Sonoco Products Co (SON) 2009 Q3 法說會逐字稿

Greetings, and welcome to the Sonoco Products Company third quarter 2009 earnings conference call. (Operator Instructions). It is now my pleasure to introduce your host, Roger Schrum, Vice President, Investor Relations for Sonoco Products Company. Thank you, Mr. Schrum, you may now begin.

Thank you, Shay, and good morning, everyone. Welcome to Sonoco's 2009 third quarter earnings investor call. This call is being conducted on October 22nd, 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 third quarter were released before the market opened today and are available via our website at Sonoco.com.

Let me begin by stating that today's investor call may contain a number of forward-looking statements that are based on current expectations, estimates, and projections. These statements are not guarantees of future performance, and are subject to certain risks and uncertainties. Therefore, actual results may differ materially. Additional information about factors that could cause different results and 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 turn things over to Charlie Hupfer.

Thank you, Roger. Today, Sonoco reported EPS of $0.47 per share for the third quarter of 2009. These are our GAAP earnings and they include restructuring charges and also non-operating gains and losses. , We reported base EPS at $0.50 a share, which excludes those restructuring charges, and in this year's third quarter some non-operating gains. This was a good quarter for us. Our guidance was $0.43 to $0.47, so at $0.50 we exceeded the high side of the guidance by $0.03 a share. And as I go through my notes, the general theme, I believe, will be that domestic volume showed some improvement over the second quarter, price cost was positive, and productivity was very good for the quarter.

So let me begin by reconciling GAAP net income to base net income. GAAP net income was $47.7 million or $0.47 a share versus base net income of $50.9 million or $0.50 a share. The difference is a net of $3 per share, and that's a charge, and that consists of restructuring charges in the quarter, net of some one-time non-operating income. It is a little bit confusing, so I will walk you through how that affects the P&L. During the quarter, we recorded $7.2 million in restructuring charges. Those are expenses, and most of that related to the consolidation of 19 divisions into 6 business units. We also recorded as an offset, income of $7 million, and most of that related to a gain on the sale of property at our former paper mill in China. So the net amount rounds to an expense of $100,000 at the earnings before interest and tax line.

This is where it starts to get confusing, because the minority interest impact of that is a charge of $3.1 million, and that represents our Asian partner share of the gain. And now let me reiterate, that gain then is not in base earnings, nor is the minority interest offset of that in base earnings. So what that does is, is the minority interest charge of $3.1 million brings the net impact -- net income impact to $3.2 million for the quarter or $0.03 a share. So if we add back the $0.03 a share to our GAAP EPS -- excuse me -- of $0.47, then that brings us to base EPS of $0.50 per share. Now last year's third quarter restructuring totaled $5.5 million. After tax that was 3.3 million or $0.03 a share. So if we add back that $0.03 to last year's GAAP EPS, the $0.57, then that brings us to $0.60 a share. So the year-over-year comparison is $0.50 a share this year versus $0.60 a share last year, with $0.08 of that being the incremental pension expanse that makes up most of the difference.

So with those restructuring elements in mind, let me just read out to you the full comparative income statement on a base earnings basis. And starting at the top, sales for the quarter were $930.6 million, and that is 12.5% below last year's $1.63.3 billion. And then a little bit later on, I will give you the usual year-over-year reconciliation. Cost of sales was 757.5 million versus 878.5 last year. The gross profit margin in the quarter was 18.6%, and that compares with 17.4% last year. so up significantly in gross profit margin, In fact, the gross profit margin was 18.3% in the second quarter and it was 17.6 in the first quarter, and going back to the fourth quarter of last year it was 16.9. So we are very pleased with the sequential improvement we have seen over the last three quarters in the gross profit margin.

And coming on down the income statement, selling, general and administrative cost was 98.1 million versus 93 million last year. That brings us to earnings before interest and tax, or EBIT, of 75 million in the third quarter versus 91.7 million in last year's third quarter. That is a difference of $16.7 million or 18.2%. Now, you remember of course that this year's numbers has this incremental pension expense, so absent that incremental pension expense, EBIT would have been down not 18.2, but 3.2%. So generally with that in mind, we were pleased with the EBIT performance in the quarter, especially compared with the sales decline of 12.5%. Walking on down the income statement, interest expense was $9.4 million versus 10.6 million last year. We had lower commercial paper rates, and that accounted for some part of the favorable $1.2 million difference. But frankly, most of the difference was due to the fact that we had a significant debt reduction.

And in fact, we have no commercial paper outstanding at quarter end. Then further down in the income statement, equity and earnings of affiliates is 2.4 million versus 3 million last year. And then non-controlling interest, that's what we used to call minority interest, is a negative $600,000. That's an expense of 600,000 versus last year we had income of $400,000. So that is a year-over-year difference of a negative $1 million. But actually that's a good thing, because what that represents again, minority interest is the partner share of profits or losses. So this represents improved profitability in our Asian operations as well as in our Brazilian plastics operations, and this minority interest just represents the partner share of that improved profitability. So at the bottom line, base net income is $50.9 million versus $60.6 million last year, and that is a 16.1% negative year-over-year.

