up $48 million. Now we are saying it is going to be up $59 million. The big difference is the Citigroup discount rate that we used on those -- and it was calculated as of November 15 -- dropped from 8.4% to 6.1%. So 6.1% as a discount rate is what we are using in these calculations and that further drove up the pension liabilities.

Now let me turn to guidance. Our EPS guidance before the incremental pension expense that I just talked about is $0.38 to $0.42 in the first quarter of 2009. After the $0.10 per share pension adjustment, it's $0.28 to $0.32. For the year, EPS is $1.90 to $2.25 before the pension adjustment and after the $0.35 adjustment for the whole year, it drops it to $1.55 to $1.90.

We say in the press release and I quote here, the unusually wide range in the guidance reflects the degree of uncertainty in today's business environment. Let me expand on that a little bit. The $1.90, of course it's really $1.55 after the pension, that scenario reflects business conditions as we see them today. In other words, our industrial businesses stay relatively flat through the year. It does this through ordinary seasonality and projected contractual price increases in the second half of the year along with some volume growth in composite cans and inflexibles. It also assumes the effective tax rate is increased to 32%.

The high side scenario, $2.25, and then of course after the pension adjustment, that's $1.90, has seen general economic improvement in the second half of the year. Now our cash flow projections at the lower end of that, that would be the $1.90 scenario or $1.55 after pension, suggests that we would have operating cash of $350 million assuming that that capital spending stays at roughly at the $125 million level and dividends stay flat, we would expect free cash flow to be $115 million as we are defining free cash flow here.

At the higher level, I would expect that -- that is at the $2.25 level -- I would expect operating cash to be about $385 million and free cash flow to be about $150 million.

Now as we always finish, let me wrap it up with just some comment on new products. We did have $41 million worth of new products in the fourth quarter of 2008. That compares with $29 million in the fourth quarter of 2007. The biggest year-over-year changes were first of all in the new technology, the Smartseal reclosable flexible package, and also the retortable membrane end.

So with those comments, operator, I will turn it over now for questions.

(Operator Instructions) Claudia Hueston, JPMorgan.

Thanks very much. Good morning. I was hoping you could talk just a little bit more about the Consumer Packaging business and if you could maybe break out some of the different product markets, composite cans, flexible packaging and the like. And just talk about what's happened from a demand standpoint in those markets and maybe if there's any changes in competitive behavior there?

I can certainly give you some -- a little bit more color on the volume. I think the important thing there is that our rigid paper and plastics business in the US, and that's largely composite cans, where we actually saw volume there was it was up slightly, it was up about a little less than half a percent. But that is a bit misleading because what we saw was -- and I think I commented that we saw a range of 6% to 13%.

Our snack volume was up 6%. Our dough volume was up 13%. Concentrate, which had been showing a steady decline for a decade was up 9%. Miscellaneous food, which includes -- was up 13%. That includes some of those coffee conversions we've talked about. And then we also had -- and I don't have a percent number -- plastic bottles sold to Abbott is a new product this year versus last year. So we had some sizable increases in volume on the composite can side.

But there were some negatives and I mentioned that caulk and adhesives was down 22% and the nuts category, I don't know what the percentage was, but it was a couple million dollars short of last year's number. So when you roll it all up, it was -- volume was up modestly in rigid paper and plastics. But really pretty good volume in the basic snack, dough, concentrate, the core part of that business.

The matrix business -- that's the plastic bottle business -- their volume was down a little less than 5%, but that's mostly coming out of the Canadian plants and it's really the one customer and FX-related. And then composite cans in Europe was down 7% and that's a little bit of a lost market share and the decline in dough business there. Then our Phoenix business was relatively flat in dollar terms year-over-year.

So there's some pretty good strength in the consumer side of the business in both the sales side, principally volume, and also in -- it trips over into the profit side. Price cost was good in that net segment. Price cost, we did have to absorb a good bit of year-over-year at any rate metal costs and film costs, but we did and so profitability was strong as well.

Harris might want to give some color to this deal.

