Sonoco Products Co (SON) 2009 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Sonoco first-quarter 2009 earnings conference call. At this time all participants are in a listen-only mode. A 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 Investor Relations. Thank you, Mr. Schrum, you may begin.

Thank you, Claudia. Good morning, everyone, and welcome to Sonoco's 2009 first-quarter earnings investor call. This call is being conducted on April 16, 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 first 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 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 brief introduction I'll turn it over to Charlie Hupfer.

Thank you, Roger. Today Sonoco reported first-quarter EPS of $0.23 per share and base EPS of $0.29 a share. Base EPS of $0.29 excludes restructuring and asset impairment and is inside our guidance of $0.28 to $0.32. So we felt very good about the quarter; it was clearly in line with our expectations.

Let me begin by reconciling GAAP bottom-line net income and what that is, is net income attributable to the parent company; I'll compare that to base net income. In the first quarter of 2009 we took a 7.2 net pretax charge to earnings for restructuring, the largest individual amount related to the closure of a paper mill in the US and two tube plants in Europe.

The net restructuring charge included a gain related to the disposition of our Chinese paper mill. The tax effect of the restructuring charge is $2.6 million and the minority interest effect on the gain is $1.5 million. So altogether, the bottom-line impact of the restructuring charge in the quarter is a net charge or expense of $6.1 million or $0.06 per share. So we arrived at base EPS by adding the $0.06 per share to GAAP EPS of $0.23 to arrive at a total of $0.29 per share.

In last year's first quarter we reported an after-tax restructuring charge of $9.8 million or $0.10 per share and we reported a $31 million or $0.31 per share charge related to the impairment of a subordinated note and preferred stock position that we had taken back when we sold our plastic bags business in 2003. So we arrived at last year's base EPS for the quarter by adding $0.10 and $0.31 to the GAAP EPS of $0.13 to arrive at a total of $0.54 per share.

So for us the appropriate comparison then is $0.29 a share this year versus $0.54 a share last year. And of course this year's figure includes $0.09 per share of incremental pension expense which I'll talk about a little later.

So with all these adjustments in mind let me read out the comparative income statement for you. This would be the base earnings income statement. It starts with sales of $800.6 million which is 22.9% below last year's sales of $1.038 billion. We'll see a little bit later on the sales bridge that it's volume that's down significantly year-over-year and that volume is especially in the industrial-related businesses.

Base EBIT, earnings before interest and tax, is $51.9 million compared with $88.3 million last year. That's a 41% shortfall year-over-year. Absent the incremental pension expense EBIT would be below last year by approximately 24% which is generally in line with the sales shortfall.

Interest expense is $9.6 million, that compares with $13.2 million last year and that's a function of lower interest rates principally on our commercial paper program and lower outstanding balances. We had approximately $160 million less debt this here than we did last. So that leaves us with income before tax of $42.3 million which compares with $79 million last year.

Taxes are $14 million versus $23.8 million last year and the effective tax rate for this quarter was 33.2% versus 31.7% last year. The effective tax rate, frankly, was a little higher than we expected and that's because during this year's first quarter we did take a charge to reflect the disallowance of some interest expense as a result of a tax audit that's going on in Italy. Otherwise we would have been more like 31% effective tax rate.

Equity in earnings of affiliates was $100,000 and that compares with $1.9 million last year. Our affiliates are largely on the industrial side of the business and they're facing the same macroeconomic conditions that we are.

Coming on down that income statement, minority interest is an add back and that's $900,000 in both this year's quarter and last year's quarter. So what that leaves us with is net income attributable to the parent of $29.2 million compared with $54.1 million last year and that's a shortfall of 46% year-over-year. But again, absent that pension difference, net income would be approximately 29% below last year.

Let me shift gears and talk a little bit about segment reporting which is found on page 6 of the press release. Our segment reporting tells the same story that it did in all of last year; it talks about year-over-year improvement in the consumer segment and year-over-year weakness in the other parts of our business.

The consumer segment operating profit, that's earnings before interest and tax, were $39.4 million and that's up 8.5% year-over-year. Without that incremental pension expense those profits would have been up 22% year-over-year and this represents a record quarterly profit for the segment. Clearly the shift to the consumer side has significantly improved the stability of our earnings in times of an economic slowdown like we're seeing now.

Tube, core and paper sales were down 34% and profits were down 81%. Without the incremental pension expense profits would have still been down 60% year-over-year. This segment is where we saw the most significant volume declines.

Packaging Services sales were down 23% and profits were down 89%. Again, without that incremental pension expense profits would have been down 68% and here too we saw some significant volume shortfalls in our point-of-purchase display and our custom fulfillment operations. A number of our customers have delayed point-of-purchase advertising until later in the year.