Again, though, absent the incremental pension expense, that year-over-year negative would have been a little bit over 2% -- probably around 2.1%. And then at the very bottom, base EPS, as I said earlier, is $0.50 a share versus $0.60 a share last year. Now let's look at the segment reporting that's found in the press release. The numbers are in the press release, so I won't go over those, but what I will talk about is the increase or decrease from the prior year. Starting with consumer, consumer sales were down year-over-year by 1%, but profits were actually up by 45.5%. And that pension expense -- the incremental pension expense -- profits would have been up 61%. So this was a very solid quarter for our consumer group. In fact, it was the seventh consecutive quarter of year-over-year performance. Most of our operations in this segment showed solid year-over-year improvement, but especially our matrix plastics bottle business, our flexibles business and our composite can operation. Price costs and productivity were the big drivers that influenced the segment's profitability.

The next segment is tubes, core and paper, and their sales were down 20.5%, and EBIT was down 49%, which was actually much better than the first quarter, but relatively flat with the second quarter. Absent incremental pension expense, EBIT would have been down 34%. In our US tube and core business, volume in the third quarter was actually approximately 6% stronger than it was in the second quarter. However, again comparing the two quarters -- the second quarter to the third quarter -- price cost was at slight negative, and that's because with the some of our contract customers, we set the third quarter pricing based on an OCC level that was at the time $60 a ton. That would have been the June price, but then OCC moved up to $80 through the quarter. So we had a negative price cost squeeze there, a modest one, that affected the tube and core/paper segment. Interestingly, OCC expense moved down to $70 a ton, which should provide a little bit of margin relief in the fourth quarter. Also in this segment, our Asian tube and core business, although it is small, continues to show a nice year-over-year turn around.

The next segment is packaging services, and their sales were down 13.3% and EBIT was down 33.6%. Again, absent the incremental pension expense EBIT would have been down 21% -- just still a little off year-over-year, but with an EBIT of $6 million, this third quarter was much improved over the second quarter. In the second quarter, if you recall, EBIT was only $1.1 million. And then the last -- it's not actually a segment -- is the all other category. Sales were down 23%, and EBIT was down 53.8%. In that category, our baker reels business continues to be weak, and that just simply reflects the cable and wire market that they sell in to. So now let me turn to the sales bridge, and this is where we reconcile last year's sales of $1.63.3 billion to this year's sales of 930.6 million, and that is a difference of $132.7 million. So the make up of that 132.7 is -- starting with volume, volume was a negative $73.1 million.

Price -- and this would be price declines -- price was a negative $21.8 million and FX was a negative $37.9 million. So those three numbers -- 73, 21, almost 22, and 38 -- should add up to the 132.7 million shortfall. Let me start with volume. As I said, volume was a negative $73.1 million. The majority of that volume shortfall was in the tube, core and paper segment. Tube sales in the US were down 17% year-over-year. But again, remember, tube sales were down 22% in the second quarter year-over-year, and they were down 24% in the first quarter year-over-year.

So as I said earlier, we did see an improvement in volume, probably around 6% -- a little bit less than that --between the second quarter and the third quarter. However, it is still down significantly year-over-year. Europe tube volume was down 12%. In Western Europe, we saw volumes down 13%. All of the regions there were unfavorable. I'll give you an example of that, Germany, France were down year-over-year by 16%. But then our Eastern European businesses were unfavorable, but only to the tune of roughly 6% down. And then as I have said earlier, Asia but also Latin American volumes were up -- they were up a little more than 3% year-over-year. Now the composite can. Composite can volume was flat. We had short falls in snacks, much less than we did in the second quarter, but that was offset by powdered instant formula and coffee conversion. So put it all together, the composite can volume was flat year-over-year.

Flexible volume was down 5%, but that's actually versus 11% in the second quarter. So we saw some improvement. That was due to new candy volume at our Waco, Texas plant and some very good SmartSeal -- that's the reclose package -- SmartSeal volume in this quarter. In fact, that product was up 29% year-over-year and was a big reason for driving flexible volume stronger in the third quarter than it was in the second. Overall packaging services volume was down slightly year-over-year in total, but the mix was unfavorable because most of the shortfall was in our US Corflex business. And in the all other category, baker reels volume was down roughly 27%, and molded plastics -- which is selling largely into the industrial related businesses -- was down 20%.

The next item on the bridge is pricing. Pricing was negative $21.8 million. The majority of that shortfall is due to waste paper sales coming from our recycling business. OCC was down 30% year-over-year in the US; and because OCC is our primary raw material in paper making, that drop in OCC caused modest declines in the overall pricing of our paper and our tube products, especially with contract customers. Pricing was positive in the consumer segment, and that is due to early in the year price increases to cover higher tin plate costs. FX was negative $37.9 million, and that just simply reflects the strong dollar in the average rates during this year's third quarter versus the average in last year's third quarter. And that is sort of interesting, because the dollar has clearly weakened since the beginning of the year, but this is a third quarter to third quarter comparison, where the dollar was still stronger on average. So those are the components of the sales bridge.

Let me turn now to the EBIT bridge, where we are reconciling last year's EBIT of 91.7 million to this year's 75 million, and that's a difference of $16.7 million, and that is made up of the following categories. Volume mix is a negative $29.2 million. Price cost -- and this now includes energy and freight, as it has for some time -- is a positive $14.7 million. Productivity is a positive $13.2 million, and the all other category is a negative $1.7 million, and then incremental pension expense is a negative 13.8 million. And that should all add up to a negative $16.7 million. So again, volume $29 million, price cost 14.7, productivity, 13.2, all other, negative 1.7, and pension, 13.8 negative.