I think that's fine, Charlie. Does that answer your --? Claudia, do you need something else?

Maybe just your confidence in recouping the tin plate cost inflation that you mentioned, Charlie.

As Charlie said, we did see some of the increase in the fourth quarter which we absorbed most of. As you know, most of that is contractual passthroughs. We passed through I don't know what percentage it was, 50%, 60% of it the first of the year. The balance of it will come in the second quarter and I think we will fully recover it by the end of the second quarter of the year.

Okay, that's helpful. Then just finally, Charlie, I don't know if you have the foreign exchange impact on sales just by segment or at least in the sort of two larger segments. That would be helpful if you have it.

Well, there's next to none of it in the Packaging Services and other segments. So it's probably two-thirds is in the Tube, Core and Paper segment and about one-third is in the Consumer Packaging segment.

Great, thank you.

George Staphos, Banc of America.

Thanks, everyone. Good morning. I guess first question was when you look at the change in guidance from December to the current time, is most of that negative variance coming within Tubes, Cores and Paper and I guess some follow-on was in Packaging Services and is there any change -- if we could have seen what you were thinking about back in December, any improvement that partly offsets that was in the consumer segment. How would those shake out as you revise your guidance?

George, I would say that probably 95% of that downward guidance was a result of the Tube and Core and Paper operations globally where we have seen, as Charlie talked about, to sort of put it in perspective, we were going through the year through the first seven, eight months and we were down 4% or 5% year-over-year. We got into September as you may recall, I think we said it was down about 8%. October was down about 10% and then it fell off pretty dramatically to the high teens and then in December, it was in the mid-20s% year-over-year comparisons and that was around the globe, as Charlie said, except for South America.

As we have looked into January and had visibility obviously on into January, we have not seen any improvement in North America over the December run rates in Tube and Core. So I would say that going back to my original statement, probably 90% of that is a result of the Tube and Core business. On the offset side, we have seen continued accelerating gains in a couple of the sectors the Charlie talked about; concentrate I think was up 9% for the year. That is continuing to grow. Dough is continuing to grow, which says to me once again that the consumer is moving down that value chain, trying to get more value for their dollar but also staying at home and eating and we continue to see that trend going on into January.

Thanks for that, Harris. Now as we think about January, so there is no improvement versus December. Has it deteriorated versus December?

No, it has not deteriorated. It's -- I would say it's basically right on target with where December was, George, on the Tube and Core side. And I'd carry that a step further. We have not seen any further deterioration -- we have not deterioration anywhere but clearly the Tube and Core volume has not improved.

Okay, now in Packaging Services, have you seen any incrementally intensified competitive activity since either the fourth quarter or earlier in 2008? Obviously some of the performance that you've seen reflects previous share losses that presumably you have now anniversaried, so help us. Give us some details in terms of what might be happening or not relative to competition there.

Okay, let me start off by saying we have not seen any increased competition in that business and you are quite correct that the year-over-year reflects the bid that we've talked about a lot that we lost some share on and that is now grandfathered. Actually we have picked up some nice new business, some of which we've talked about and some of which would be a bit premature to in fact talk about, but we have seen a continuing weakness in that sector with customers that we have delaying launches.

Without getting into specifics customers, we had a lunch in the December time frame that was set up for let's say 100 and they called back and cut it back to about 50 simply because economic pressures that they were seeing particularly from the larger retailers that didn't want to take that much inventory into their system at this point in time. So clearly we have seen a slowing on that side of the business not as a result of competitive pressures but what I would characterize as more economic pressures, George.

Okay, is that leading to any changes in your customers' expectations for marketing support for products that utilize your Consumer Packaging?

Actually I think what we are sensing and seeing some of is that some of our consumer customers are in fact reducing their costs of design marketing and are relying more on us to provide some of those services which we view as an opportunity going forward.

Okay, I will turn it over. Thanks.

Mark Wilde, Deutsche Bank.