And then the last category, all other, sales were down 28% and profits were down 55%. And here again, without the incremental pension expense, profits would have been down 37%. And much of this business that falls in the all other category, especially our baker reels and our protective packaging businesses, is affected by the housing slump.

Now let me move off of segment reporting and turn to the sales bridge. The sales bridge is where we reconcile last year's sales of $1.038 billion to this year's sales of $800.6 million. The difference there is $237.4 million and the bridge is made up really of three components.

The first is volume and we had negative volume that affected sales by $158 million. The second element is price, we had negative price of $8 million. And we had the third element, negative foreign exchange, this is translation exchange, of $71 million. So those three numbers -- $158 million, $8 million and $71 million -- add up to the $237 million year-over-year shortfall.

Starting with volume, tube and core volume in the US and Canada was off 24% across basically all the segments that we sell into. Paper mill core sales into the paper industry were off 23%; film cores were down 19%; textile tubes were off as much as 40% year-over-year. We saw much of the same thing in Europe, tube and core volume in Europe was down 25%; in Western Europe it was down 26%; and in what we call frontier Europe, mostly Eastern Europe, it was down 18%. Paper volume in the US was down 16%, what that represents is outside sales of paperboard, largely tissue and tile board, edge board and core board, all down 16% in total.

On the composite can side of our business volume was down 7.5%, some portion of that would be two fewer days, but the raw numbers themselves down about 7.5% with caulk cartridges obviously selling into the housing industry down 40% year-over-year. We did see growth in powdered infant formula and coffee due to conversions, but other than the conversions for metal we did see some general weakness in composite cans.

Our metal end volume was down 15% and that's probably due to customers pre buying in the fourth quarter ahead of some of the steel price increases. And our pack center volume was down around 16%, although a lot of that is pass-through sales, it really doesn't affect our operating profits. As I mentioned earlier, sales volume was down throughout the all other category.

Now let me turn to net prices which, I mentioned earlier, were down year-over-year by $8 million. This shortfall can be largely attributed to the lower wastepaper prices that in turn reduce the selling price of our tubes, our paper and our outside wastepaper sales. The average selling price of wastepaper was down $90 a ton from last year's levels. Prices did increase in composite cans and metal ends at the beginning of the year to reflect a 60% to 70% increase that we took at the beginning of the year in tin plate. And then the last element, foreign exchange, that shortfall is entirely due to the strong dollar versus basically all of the other currencies that we do business in.

Let me turn now to the EBIT bridge and here we're reconciling last year's $88.3 million of EBIT with this year's $51.9 million and that's a difference of $36.4 million. There are really five elements to this bridge. The first is volume and volume as it affected EBIT was down $51.2 million. Price cost is a positive $19.9 million, productivity a positive $5.4 million, all other is a positive $4.8 million.

And then pension, this incremental pension expense that I was talking about, is a negative $15.3 million. So a negative $51.2 million and then positive $19.9 million, $5.4 million, $4.8 million and the negative pension of $15.3 million should add up to a negative $36.4 million.

This bridge highlights the fact that volume is really the main story of the day for us which I've already given you some numbers on. The $51.2 million profit shortfall is really the lost profitability on that $158 million sales shortfall. And of course, this is an integrated margin so it also includes the lost profitability on the intercompany sales shortfall.

Despite the fact that net sales prices were down $8 million year-over-year, price cost, as I mentioned earlier, is a positive $19.9 million. The decline in wastepaper prices resulted in approximately 60% drop in furnished raw material cost to our paper division and this resulted having lower furnished costs, lower cost of sales resulted in a modest price cost positive in the tube, core and paper segment.

On the consumer side price cost was positive as well, that was spread out really over most of the divisions that make up the consumer group. Our Phoenix metal end business had a modest net positive price cost and a reduction that we saw in film and resin costs yielded a modest positive price cost in our flexibles business as well as in our plastics operations. Our guidance, which I'll talk about a little bit later, assumes that we have a more neutral price cost going forward.

In terms of productivity, we were pleased with manufacturing productivity of $5.4 million for the quarter. You remember, productivity was a negative $2.2 million in the fourth quarter and was only $33 million for all of last year. Give you one example, our productivity in our paper group was a positive $1.7 million and that's despite a significantly higher number of down days this quarter versus last year's first quarter. With the exception of Europe which doesn't have as much flexibility in its workforce, I think these are good productivity numbers and they suggest that we've adjusted well to the lower level of volume.

The other category, all other, is a positive, as I said, $4.8 million. This is our catchall category; it includes year-over-year wage increases, benefit increases and general inflation. The fact that it's positive reflects the positive impact of our restructuring programs as well as very tight control over discretionary spending and I'll give you an example of that. Actual selling and administrative expense as we record it, and that's just the pure selling and administrative expense, is lower year-over-year by $10.3 million.