So let me start with volume. Volume is a negative $29.2 million. This just simply represents the loss profit on the volume shortfall that I just talked about that totaled $73.1 million. Price cost is a positive $14.7 million. From what I said earlier about the sales bridge, we saw the pricing decline by $21.8 million. So what this means is that the cost declined even more. Cost declined by $28.5 million, and then our best estimate of energy and freight is that these costs were about $8 million favorable year-over-year. So putting those three elements together, we end up with a net positive price cost of $14.7 million.

I have already mentioned that OCC dropped 30%. That is from an average of $110 a ton last year to $78 a ton this year. So that's the biggest driver in the costs. Our overall waste paper costs -- a whole lot of that is OCC -- at the mills dropped by 32%, and we had a similar decline in Europe. We also saw some costs, lower costs, in our flexibles division. Films were down anywhere from 18 to 23%, and resin costs in our plastics businesses were down 25 to 40% depending upon the grade. So all of that contributed to the positive price costs. Productivity was a positive $13.2 million. That is well above the first quarter's 5.4 million, and the second quarter's 3.5 million. In fact, what you have to do is go all the way back to the fourth quarter of 2007 to find a higher productivity number.

So we were real pleased with productivity in the quarter. It was good across all of our divisions. It was especially good in our US paper operations. There, our machine utilization was at 95% in the quarter. That is versus 87% in the second quarter. Downtime days in the paper division were 148 days in this quarter. They were 281 days in the second quarter. So the machines were running, and they were running well. And actually, paper division profitability -- or productivity -- was in the $5 million range out of that 13.2 million. And then last -- well, not last -- but other is a negative $1.7 million. This this is our catch-all category, and that includes savings from restructurings that we have done. It includes tight control over discretionary spending -- that's net of general inflation, and wage and salary and benefit increases. So all other is a negative $1.7 million.

And then lastly, pension -- pension is a negative 13.8, and that is just simply is year-over-year increase in pension expense. It was brought about by last year's negative 24% return. Just as information, by the way, our year-to-date pension performance through September is just a little short of 18% positive, so a little bit of a turn around there. Now let me go to cash flow. Cash flow in the quarter was extremely strong. Cash from operations for the quarter was $176 million, which was $9.6 million more than last year. But last year had a one-time insurance recovery in it that totaled right at $25 million. So if we take this in mind, the true cash from operations was almost $35 million greater in this quarter than it was in last year's third quarter.

Our working capital management continues to add value. In fact working capital added cash of $10 million more this year than it did last year. We measure ourselves in a number of different ways. One of them is cash GAAP days, and cash GAAP days stood at 38.1 in September versus 41.9 in June and 42.6 in March. So we saw good improvement there. And then looking at another statistic that we use, accounts receivable compliance -- which would be the percentage of the customers who are within terms -- that was 88% in this quarter versus 86% in June. So again, working capital's management has performed well. Free cash flow then -- and we define that as cash from operations minus capital spending and minus dividends -- was 123.6 million for the quarter, and for the whole year, cash flow -- free cash flow -- was $194 million.

Turning to our balance sheet, our balance sheet is strong. Debt was reduced by $98 million since the beginning of the year. $54 million of that was in the third quarter alone. Debt to total l capital is 31%, which is the lowest level that it has been since before 1990. And that is where I stopped looking, so I am not exactly sure where it goes back to. We had zero commercial paper outstanding at quarter end. So again, the balance sheet is strong -- stronger than ever. Let me turn to the forecast. This will be the forecast for the fourth quarter and for the full year 2009. Our guidance for the fourth quarter is $0.42 to $0.47 per share, and that will bring our full-year guidance to $1.62 to $1.67 per share. Our fourth quarter guidance is largely unchanged from the forecast that we gave in July after our second quarter.

Obviously for us then, the third quarter was a stronger quarter -- stronger than we projected. But we project the fourth quarter to be back in line with what that earlier second quarter or July projection was. In looking at the fourth quarter -- and now I am talking about the guidance of $0.42 to 4 $0.47 -- versus the fourth quarter of actual $0.50, there's a couple of differences that stand out. One big difference is taxes. We are assuming a 30.5% effective tax rate in the fourth quarter compared with 25% in the third quarter. The third quarter is when we adjust our 2008 tax accrual to the filed tax return. That's also when we fine tune tax reserves period. We will have no similar adjustment to that in the fourth quarter, and that probably accounts for about $0.03 of the difference.

From an operating perspective, we are projecting a seasonal drop off that we always see in packaging services and in flexibles. That is the November and December decline that's typical as the holiday volume goes away. We assume that in this projection, the tube, core and paper in the US holds, but we have also factored in what our customers are telling us about the holiday shut downs, and we are projecting a modest decline in Europe, and that is because we usually pay higher energy costs there in the fourth quarter, and we have factored all of that in. That means that for the full year at $1.62 to $1.67 per share will have played out pretty much as we expected it to. At the very first conference call that we placed in February, we projected 2009 EPS at $1.55 on the low side, and we said any upside would come from improved volume. And we did see improved tube volume. It modestly picked up in June in the US, and it has carried on through the third quarter, and we are projecting here on through rest of the year.

Our cash flow forecast for the year is for free cash flow to exceed $200 million. Now I know if you think about that, you think we are not saying a whole lot given the free cash flow is already at $194 million through three quarters. But as I have said, working capital management was extremely effective in the third quarter. What we saw in third quarter was with improved volume, that we saw some changes in that mix of working capital. The improved volume gave us overall higher levels of accounts receivable, and our receivables went up $28 million. We did see inventories go down, and we saw accounts payable increase by $41 million. So with the increased volume in the third quarter, receivables were up 28, payables were up 41. I think when we experience the usual December slow down, we will see some reversal of that $13 million accounts receivable/accounts payable difference. So maybe we have been a little bit cautious, but we have built some of that reversal into the fourth quarter guidance.