Good morning, guys. Good morning, Charlie. I wondered just first globally if you could differentiate at all away from just the comments you made about Latin America being a little stronger. You've got a big position in Europe, variations there and variations any other places that you do business globally?

Mark, I will take that and then I'll let Charlie get into specific numbers. What we saw in the fourth quarter in Europe was almost a mirror of what we saw in the US in terms of volume decline year-over-year. Now we didn't see that in Europe as early as we saw it in the US. They tended to follow us and we started seeing the softness in Europe probably in the October time frame particularly after they came out of the vacation time in the summer.

Asia has been slowing on the Tube and Core side I would say since midyear and Charlie referenced and I referenced both South America being stronger. But I will say that in December, we started seeing the slowing in South America, particularly Brazil as well.

Charlie, you may have some color on the numbers that I didn't give.

Well of course, Europe would be besides the US the next biggest operation. Their volume, their overall volume was down 14%, I said earlier, The legacy operations, that would be the UK, France, Germany, Finland, those old mainstay operations of Sonoco's were down 11%. But the frontier operations were down 21% and that is unusual for us because we have been seeing good strength there.

Turkey was down and that is textile-related, probably about 17%. Greece was down almost 39%. That's probably economy and strikes but we generally saw weakness across all the regions which really gets to the crux of what Harris said, pretty significant drop-off when it occurred.

Okay, second question I have, in the Tube and Core business, you've got a competitor that has a big financial maturity coming up in the second quarter. I just wondered whether you are seeing customers who may want to move business around because they are nervous about that?

Mark, let me cautiously answer that question simply by saying there is a lot of interesting things going on in that market and we are having probably an unusual -- more unusual inquiries about RFPs and customer interest than we've seen in the past.

Okay, I appreciate that it's a sensitive issue, Harris, but I think it's also a pretty obvious issue.

Well, I want to be sensitive in how we are seeing more activity and more interest coming to us than perhaps we have in the past.

Okay, that's fine. The last question I have, you mentioned -- Charlie mentioned that these OCC prices were down to like $25 in December. Can you just help us understand at what point does this just get to be completely uneconomic to go out and gather this stuff?

Well, it fell to $20 a ton in December. It popped back up the first of January, and January's $20, it snapped back up to $25. You know, I think that we used to see when we would get a lot of people collecting it, when it got to that level these people quit picking it up because of the economics that you bring out and it starts going to the landfill. Then as the economy picks back up, it creates quite a spike in it. But I think you are at the level where we are having a lot of telephone calls from small independent dealers that are saying, hey, maybe I don't want to be in this business.

So this is part of the cycle that you normally see. It's been a long time since I've seen OCC in the $20 and $30 range but what we are seeing today follows the patterns of the past. So you are right on target.

Okay, I guess actually just one other follow-up. Just can you talk about how you are kind of dealing with credit issues now vis-a-vis your customers?

Well, Charlie has got some numbers. Our percent of current hasn't fallen off at all. It's where it needs to stay, obviously where it needs to be. We are staying on top of it. We do have a few customers that have debt bullets like you described with other people. And obviously we are all -- we're watching those and dealing with them appropriately as we move forward.

But we don't have any concerns at this point about our receivables and we think our percent current is where it should be. I don't know the quite number. Charlie does, but we think we are fully reserved against where we need to be in that regard.

Okay, very good. Thanks, Harris.

Chris Manuel, KeyBanc Capital Markets.

Good morning, gentlemen. A couple questions for you. First, as you take a look through your different businesses and having seen an incremental downturn from where you were October and even November, when you were taking a look at restructuring, what additional steps have you taken as you look to the businesses that you could potentially share with us? Have you taken out more temp personnel, things of that nature? Have you --?

Are you contemplating further restructuring actions should volumes persist at this level for another quarter or so? Can you maybe show us a little bit of the thought process?

Chris, you obviously asked several questions in that. I think that I saw a number the other day that basically we were about $14 million year-over-year S&A down from 2007 and against plan, we were down some $35 million, $34 million. So I think cost control in the Company from a discretionary spending standpoint has been clamped down and it continues to clamp down. We started last year with some contingency plans which we implemented in the first and third and fourth quarters. We have started as we went in the budget process for '09, we started with some contingency plans. Some of our businesses have already implemented those as already this year simply because of volume levels that you talked about.