And then the last category, of course, was pension -- that's an incremental negative -- or expense, it's a negative to the bridge of $15.3 million and this is what we've talked about in the past. It was in line with our forecast. It largely reflects the 2008 pension investment performance that we had as well as the change last year in the discount rate.

Now let me change and shift gears to talk about cash flow. Cash flow was good. Operating cash flow was $75.5 million versus $64 million last year, so operating cash was a positive $11.5 million year-over-year. As you know, we always have a buildup in working capital after the year end. Last year's working capital increase used up $33 million of Sonoco's cash. This year the increase only used $21.2 million. So that difference is $11.7 million in net working capital and that change explains the majority of the year-over-year increase that we saw in operating cash. Cash flow after capital spending and after dividends was a positive $10 million year-over-year.

Our balance sheet remains strong; debt was reduced by $23 million since year end, debt to total capital dropped from 37% at the end of December to 36.2% on March 29.

And then lastly I'll talk about guidance. Our press release gave our guidance, it said our guidance for the second quarter is $0.34 to $0.38 per share and for the full year $1.55 to $1.75. The guidance for the quarter and the year is based on a forecast that we prepared in late March. The $1.55 assumes that business conditions remain relatively steady at today's levels in our industrial businesses, ordinary seasonality has been built into that forecast.

Besides the seasonality, and especially in our core flex operations, our consumer businesses do expect some growth as projected into this forecast plus some known contractual price increases. That's how we put together the guidance that arrived to the $1.55 per share. The high side of the guidance as we look at it right now probably isn't realistic where we are today. It assumes roughly a 10% increase in tube and core volume beyond the usual seasonality that I talked about. But that does give you some idea of the kind of operating leverage we have when business conditions improve.

Our second-quarter guidance of $0.34 to $0.38 assumes some improved volume over first-quarter levels but, as I said earlier, a more neutral price cost. Our cash flow guidance, and that's based on this $1.55 per share, is for operating cash to be around $330 million. We recently surveyed all of our divisions and now we expect capital spending to be approximately $110 million we had previously said it would be in the $125 million range. So capital spending come in at about $110 million.

So cash flow after dividends, after capital spending is expected to be in the $100 million to $110 million range which we would expect to use right now to simply pay down debt. And then lastly, as for dividends, yesterday the Board approved a $0.27 per share dividend which is unchanged from the prior quarter. Those are my comments. I'll turn it over now for questions.

(Operator Instructions). Claudia Hueston, JPMorgan.

I was hoping you could just talk a little bit more about the tube and core business and just discuss the deterioration that you've seen from last quarter, are the trends still getting worse, are they stabilized in the US, are they better in Europe? Just provide a little bit more color there. And then also if you're seeing -- normally that business picks up in the spring. Just comment if you've seen any pickup from a seasonal standpoint.

Claudia, I'll be happy to do that. As we said I think in the first-quarter conference -- the fourth-quarter conference call and in several analyst meetings, what we saw in the first quarter was consistent -- the tubing core business, consistent with what we had seen in November and December. We saw that in January and February, the same thing occurred in March. So the good news to me there is that we have not seen any further deterioration in the tube and core market that has existed in the fourth quarter.

That's consistent basically around the world. Europe and the US are about the same level of decline year-over-year as is Asia and South America. As you point out quite correctly, we normally do see some seasonality and we have seen some improvement in the first week or so of April. I wouldn't read anything more into that other than the fact that it is the normal seasonality that we would expect to see sometime in the March/April timeframe.

That's helpful. And then you've been going through a little bit of cost reduction efforts within that business. Can you maybe just give us some sense of where you are in that process? And if demand stays at these levels for the rest of the year are there more levers you can pull to improve the cost situation in that business?

Claudia, we have taken costs out of that business. We've closed a number of plants. We tend to take more of a longer-term view -- obviously there are certain things that you do for the short term and we've had those in effect for six months or more. But we're taking a longer-term view of that and trying to project what we would call the rebound volume would be and what is the volume when this economy does turn around and what's our footprint and what's our cost structure we need. We're looking at that, we're very close to that, I don't want to speculate on what we might do, but we will always continue to look to have the right cost structure in that business around the world.

And what do you think about that sort of volume pick up that you could see as we come out of this and what sort of normalized kind of volume trends might the tube and core business look like?

I don't know that. Always when you go through this, if I look back in the '80s and the '90s and the recession at the beginning of this decade, there are always some shifts of businesses when that happens. And there are certain geographies that benefit from these shifts. So our global footprint may change, but I don't know that the volumes change a lot.

There are certain sectors in this market that -- and I hate to pick on one, but you look at newsprint and you have to say that -- you look at your newspaper and it's smaller than it was a year ago and it's probably not going to get back to the size that it was a year ago. So you come to the conclusion on that that newsprint as a sector is probably going to be down when we come back into it and so you look at your footprint. But that's just one I would point to.