Last year, our fourth quarter free cash flow guidance -- or not guidance, but actual, was $10.7 million. The press release also mentions the likelihood that we will make at least a $50 million pension contribution by year end. Let me speak to that for just a minute. There have been some very new IRS guidelines; in fact, they are dated September 25th, and they have loosened the funding requirements for the year 2010. Nevertheless, we are still likely to fund 50 to $100 million by year end. These new guidelines let us use a more favorable discount rate, but that's only for funding purposes. It doesn't really change the economics of the unfunded position that we have. So what it boils down to is we have the cash; in fact, there's $194 million worth of cash on our balance sheet in total. Our balance sheet couldn't be any stronger.

There are really no significant acquisitions that are pending at the present time. So as I have said, we feel that funding between 50 to $100 million into the pension plan is probably the best use of our cash today. So with that, let me just summarize. We had a solid quarter. We were real pleased with it. If you recall, in July, we said that tube and core volume in the US had picked up in the month of June. We were pleased that that uptick in volume carried through the third quarter. It has carried through this -- so far into the month of October. Price cost was positive for us. Productivity was extremely good. So we were quite pleased with the overall quarter. So with those comments now, I will turn it over for questions, for Harris and for myself.

(Operator Instructions). One moment please while we poll for questions. Our first question comes from Joseph Naya from UBS.

Good morning, guys.

Good morning, Joe.

Morning, Joe.

Was just curious, in packaging services in the quarter you saw some pretty significant improvement there versus the second quarter. Are there any particular things going on there that led to that?

Joe, I don't -- this is Harris. I don't think there was anything in particular that caused it. We see -- in normal season we see a much stronger third quarter than generally a second quarter, and we saw that again this year. But that volume is still not back up to what I would call traditional levels at this time.

Have you seen -- I guess, what kind of trends have you seen there, and in other businesses in terms of customer activity? Have you seen any pick up or any sequential improvement?

We have seen sequential improvement quarter to quarter in most all of the businesses. And obviously the first cycle was done on the 1st, the third has been done on the second. So we have clearly seen that in most all of the businesses, and our customers -- I would have to say our forecast that Charlie referred to is basically a bottoms up forecast that starts with the customers, and I would say that our customers, based on what they encountered last November and December, are optimistic but very cautious. And I would say that our guidance reflects that same tone.

Okay. In terms of new products, obviously you have done well with the coffee cans and the infant formula. Are there any other things that you can point to at this point, or kind of what does the pipeline look like there?

Well, the pipeline for new products is quite strong. I don't know that Charlie mentioned it. But through the quarter we had -- year-to-date, we are at about $124 million of new products, so $125 million versus 136 for the total of the year last year. And I think it was about $42 million for the quarter. And in that we have some things that are actually grandfathering off. The Snack 'n Seal -- you mentioned the coffee cans, the Maxwell House coffee can, we have some other conversions and other things that are coming on as well, Joe. So we are quite optimistic and confident that we will hit that 125 to $150 million next year as well.

Have you seen a lot of interest from your customers in terms of rolling out new products? Or have you seen any sort of change there?

Absolutely, particularly on the plastic side. We have got -- you mentioned the coffee can, but then that, if you have got the lid and that. We have got some (inaudible) coils and some bottle sales -- some bottle sales. We have got a new 603 (inaudible) can that is out there. We have got some retorqued bows that are out there, so a potpourri of a lot of activity going on. We are quite optimistic about it, frankly.

Okay, great. Thanks a lot.

Thank you, Joe.

Thank you. Our next question is coming from George Staphos from Bank of America-Merrill Lynch.

Hi guys, how are you. Good morning.

Hello, George. How are you?

Not too bad. I guess the question I had to start, and if we look at it a little bit differently here -- we apologize, (inaudible) earnings. Even with the sequential pick up in the third quarter in tubes and cores and paper, the EBIT number, if we look at it correctly, didn't really move much from the second quarter level. If that's correct, what were the impediments to seeing a better, if you will, conversion of volume sequentially to dollar profitability?

George, let me comment just briefly. Obviously the tube/core/paper segment was up from the third quarter, and that would have been the volume, that would have been the 6%. It was actually about 5.7% if I recall correctly that it was up. And then where we did see some squeeze, we had a positive price cost in the second quarter in that particular segment, and a modestly negative one in the third quarter. And again, that is because we set those contracts prices when OCC was at $60 a ton, and then it promptly moved up to 80. And so I think that the volume was up -- the volume was there, or at least that improvement in the volume was there. But you did see a slip between positive price cost in second quarter and negative price cost in third quarter. And again, though I mentioned earlier, that that we may see some of that same impact in the fourth quarter because we would have set those same prices with the September OCC at $80 a ton, and then it probably moved down to $70 and I don't know what it will do through the rest of the year: But it probably show more weakness than strength.

Okay. Understood. I guess I would have expected to see a bit more incremental profitability given a sequential pick up in volume. But were there any other factors other than the price cost slip that kept, if you will, a lid on the tube and core segment profitability in the quarter?