We have in place other plans if in fact volume continues to drift down from where we are that we will in fact execute. We have taken temporary employees out of the system where they need to be out. We have taken a significant amount of downtime in the system not to build inventories.

A for instance of that is that we took in our mill system 770 days of downtime in 2008 and of that 769.6 to be exact, 70% of it was in the last five months of the year. And that was even compared to '07, there were three more paper machines in the system in '07. So we have taken a significant amount of downtime, which resulted in us furloughing people during that period time to control costs and not to build inventories. We have continued to do that in January when we have taken downtime in our mill system. So we will continue to match our cost structure to the revenue level that we are experiencing.

Okay, well I guess let me ask one follow-on to that. Does there come another point at which you -- beyond taking downtime you opt to take another layer out of overhead, close another mill or two somewhere around the globe and a few plants, things of that nature?

Chris, we have in those plans that I talked about contingency plans to take that to another level if that is in fact necessary. Those plans sit on my desk in my top-drawer if we need to do it.

Okay. Second question I had was use of the cash for 2009. It sounds like, Charlie, you are going to still have a chunk of free cash flow left even after some lower earnings. What are the plans as you look here today? The debt levels are as low as they have been. You do have a pension that sounds like it could use a little money. In the press release, it sounded like you're looking at opportunities and things as well. Can you maybe flesh out a little of the thought process?

Chris, you are correct. We will still have good free cash flow next year, good operating cash next year even at reduced levels that we described to you. We -- our projections show that we would be out of our commercial paper program sometime in the second quarter or third quarter depending on the earnings level. Frankly, we will continue to conserve that cash and look for opportunities. I don't see us -- there is no reason for us to fund this pension plan this year and I don't anticipate using that cash this year. We will have some payments in 2010 depending upon the degree to which the market comes back would sort of dictate what we would have to do.

But I think we will continue to do as we have done in the last 12 months and that is watch our cash and debt levels to your point is the lowest level they have been in 25 or 30 years as debt to capital. And we will look for opportunities which I am reasonably convinced are going to present themselves in the next few months.

Okay, thank you much.

Joseph Naya, UBS.

I was just curious obviously quite a bit of I guess the weakness that we are seeing here has been coming in in the industrial operations. I was wondering if you were looking for any particular signs or things that might indicate that we would be seeing a turn there?

Joseph, I think you look at just GDP spending, GDP basically numbers that are coming in. We are in my mind at least generally a leading indicator. Somebody described Sonoco to me the other day said you are kind of like the canary in the coal mine. And I'm not sure what the canary is doing right now. But as I look at our various sectors traditionally as most of you on the phone know, our customers don't keep a lot of inventory. And we basically don't keep a lot of inventory either. So when we do see a turnaround, that canary starts reviving, it generally revives pretty quickly.

And Charlie made the point that volume cost us I think $34 million. The effect of volume on EBIT was about $34 million in the quarter. When that comes back, that comes back pretty quickly. And so I would watch -- at least I watch daily or the weekly numbers coming out of our industrial products business across all those sectors being textiles, film, and generally that's basic industry.

When we start and to see that turn, it generally turns pretty quickly. But I can't give you much more color than that.

(Operator Instructions) George Staphos, Banc of America.

Harris, when you look at the business and talk about it, we hear a number of common themes your customers don't carry inventory, you don't carry a lot of inventory, and here I am referring mostly to your Tube and Core business. You are also from your data maybe picking up a little bit of share and as you were answering Mark's question earlier again, given some of the trends that have been out there for a while, perhaps you are getting even more share of the RFPs that are out there.

How do we reconcile all of that with the downturn that you are seeing in volumes in tubes and cores, down 15% on average and 15% to 25% in the most recent months? I mean if the customers don't carry inventory, it doesn't reflect destocking. So is it purely demand driven and consumption driven?