Okay, thanks very much. And then just one question for Charlie just on the tax rate. Were you sort of suggesting the tax rate for the year would be around 31%?

That's right. The tax rate was a little bit high this quarter because we did have that extra charge related to what we think is going to be a disallowance of some interest out of Italy. Other than that the tax rate we'd expect to be pretty normal. We go through -- when we do the re-forecast we also reforecast taxes. So it might shift a little bit due to mix and we would expect some release of reserves in the third quarter, but overall it should come down into that range and we said 30% in our press release.

Okay, thank you.

And it frankly would have been down in that range absent this extra charge we took in the quarter.

Al Kabili, Macquarrie.

Thank you, guys. Good afternoon. On the tubes and cores, could you just talk to us a little bit about what you're hearing from customers? Are they still pessimistic? Are they expecting volumes are going to improve shortly here? What are you hearing from customers?

I guess as you talk to customers they have very little visibility, they have less visibility than I would say they normally have. And they are cautious, but most of the ones I talk to do not see a short-term rebound of this. They're talking that a rebound comes the end of this year or early next year. It varies -- you see some of these industrial customers that touch housing and autos and they're looking at those sectors. You see others that touch other things. But I would say in general no one is expecting a very quick turnaround.

Okay. And then Harris, quickly on the pricing side, you mentioned going forward you're not assuming as much price mix or price cost benefit in the EBIT line. On the tubes and cores what are you seeing on the price front? Is that degrading some? Are you --?

No, we have not seen a lot of degradation of pricing there and we've obviously seen a decline in OCC and we've given back some pricing. But we've been able to hold on and actually improve margins in that sector. And I would say it's a relatively disciplined market right now.

Okay. And then if we could also talk about the guidance of $0.34 to $0.38 for the quarter. Can you share with us roughly what that assumes for year-over-year declines in volumes in tubes and cores?

I don't know about the year-over-year, but clearly it, as Charlie said, assumes current run rates plus normal seasonality and I would guess it would be down year-over-year about the same as the first quarter.

I would think it would be, that's right.

Okay, got it. And then shifting over -- shifting over to consumer a little bit, clearly some very strong margins on the resin savings there. Can you give us a sense for what a more normalized margin will be? And will you have -- I assume you're going to have still a little bit of resin benefit in 2Q and 3Q, but maybe you could give us some color on that, please.

I think the consumer side of the business had a very strong quarter and part of it was obviously some favorable pricing on resin and films and some of that will probably go away. But we saw clearly improved operating results in some startup plants that a year ago were not performing as well as they should have been. They're performing at excellent levels today.

We continue to see nice conversion opportunities in powdered infant formula and coffee. And as Charlie mentioned, composite cans were down I think about 7.5%. But if you took out the caulk and you took out one motor oil customer that was down about 60 something percent, overall composite cans were down around 3% and the conversions are excellent. So I think the consumer business had a very strong quarter and I anticipate that to continue for the year.

Okay. And then last question and I'll turn it over. It looks like in the Packaging Services -- it looks like, I would guess from the results, that the core flex business is now operating at a loss and want to get your thoughts there, what's happening there and if there are any levers you can pull near term to turn that around?

Yes, I've got several comments about that. First of all, as Charlie said, volumes on the point-of-purchase side of the business and the manipulation side of core flex were down significantly. Now generally the first quarter in that business is the weakest quarter of the year. We operate -- we generate about 80% of the profits in that business in the last three quarters and core flex was in a loss position in the first quarter; it was in a loss position in the first quarter of last year. So that's not something that we have not seen before.

Now volumes were certainly less this year than they were last year and as we talk to our customers they say they have cut back on marketing promotional dollars which obviously we have in fact seen. We have taken some cost out of core flex, we took some cost out of core flex in the last several weeks, and we pulled the levers that we pulled. We still expect our new products and new services that are in the design, what I would call [following] core flex, are basically at an all-time high which would signal to us that the second, third and fourth quarters should improve and that's certainly what we expect.

The other thing in our pack services center, and I think this is indicative of consumer spending, Charlie talked about the pack center side where basically we manage that for a fee and some incentives, but those sales were down I think 17% to 18% and those are just pure dollars of razors and blades and ink jet cartridges and other things that are going through that which I think is indicative of the overall slowness in that category.

Okay, thank you, guys. I'll turn it over.

Fred Speece, Speece Thorson Capital.

Good morning. You cut back on your SG&A; can you talk about whether your expenses and investments have gone up or down in research and development and product development?

They have not gone down. My guess is they have stayed basically flat, Fred. It could be up slightly but it's not appreciably a lot, we have not cut it.

And do you have any -- can you share with us any semi-material market share gains or losses?

Clearly on the tube side I think we have picked up some share from several of our competitors that frankly their customers are concerned about their financial stability. And so we have in fact picked up there. We talked about the gains in powdered infant formula, we've talked about some gains in coffee, and so we continue to grow those businesses.