George, I would say two things to that. Actually we had two product quality claims in the quarter that cost us 7.5 or $0.02 a share, which was very disappointing, and that one-time occurrence I think is behind. In addition to that, with better volumes on the industrial side of the business, we had some accruals of performance-based calculations that kicked in, and we had to go back to the first of the year and catch that up in the quarter as well. So that would be -- those would be the other two factors that would impact, and pulled earnings down a little bit.

Okay. Two follow-ons and I will turn it over. The product quality claims, can you give us any color on that? And my take on that was that it was a $0.02 in total impact, right, Harris?

I will say more to a 7.5, George.

Okay, got it. And the other thing, Charlie, do you happen to have for the consolidated operations, the pretax and after tax effect of the restructuring and the gain?

I do. Actually, looking at that, I walked down there -- I walked down this again. The EBIT impact -- there's a little bit of rounding here, so it's at $100,000 negative at the income before equity and equity line. And then so that the income line is $100,000 negative. There is no tax impact on that number. And then he minority interest is a negative 3.1 million, and that's what brings the total to 3.2 million. So as I'm looking across this, the as-reported EBIT was $74.8 million. $200,000 of restructuring takes that to 75 million, and then interest is unchanged, taxes are unchanged. That means that income before equity and affiliates is $49 million, and base equity and affiliates is 49.1. Everything is unchanged until you get to controlling interest, minority interest, which shows as a reported negative $3.7 million. I am going adjust out 3.1 of that to take that on the base earnings income statement to a negative $600,000.

Okay, thanks very much. I will turn it over.

Okay.

Thank you. Our next question is coming from Ghansham Panjabi from Robert W. Baird.

Hey, guys, good morning.

Good morning, Ghansham. How are you?

Good, thank you. So historically on tubes and cores, can you give us a sense as to what volumes do between 3Q and 2Q typically?

Between two and three? I don't know percentage wise. Charlie may. It is normally an uplift -- the third quarter is generally better than the second quarter. The fourth quarter generally reflects more like about the second quarter from --

But the 6% improvement is clearly up there, right?

Yes, it is.

And it is about what the year-over-year improvement was, because I said it was 22% down second quarter over second quarter, and 17 down third quarter-over-quarter. And when we compare just looking at volumes, this is another analysis the division does, it was up 5.7%. So I think all those pieces fit together reasonably well.

Okay, and then Charlie, you commented on the consumer business -- matrix plastics, saw some improvement there. Can you give us some more color there, please?

Well, the matrix plastics sales, they are benefiting from hand sanitizer sales, that in fact full running out. So I don't know that -- and that's obviously related to that H1N1 flu. And then also we had certainly seen improved product in the Ensure product and the Febreeze product, as well as running full out with some of that energy (inaudible) drink product that we do. So just a solid quarter for them from a volume perspective.

Okay, and just one final one, Charlie, if I could. On pension, if the year sort of ended today in terms of where discount rates and what your pension performance has done year-to-date, what can we look forward to for pension expense for next year in terms of the variance between this year and next year?

The one variable -- and I mentioned that we are running a little bit less than 18% as a positive return, but the discount rates will be down to a 5.5% range versus a little over 6. And so that is a negative factor. I think if you froze it right now, there would be about a $25 million improvement in our unfunded position. So it gets sort of washed out there. There's two things that will affect this next year. One of them is the change that was made in January to freeze the plan after ten years, and then the other change would be the -- just this improved performance, the net return versus the discount rate. And that will probably add 5 to 6 -- -- those two elements alone, if we just froze them now, is probably about $0.06 a share.

Okay, great. Thanks so much. That's very helpful.

Thank you. Our next question is coming from Chris Manuel with Keybanc Capital Markets.

Good morning, gentlemen.

Good morning, Chris. How are you?

Okay, thank you. A couple of questions for you, to kind of follow-up with what Ghansham was just asking. With respect to the volume trajectory. Was there any change as the quarter progressed, or was it -- the lift kind of came in June and running at that same improved June level the whole way through? And if you don't mind, Harris, could you kind of address that, looking both across the different pieces of business as well?

Well, let me take the tube and core business, Chris. I would say what we saw in June basically continued across the entire quarter in North America. We didn't see much of a pick up. But it stayed within a band. In Europe, actually the first part of the quarter was flat. We did see some improvement in Europe in September, and that is continued into October. So we are hopeful that we are starting to see some improvement in Europe on the tube and core business. I think Charlie comments on South America and Asia. Both of them were up low single digit range. On the consumer side, the composite can volume is showing more of what I would call a normal seasonality pick up that we normally see going into the third and fourth quarter, and that is probably the same for the rest of the consumer businesses, and I think I commented this response to Joe on the packaging services business.

That is helpful. At what point, with some of these industrial businesses, we start to lap some -- what are going to be obviously much easier comparisons in the next couple of quarters? Do you anticipate that at some point that starts to flip and turn? And when you anticipate some of those start to flip and potentially flatten out or turn positive?

I would think they would turn positive in the first quarter of next year. The third -- or the fourth quarter of last year, October was the reasonably strong month as I recall. And we saw certainly the downturn in October and November. So I wouldn't speculate on what the fourth quarter is going to be comparatively-wise. But clearly in the first quarter, we will start running into much some easier comps I would think.

Okay. That's helpful. And then last question I had was kind of two parts. It was on the restructuring side from some of the stuff you've announced, going from 19 divisions to 6. I think you mentioned a 20 million savings. How should we anticipate the phasing of that flowing through, is the first part?