George, I think it's purely demand driven and consumption driven. I was at a meeting last week with -- it's a sector of one of our largest sectors in the industrial side of our business. It uses our -- obviously our cores and the leading producer of this particular product stated to the group, said our falloff in demand in November/December was unprecedented in our industry and that was echoed by the other six CEOs that were sitting around the table in this particular industry.

And I also had an occasion earlier this week to be with another sector and I heard the same sort of thing about the demand of their products. So I think it's purely demand driven. I have been around Sonoco 20-something years and generally what we see in this downturn is year-over-year downturn of 10%, 12% so from the [sea] or to the trough of the cycle. And this is much deeper than that. And we clearly are seeing more fall off and so this is deeper than we typically see.

Okay, I appreciate the color there. I guess then while maybe this is a way off in the future, how do you prepare then for the ultimate -- we hope -- pickup where the canary starts chirping again? And we know the volume will come back fairly quickly when it does, but we also know that the costs can recover fairly quickly too. And so when you hope that you are finally seeing an earnings acceleration, you will lose a little bit in terms of spread. What do you do in advance or is that so far out that you will worry about it when you have to?

Well, you worry about it. You do what you can now and obviously there are some things that you can do on the wastepaper side and look at that, because that is our largest cost and we are in fact preparing for that uptick. I think the unknown and Mark's question obviously raised this as we look into these projections, as Charlie said, we are looking at business continuing on the industrial side as it is now. That's at the low-end of our guidance. And at the upper end obviously, that's a second half recovery.

I think the unknown in that is what happens in this market with the weakness of some of the competition and what kind of opportunities that does present itself to take advantage of. And I think that's frankly the upside in this argument if there is an upside.

Do you think there's more opportunity in conversion or do you think there's maybe more opportunity in getting your -- I'm trying to find the right way to phrase this -- building more flexibility into your supply of furnish and access to it anyway?

Well, I think it's a little of both, George. I think improving your access into furnish obviously improves your cost situation. So I think, though, that the converting side opportunity obviously drive the volume and that's what ultimately drives the profitability. If you had the volume, if everybody had volume, you probably would not have $20, $25 OCC. But if you had had the volume at $20, $25 OCC, you saw it rain money in the process.

We will look forward to buying some umbrellas. Thanks, Harris.

Mark Wilde, Deutsche Bank.

Harris, I would like if I could just for a couple minutes to just take maybe two or three steps back. If you think about what Sonoco has been trying to do over the last for a decade and more of really kind of shifting the company from kind of an industrial packaging to more of a value-added consumer packaging focus, it's a strategy it seems to me that we've seen some other companies both kind of small and midsized companies pursue, some with more success than others.

I just wonder, you know, when you look at your own experience in trying to go through this metamorphosis and you have seen what other folks have accomplished or not accomplished as they have tried to do it, what are the two or three kind of main lessons you take away from that?

Well, I think, Mark, I will start out by saying that I think the Company's business model is working the way I would expect it to work in in this environment. The industrial is down more from a volume standpoint than I would have expected in a recessionary environment and more than we've ever seen in a recessionary environment.

Nonetheless, it is working the way I would expect it to work with OCC following and we have gone from basically a 60% industrial 40% consumer. We flipped that to where it's about 50-50 today and obviously, as Charlie pointed out, the consumer side is up nicely year-over-year.

I think the learnings on that probably if we can move it faster, we should -- I would liked to have done that. We generate a lot of cash on that industrial side of the business. We continue to generate a lot of cash on that even at lower levels. So with moving it faster and it's always in my case I think that there's always opportunities to execute better in particular places. So I think those are the two folks moving faster and continue to improve execution.

Okay, very good. Thanks.

Thank you. At this time, we have no further questions. I would like to turn the call back over to the speakers for any closing comments.

Thank you again, Shea. Again, let me thank everyone for joining us today. We certainly appreciate your interest in the Company and as always if you have any questions, please don't hesitate to give us a call. Thank you again.

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