Thank you.

Sarah Hunt, Alpine Funds.

My question was essentially about margins in Q2 on the consumer side since they looked much better than they have, I mean, historically over the last couple of years. So I just was trying to figure out if that was a one-off which I think you sort of answered. But was there anything else we should be thinking about on the margin side on that consumer business since it seems to be the strongest business that is going on right now?

Well, hopefully I did answer your question about the margins and I think as we continue to grow -- both the composite can and the flexible side, we have plenty of capacity in place to take on this new business and so we are further leveraging those fixed assets and so that should reflect itself in continuing to improve margins as well.

And are people looking more -- I know you mentioned some opportunities on the coffee side. Is there any other type of product where people are looking at switching it in the way that coffee is that could be a benefit?

I think clearly the rise in tin plate prices is giving us an opportunity to expand what was already a nice cost advantage that we had in that business. We have significant opportunities outside the United States on powdered infant formula where we've converted about 65%, 70%, 75% of the North American market over the last 18 months. The same customers of the Abbott's, the Mead Johnson's, the Heinz, the Nestle's are making the same conversions outside.

We made conversions in the UK, Brazil and some other places -- it slips my mind at this point. But we've seen nice conversion opportunities outside of North America. We have the footprint in place to take advantage of those conversions. We saw the Nabob and the [Uban] conversions to coffee in the third and fourth quarter of last year.

I think we previously announced that we are now fielding for a major that will make a major launch on the coffee side later this month that's totally our package, the closure, the metal ends, the package, the can body itself. And we are having significant inquiry of other coffee producers about making those conversions. So we're really bullish about that side of the business frankly.

Okay, thank you very much.

Joseph Naya, UBS.

Good morning. Just was curious -- obviously nobody has much visibility in this environment, but kind of going back to a previous question. Are you seeing a difference in terms of what you're hearing from your customers on the consumer side versus the industrial? Is there a little bit more optimism on the consumer side or what are those customers saying?

I don't know that either of those customers have a lot more visibility, Joseph, to be perfectly honest. But clearly those on the consumer side that touch more of a food category are more bullish than others. But as we look around the globe for the most part the consumer side is holding up pretty well. There are pockets where it's down. Nuts I don't think Charlie talked about, nuts were down about 4.5% in the quarter year-over-year. Most of that occurred in January and early February and I think it was down about 2% in March and so improving. But I don't hear as much -- it's a more bullish attitude I would say on the consumer side than it is on the industrial side. The industrial side simply just doesn't know.

Okay. I was also curious, I believe you mentioned that in your guidance you've incorporated I guess price increases that are already kind of known and set later in the year. Could you offer any additional color in terms of timing, magnitude, those types of things?

I can't give you magnitude, I can give you color to what that is. Those would be our consumer prices that reset on an annualized basis and we have either three or four contracts, one reset I think the first of April, one or two the first of June, or the first of July. And that's basically we have been eating the steel increase that we received in January on those accounts and we will recover those contractually on those dates and then we'll have them throughout the next year. The magnitude of those, quite honestly, I don't have.

Okay. And just one last question about industry consolidation and kind of what you're thinking, what you're seeing in terms of opportunities there.

Are you speaking on any particular one side of the business or the other, Joseph?

I was thinking more on the industrial side, but if you have any comments on the consumer side I'd be glad to hear them.

We think there will be consolidation opportunities on the tube and core business both in North America and in Europe and our plans are with our balance sheet and cash flow to participate in those consolidation opportunities as they come and we will aggressively pursue those. There could also be some opportunities on the consumer side of the business and we will take a look at those as well.

So at this point just kind of waiting to see what presents itself?

Exactly.

Very good. Thank you.

Chris Manuel, KeyBanc Capital.

A couple of questions for you. Let me follow up from a little discussion that you talked about with the last two callers on composite cans. Another quarter of a negative number there and it sounds like you've got a lot of good conversions and such happening that would normally suggest that should be up a bit.

Can you help us maybe get a better sense of are a lot of these wins in composite can going to just continue to offset other declines or do we reach a point of inflection sometime here in the near future? I know you mentioned a major product introduction soon. Should there not be some maybe pipeline filling from that or etc.? Can you give us a little more color there maybe, Harris?

Chris, most of the pipeline filling for that will be occurring as we speak right now and you will see that ramp up probably in the second quarter and reach full potential in the third quarter of this year. If you look, the big drag on composite cans of the last couple of quarters has frankly been caulk, and it's been down, as I said earlier, and I think Charlie said it was down 40% year-over-year and I don't what it was down last year year-over-year because that's obviously tied to housing.

We did see a decline in concentrate I think if I'm not mistaken year-over-year and that's a trend that I think will continue. But other than that there's not a lot of decline in the sector and I think right now we probably have more momentum in conversions not only in coffee and PIF but some tests we have going on in some other products such as paints and some warm-filled aseptic opportunities than I've seen probably in my career at the Company.