Chris, we are in the embryonic stages of that now. We have obviously seen some of the savings, as we've had some reductions of people. There will also be some structural savings that will probably take place in the first part of next year. So I would think the second quarter of next year you should start seeing that coming in.

Okay. And then the second part of my question with the restructuring stuff was, from looking through that release, it seems as though most of that has generally been business realignment and streamlining the organizational structure?

That's what it was, Chris. The intention of this was obviously -- I mean, we reduced some costs, which is positive. But the idea and the objective of this was to basically streamline the organization to what we felt volume levels were going to be when we came out of this recession, and the organizational structure to grow the business for the next decade, and I think that's what we've done.

Okay, so maybe I -- as I look at how you have been running in kind of tube and core segments, with volumes off in the high teens, low 20s, you are kind of at about half of the profit level you used to be looking at last year or even going back to '07 or '06 sort of levels. It seemed that -- at least my impression was -- most of the actions were -- that you have taken thus far have been more personnel streamlining and less of structural, i.e, closing footprint consolidation, things of that nature. Have there -- A., maybe correct me if I'm incorrect there, but B., could you talk about the thought process to potentially address the footprint as well?

Well, that is an ongoing exercise, Chris, but you are -- in my opinion, you are incorrect as well, because this process started -- not the realignment process, but addressing the footprint basically started at the beginning of '08, and since that time, we have taken about 16% off the headcount out of the industrial side of the business and we've closed four paper mills -- I forget how many converting plants -- seven or eight in the process. So we have clearly been addressing that over the period of time. And there are a couple of more plants that will likely come out over the next 12 to 18 months internationally. And that is in the Q, I think, that Charlie is looking at.

That's right. We will delineate all that in the Q that will go out next week. But we have taken out a number of plants. I am just reading the 2009 actions, "The Company initiated closures in its tube and core paper segment, including a paper mill, five tube and core plants, three in the US, one in Europe, one in Canada." I think if I read through the rest of this, we would see that this has been an o going thing and there has been a lot of structural change.

So I would say, Chris, that we have been aggressively ahead of the curve, in what we thought the curve was going to be when we go -- when these volumes started falling in the middle of late '07 timeframe.

Okay. Thank you for the color, gentlemen.

You're welcome, Chris.

Thank you. Our next question is coming from Claudia Houston from JPMorgan Chase and Company.

Hi. Thanks very much. How are you?

Hi Claudia, how are you?

I'm good, thank you. Cash flow was quite strong in the quarter, and I know, Charlie, you talked about some of the puts and takes for the fourth quarter, but it still looks like you will finish in a really good position. I was wondering if you could just talk a little bit about your priorities for cash, how you are thinking about things, and then maybe just comment also on the M&A environment. I know you said when you were talking about the decision to put money into the pension, that there weren't any acquisitions sort of imminently happening here, but maybe just comment on the environment as a whole and what you are seeing out there. Thanks.

Claudia, thank you. As Charlie said, we have been looking over the last couple of months. We are not required to make a pension payment this year, and in fact, with the new regs of September ,we probably are not required to make one in 2010 either. However, we have, as you pointed out, generated a nice amount of cash this year. We have no commercial paper outstanding at the end of the quarter, and our debt to capital is, frankly, lower than I would like to have it. And as I look out over the next couple of years, I think we are going to see a fairly active M&A activity for the Company and environment driven by a couple of things, the least of which is not the fact that some individuals who own businesses, I think, appropriately think the taxes are probably going to go up in this country, and that the time may be to sell now rather than later.

So we are probably being a little conservative about our pension situation in saying we have the cash now, and why not go on and face the inevitable on the pension contribution; and we will probably do it before year end rather than wait into 2011 and '12 when we may be -- we would be more active, we think, in the M&A. Charlie said we don't have anything significant -- large significant acquisition on the burner at this point in time. I'd generally say I am not going to comment about acquisition activity, but Charlie has already commented on that. So I can't contradict my buddy across the table. But we do in fact -- we always have dialogues going on, and -- but that's still our top priority, and we will look from time to time at stock buy backs, and that's the second priority. So hopefully that gives you some flavor of my thought process.

Yes, that helps quite a lot. You mentioned that your debt to cap is probably a little bit lower than you would like. I mean, where are you really comfortable with that on a longer term basis?

I think we have been, obviously, over the 50% level. I think in the mid 40% level debt to cap is probably where we are more comfortable.

Okay. Great. Thank you.

Charlie is even agreeing with me.

Thank you. Our next question is coming from Chip [Dylan] from Credit Suisse Group.

Hi. Good morning.

Good morning, Chip.

First question, just on the pension, you mentioned that if you froze everything today, I guess the plant -- the liability would be 25 million lower. But when you look at the actual cash contribution commitment, do you see that changing a lot from this year to next year?

It would have the effect -- I don't know how to answer that because the Pension Protection Act rules are entirely different from the FAS-87 calculations, and that's why we said that the unfunded position hasn't changed substantially. We would still be around 28% unfunded at this -- if you just take into consideration the performance to date and the change in the discount rate. I would think that over the long haul -- and it would make some concessions, obviously, as a result of this relief act to put this Company in a position where they don't have to make a sizable contribution. But over the long haul, you have got to recover that deficit position. So before this, we would have said the thinking was that over about a five year period of time that unfunded position had to be covered. That's not true for 2010, but I don't know any reason why it wouldn't be true going out. So we certainly still have to have some combination of improved pension performance and funding to recover that negative position.