So I guess to maybe summarize that, in the next couple quarters that should begin to turn and (multiple speakers) become positive, is that fair?

I would expect that, yes.

Okay. A second question I had was could you maybe give us a sense of what your volume levels were like in some of your other consumer businesses as well, the bowls ends, rigid plastics, etc.?

I'll let Charlie do that. He probably has those numbers in front of him.

I do. Our volume in our metal ends business was down 16% and I think that largely reflects the pre buying that I talked about. We had customers that clearly bought ahead at the end of last year ahead of the first-quarter increases, and then just the general economic slowdown. That accounts for some of it.

Our matrix business, which is starting to see some volume strength, was down 8% year-over-year and that's just some lost business out of Canada. And our flexibles business was down, specifically for a couple reasons, around 7%.

Okay, so it sounds like overall consumer volumes were down a bit but yet still profitability was pretty good, is that fair?

That's right.

And a sense moving forward absent all of these pre-buys that would it be your anticipation of these pre-buys are behind us?

I would certainly think so.

Okay. So moving forward we should begin to see volumes pick back up in that consumer business consistent with that these are staple oriented products and eat at home, that type of stuff?

Yes, I would think so, Chris.

Okay. Next question I had was in the industrial side of your business, looking across North America you've had a couple large competitors that are struggling and even in the paper side I think another one filed for bankruptcy today. So with that in mind have you seen any, either on the tube and core side or on the paper side, any opportunities to pick up some share or potential acquisition opportunities or things of that nature as you view it?

Chris, we have picked up some share in the tube and core business in North America. We've had at least one large customer that we picked up in the last 30 days as a result of their concern over the financial stability of other people in the market. We have probably as many inquiries and tests going on now as we've had in some time.

So I do expect to pick up some market share simply as a result of concern about some supply security. As I said in response to an earlier question, we will be aggressive and participate in the consolidation of this market should those opportunities present themselves. And I think to say more about that would be probably imprudent at this point.

Okay, that's fair. Would it be safe to assume that any of this business you've picked up thus far there's probably a ramp or a learning curve and hence the reason that looking at results in your tube and core from first quarter and at least what would be embedded into your second-quarter guidance, it's not showing that true profit potential yet or how would you think about that? Is there a ramp that would probably be required?

I would say, Chris, there would be a small ramp up of it and it's occurring as I speak. We don't put things in our guidance until we actually have them.

So it is in your back half of the year guidance then?

No, I would say it's probably not because we don't have all the business yet.

Okay. Thank you, guys.

Amy Norflus, Pilot Advisors.

Can you explain when we'll have to make actual dollar contributions to the pension plan?

We won't have to make a contribution in 2009, so our contributions will start in 2010 and the reason we don't make a contribution in 2009 is simply that we were over funded at the beginning of -- I guess it would be the beginning of 2008. So we've brought some carryover credits into that calculation. We said earlier that we would have around a $60 million payment to make in 2010.

And if the markets reverse what are the implications of that?

I think you just see the flip side of that. The things that were driving that shortfall which was about $200 million then our overall US pension plan, the things that were driving that were the investment performance in 2008 was down 24% and the discount rate moved against us. So that actually triggered a $57 million increase in expense which it's not a coincidence that that's about what we're going to be paying out as a cash outflow because there are different calculations that more or less link together. So I think you just see the inverse of that.

Thank you.

George Staphos, Bank of America.

Hi, everyone. Good morning still. Let's see, a couple questions -- maybe just to get back to consumer. I wanted to check in first of all on the snack side. I think earlier in the quarter or maybe last quarter we had asked given some of the trade data that we're getting whether your snack customers were seeing any decline in volumes. The view was no. How were the snack volumes in the first quarter? And was that a reason why your composite volume was down year on year?

It was actually a part of it. Snacks were down, there was one particular brand that was taken off the shelves for a while that accounted for a good part of that decline. It was down around 9% and I think that one account would account for a lot of that. And that's (multiple speakers) coming back.

What was behind that, Charlie?

It's just a customer that -- they stopped selling the product into certain stores if I recall.

A certain food chain took this one product off the shelf and it's back in now. But that did account for the snacks being down.

I think if you took that out they would have been relatively flat and our single biggest snack customer was relatively flat.

Okay. And flexibles, you said volumes were down 7% for a couple of reasons, but why would flexibles be down?

We've lost some business in the pouch business that we made, the [re-torqued] pouch business, and we lost that a year or so ago. And then we also lost some label business out of Canada in a bid that was actually about two years ago and it's taken this long to sort of wind its way through the system. So those would be the two significant things.

The other comment that I'd make would be that as we looked at baked goods which is a big category we sell into, we were more or less flat with the reclose, so reclose was more or less even year-over-year. And we were down some in the non-reclose kind of product that we sell out of flexibles into the baked goods industry.

On the flexible side, we -- so that's really what we had on the flexible side. We've got some business though that -- and it's built into our guidance, some new business that we've not really talked much about because it hasn't been announced, that we have put into the guidance into the second, third and fourth quarters.

Okay. Appreciate that.

That's on the confectionery side.

Okay. With price cost, maybe I misunderstood it, but I just wanted to check in. You had a reasonably positive first quarter which is great. You mentioned that you had lagged in getting through some of the steel increases for contractual reasons, so presumably that will pick up for you, it will be a net positive. So therefore if I'm positive in the first quarter and I'm getting some additional cost relief in 2Q and 3Q, why would I be neutral going forward? (multiple speakers)?

I think you're right. And what Harris was explaining on those few customers, that we actually make the calculations and get cost recovery on an annual basis, but there's a delayed effect. And so we will recover the 2008 increases in steel, we will recover -- and 2009 I guess I should say, but we won't necessarily recover it on a month-by-month basis. So we'll recover January to December, but we'll recover it over a period of like July to July.

And so we do have in the back half of the year some second half price increases. But what I was trying to explain with the price cost is that a good part of that price was in our flexibles and in our matrix plastics business in film and resin. And I would expect that, just the way those relationships work, that some of that price will be given back over the second, third and fourth quarters.

Okay. Charlie, if I look at your free cash flow statement, you had mentioned that most of the improvement in operating cash flow was from the reduction in working capital, so it was around a $10 million swing. Yet if I'm looking at this the right way, the other operational activity went from a minus $30 million roughly to a positive $30 million. What was behind that? (multiple speakers) was a bigger driver.

Yes, I think it was actually two, two big things that I think just sort of washed themselves out. Last year we had the impairment charge that was an expense, but the flip side of that was we had our asset position go down and they more or less -- it's non-cash transactions so they washed each other out. On this side, the first quarter this year we had the incremental pension expense, but the flip side of that is just the increase in liabilities. And so they washed themselves out, so when you boil it down it's really more I think the working capital that makes up the difference.

Okay, I got you. A couple of last questions and I'll turn it over. Back to industrial tubes and cores, realizing in the time that I've covered Sonoco I've never seen a 20% plus volume decline in any quarter let alone any month. Nonetheless, I've also never seen a 60% pension adjusted drop in EBIT. And so is there anything else going on in the business, if I'm remembering the figures correctly that you said before, in terms of either competition, cost structure, price degradation in terms of why there's such a significant drop-off in EBIT? And then I had a follow-up question in terms of structure.

George, I will say there's nothing but volume. And you're exactly right, I've said in some conference call or analyst meetings in the quarter, if you look back over the history of Sonoco and look at recessions in the '80s, '90s and this century, from peak to trough you normally see about an 8% to 12% decline in volume, what we're seeing is 24% to 25% which is obviously double that.

So we've seen a much more significant decline than we have ever seen before. And remember that in that business these are integrated profits and you've got the profit on paper, you've got the profit on the adhesives, you've got the profit obviously on the tube and core itself. So there's nothing more fundamental going on in that than obviously we are adjusting the cost structure as quickly as we can. Charlie, do you have any more (multiple speakers)?

I really don't. It is on the industrial side and I think it is just simply the change in business and the overall integrated impact of the volumes (inaudible) weren't substantially off, but clearly in our fourth quarter we had a pretty good October and then November dropped and December dropped. So fourth quarter isn't exactly comparable to the kind of levels that we were seeing. And when we put our guidance together and part of the reason our guidance was pretty much on the money was because we were basing it off of November, December and on into January. So there really wasn't a fundamental change there.

Okay. The last question is on the one hand your industrial business -- many of the operations tend to be much more portable as we think about them than other companies and sectors that we look at. On the other hand, many of the markets that you've served these many years -- I forget whose question you were answering at the time, but clearly if not going away, they are structurally going to be much lower than what they've been at from a demand standpoint the last 10 to 20 years. Newsprint for example was an example you had raised. So why won't we see a much more strategic restructuring program or realignment program within industrial discussed in the next year or two out of Sonoco?

I think you likely will see that.

Okay. All right, folks, thanks very much. Good luck.

Joseph [Peropotto], Tocqueville Asset Management.

I'm actually here with Doug Groh also. I see the Board declared a dividend again last night and obviously the Company takes a tremendous amount of pride in their dividend track record. The last few -- I guess in 2001 we got to an 83% payout ratio and back in '92 it was close to 98%. And I guess just sort of help me think about how sacrosanct that is. A lot of economically sensitive companies have cut their dividends and the stocks have actually responded kind of favorably to that given that we're kind of in an extraordinary time compared to even '91 and the last -- 2002?