Got you. And Harris, I know you were talking -- not to, again, pry too close to the line here on acquisitions, but you brought up a great point ,which was, at the end of 2010, capital gains rates go up and there's a lot of other uncertainty about what people will pay when they sell their businesses or sell their stock. And my question, I guess, is when you sort of look at your flexibility, to look at all of your alternatives, what is your -- could you just review for us quickly what your unused lines are? You mentioned you don't have commercial paper out. Sort of what kind of capability would you have there, assuming you did issue equity.

Well, our intent would not to be to issue equity. But let me let Charlie talk about the credit side.

I can certainly talk about part of it. This isn't -- this third quarter isn't anything like last year -- or fourth quarter isn't anything like year's fourth quarter. We could certainly -- the markets have opened back up for us, and we could certainly issue debt, and it would probably be in the under 6% range for ten years. So I mean, that's always a possible.

Now our commercial paper program is a $500 million program. It is fully back stopped, and the back stops don't expire until the year 2011 -- I think it's April or May of 2011. And we have been in talk with the banks to know that those markets have opened back up again, so we won't have any trouble reestalishing the back stops when the time comes. So I think we have -- on the credit side, we have all of the flexibility that is required of us. And frankly, when we talk about pension and unfunded position, we consider that a debt, too. And so using some cash and/or debt capacity to pay down some of that unfunded position really is just a wash from that -- from the perspective of capacity. So I don't think anything we have said here suggests that we don't have the capacity on the borrowing side -- not equity, but on the borrowing side -- to do everything that we would expect to do inside our strategic thinking.

Got you. And then just last question, as we have kind of gone into this tail spin that hopefully we are on the way to coming out of, have you -- can you talk a little bit just in general terms about what your customers, especially on the consumer side, are thinking in terms of developing new delivery/packaging systems? I know hat's a big effort you have there, and has the appetite for that -- did it wane at some point? Has it started to come back? Or did it just remain constant throughout the recession?

No, Chip, it hasn't remained constant. I think the -- our consumer customers were clearly impacted by consumer spending turning down, and they reacted in advertising dollars and hunkering down. They certainly have not turned the funnels loose, but we're certainly seeing more discussions about sustainable packaging, about how we create new offerings that can help us grow the side of our business which fits right into what we are talking to them about, about creating value products. The new Maxwell House coffee is obviously a good example of that. They are advertising now this new package with the seal quick lid on it as a way to try to grow market share. So the innovation that we are doing plays into what they're trying to do.

Got you. Thank you.

Thank you very much.

Thank you. Our next question is coming from Steve Chercover from D.A. Davidson.

Thank you. Good morning.

Good morning.

When Charlie went through the EBIT bridge, I guess I would say that volume and price cost ratios are basically out of your control but productivity is perhaps the one thing that you can control. Is there still much to be secured there?

Absolutely. We have productivity efforts that go back eight to ten years, and it is based on lean six sigma, and we have a goal every year of trying to drive somewhere around 3.5, 3.75% cost out of the business on productivity. And when we look out into 2010 right now, I mean, we know basically what the 2010 productivity number is going to be because we have found if you don't have productivity lined up mid-year for the next year, that you generally just don't get it. So we have funded it, we've put people in, and we feel very optimistic about the ongoing productivity program.

Great. Many of my questions have been answered, but with respect to the cash, I heard you loud and clear that you would top up the pension, and you mentioned share repurchases as maybe a second priority. I am surprised that the dividend wasn't mentioned, since it's first year that you haven't raised it in decades.

Well, actually, you said some things right and some things wrong. Actually, our second priority would be to grow the business with acquisitions, and the share repurchase would actually be our third priority. Actually, our first priority is our dividend, because I would probably get lynched by shareholders if we did something with that. So obviously we will continue to pay the dividend, it is very important to us. We have the cash flow to do it, and at the appropriate time we will look to increase that.

Thanks very much.

You're welcome, thank you.

Thank you. Our next question is coming from Al Kabili with MacQuarie Group.

Great, good morning, guys.

Hello, Al, good morning.

Just Harris, I wanted to ask a question on the competitive environment, and one of your major competitors just recently emerged from Chapter 11, and I wanted to see if there has been any meaningful change in the competitive environment in tube and core?

I would say there has not been any increase or decrease in competitive activity than we would have expected in any kind of an economic downturn. In fact, I would say it has probably been less competitive in the activity than I have seen in other recessions, and the competitor you are talking about has always been a good competitor, and in fact they understand about making money, and I think they may have led the last price increase in paper. So competitive activity is quite good.

Okay. And what struck me, I guess, is that paper board prices have increased recently with OCC. I haven't heard the same on tube and core, and and usually that follows a paper price increase, so I wanted to get your thoughts there.

Following my lawyer's advice, I don't talk a lot about pricing on these conference calls, and -- but much of our business is under contract, and we are always renegotiating these contracts as we go along , Al.

Okay, okay. And then lastly, just wanted to clarify, on the guidance for 4Q, are you assuming tube and core volumes flattish sequential in the guidance? I am just trying to struggle with that if you take away the -- kind of the $0.03 benefit from the unusually low tax rate, you are at best flat sequentially in terms of earnings, yet you've got price mix potentially a tail wind, as you mentioned, in tube and core; you got a little bit of a benefit from FX. I mean, seasonally there's not usually too much difference. I am just trying to reconcile that.