Well, Joseph, Doug, good to talk with both of you. I'm never going to say that we would never do anything with the dividend because you never know what may occur. The bottom line is, as you heard from Charlie, we've got even at the low end of our guidance, after dividends and after CapEx we've got $100 million plus of free cash flow. So there's no need for management of the Board to look at the dividend other than for -- to pay it.

And given the shareholder mix that we have where we're basically about 65% individual, that's very important to our shareholder base. We hear that all the time and we try to be responsive to our shareholders. So I see nothing on the horizon that would cause us to do anything with that dividend.

I also mentioned yesterday in the shareholder's meeting, and it was discussed in the Board meeting, that once we get back to normal business conditions, whenever that is, that we will look at the long-term view we have of increasing dividend. So it would be our intent to go the other direction rather than the suggestion that you are implying there, Joseph.

And if I could just follow up, this is Doug Groh -- as far as that $100 million or so of free cash flow, you said that's after CapEx and after dividends. And I understand that you don't really have significant debt repayment this year -- until (multiple speakers).

That's correct. $100 million is in November of 2010 and we ended the quarter with $74 million of debt in our commercial paper program.

And this $100 million of assumed free cash flow for 2009, that would be before any kind of restructuring plans or positioning that you're contemplating?

That's correct. But I would expect any kind of restructuring that we're talking about from a cash perspective would be insignificant in the scheme of that.

Okay, that's fair. Great, thank you very much.

Mark Wilde, Deutsche Bank.

Good morning, Harris. Just to kind of come back to Consumer Packaging one more time as you tried to really reshape the Company here with more of a Consumer Packaging focus; has there been anything on that side of the business that's really surprised you in this downturn, albeit the fact that it's been such a severe downturn?

No, Mark, I think what I have said is Sonoco's business model is working as I would have expected and expect it to work in this environment we're operating in. The industrial is down albeit -- in response to George Staphos' question, it is down twice what I normally would have expected to see. The consumer business is performing very well and I expect it to continue. I think the Company's strategy is right on target to shift more from the industrial focus to the consumer focus and we'll continue to push that way.

If we were to look at the consumer business, Harris, how much of that would you guesstimate is food business at this point?

Probably edible food -- probably some people would say some of the snacks are not food, but --.

Let's give them the benefit of the doubt.

Okay, let's say the edible piece of it, probably 75%, 80% of it.

All right. And can you just talk about sort of how you have seen -- what kind of perhaps inventory destocking you've seen through kind of the food processors' chain over the last six months based on where you sit?

I think that clearly in November and December we saw some destocking of people that had built up for a more robust holiday season than they saw coming and so they took a lot of down time in that time frame. I think they have cautiously come back up. I think there's very little inventory that they're keeping today, and so I think the pipeline is fairly thin, Mark.

Okay, all right. And if we could turn to offshore for just a minute or two. You said a couple of things in terms of your offshore volumes which kind of surprised me. You said that actually Eastern Europe volumes were down less than they were in Western Europe; I think a lot of what we hear about Eastern Europe would have suggested just the opposite. And then I think you also said that places like Latin America have actually held up and some of the other companies that I talk with have suggested that Latin America may just be kind of three months behind what we've seen in the US and Europe.

Mark, I don't think that I said that Latin America had held up.

Okay.

We actually -- Latin America actually held up reasonably well until about December and we started seeing a falloff in Latin America and it is not dissimilar from the rest of the globe with Sonoco right now.

Okay.

And I clearly did say though that Western Europe showed bigger decline than what we call the frontier Eastern Europe. And we've been seeing that kind of a trend. Maybe it's just the markets that we sell into -- textile market in places like Turkey. But we were consistently last year seeing their growth outpace Western Europe and so it doesn't surprise me at all that in a downturn it's not as much as Western Europe.

Okay. And Charlie, finally, can you just -- can you talk about credit issues vis-a-vis your customer base?

Well, we look at that -- in fact, that's a question that comes up at audit committee every quarter now; it didn't used to come up as much. We really -- where we look at all of our customers, we've had a very aggressive program for three years now in working capital, we put it in at the end of 2005. And frankly, that helped us a whole lot as we got into these more troubled times because we were really already on top of it.

But we have an 86% compliance ratio right now which means that 86% of all of our customers are within their terms and we looked at -- of course, the allowance for bad debt is something that gets discussed at the audit committee and we actually increased it. We took $1.6 million worth of bad debt in this quarter that wasn't a big enough number to talk about. So that tells you it's not a real big issue for us, but we're on top of it all the way. I think that reflects the fact that we've managed it well and just the kind of customers that make up the bulk of our customer base.

Okay, that's helpful. Thanks, Charlie.

Gentlemen, we have no further questions at this time. I'd like to turn the floor back over to management for any closing remarks.

Thank you again, Claudia. And again, let me thank all of you 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.

This does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.