Well, normally, what we are budgeting -- and I think our forecast -- is that we will see the normal seasonality in tube and core in the fourth quarter, which as we were saying, would be the normal shut downs that we would anticipate. And our customers, in particular the tube and core, generally take time down around Thanksgiving, and depending on inventories, around Christmas. And we are saying that we think we will see the normal year of that. And normally the fourth quarter is a little -- volume-wise -- is a little down from the third quarter, and that's what we are anticipating. To the extent that obviously the economy -- the inventories levels are higher, they are going to take more down time. To the extent that sales are better, they will probably take less. But that is about the best color we can give at this point, Al, to be perfectly honest.

Okay, okay. Very good. Thanks.

Thank you very much.

Thank you. Our next question is coming from Christopher Chin from Deutsche Bank.

Yes, thanks. Good morning or afternoon.

Good morning, Chris.

Just wondering, what is your normal tax rate? Like what should we use for 2010 and beyond?

Charlie? Yes, and we will obviously give that with some further guidance at our analysts meeting that's coming up. But I would expect it would be about 31, 31.5% would be the ordinary rate, and we have benefited from some of the tax planning initiatives that we have put in place. And they -- actually, I guess just thinking that through, this 30.5% we have projected into the fourth quarter doesn't have any special adjustments to it. So I would be inclined to think 31% would be a pretty good overall number to use.

Okay. And then I had a question about prospective margins in consumer packaging in 2010. Harris, I know you don't want to talk about the potential prices, but this is more a question about how your contracts are structured and the lags that may be in place between the movements and residents and plate costs. If those costs remain where they are today, should we expect a meaningful change in those margins in 2010 compared to where they are in 4Q?

If they were to stay where they are, I would not expect a meaningful change. I think the key to that is basically the timing of some of these contract. Some of them are reset at the first of the year, and some of them mid year. And we will try the to give you some more color of that in December, Chris, as we get further along and see what the movement really looks like.

Okay, so there are not any significant sort of lags that are waiting to be adjusted at the end of the year?

I wouldn't think so.

Okay. And then my final question has to do with tube and core margins and OCC costs. You mentioned that the higher OCC costs in 3Q were a headwind for margins, but you do your own collecting; so I guess I am wondering how -- what you pay as the point of collection varies with public OCC costs, whether that is just a one for one ratio there?

Not necessarily, but I think what Charlie was saying is basically on the tube and core side in the third quarter, we had an $70 OCC or $60 OCC at the beginning of the quarter, and we actually had $80 OCC, and that was the headwind that we had. I think he also mentioned in the fourth quarter, it reset in September at, I think, $80 a ton, and now it is $70 a ton, and we can speculate on what it is going to be over the next quarter. But we don't see a lot of variation on the course of a year in that, because we are restating that quarterly, Chris, to be honest.

Right. But I guess I'm wondering, how much variation in terms of what you would pay at the point of collection for recovered paper?

Well, I am not sure that there's a lot of variation. There was a -- we'll buy under different bases, so we might buy as a percentage below yellow sheet price or we may buy at a dollar amount below yellow sheet price. But whenever I was talking about the $78 compared to 110, a lot of our contracts we will us as an index the yellow sheet. But obviously, that's our basic raw material, so it goes into our production process. From that point that we buy OCC there's freight, there's bailing, and there's the whole collection effort. But our overall costs are going to run pretty much in proportion. So when OCC dropped 30%, and I made mention of the fact that our total furnished cost -- which is that loaded cost -- was down 32%. So they're moving in lock step.

Okay. That's helpful. Thank you.

Okay.

Thank you. Our next question is coming from David Lebowitz from Horizon Asset Management.

Good morning, or good afternoon at this point.

Hi.

Briefly, the acquisitions you're looking at, are they more consumer, or are they more industrial?

I wouldn't say they were more either, David. We are looking on both sides of the equation, with different types of acquisitions on both sides, but I would say it is probably 50/50.

Do you have a preference?

Well, I look at both of them differently, actually. On the consumer side if it is tube and core, there are consolidation opportunities, and they will have probably more of a P&L impact immediately because of consolidating into a number of our plants. I look at the consumer side more on the long-term growth side of it. So it is all a balancing act, actually.

And in terms of the pension funding, when we enter next year you said you don't have to make a contribution, but you probably will. Is that correct, Charlie?

That's correct.

And coming out of next year, presuming that the stock market is kind to you and meets your necessary allotment, where do you wind up? Will you then be equal to what you actually have unfunded, or will you still have an unfunding.

There would still be an unfunded position, because as I said, we're about -- our US plant is probably $260 million, $265 million unfunded today. So there would still be an unfunded position. But I will point out that any funding we would make in 2009 is really a carry over into 2010, '11, '12, and so we are really preserving that credit, or that carry-over credit, on into future years. So we are not doing anything to limit our flexibility here.

And the last question, what are your biggest concerns, Harris, for next year?

My biggest concerns clearly are the economy that we're going to be selling into, David.

And that pure and simple? There are no major accounts you are concerned about losing? There are no competitive evolutions coming up that would make you pause or anything of that nature?

Well, you have always got customers you are concerned about. You have always got competitors you are concerned about. But the things that would keeping up would be the general economy that we all are swimming into, and the rest of the things we will manage quite, well as we normally do.

Thank you very much.

Thank you.

Our next question is a follow-up from George Staphos from Bank of America.

Thanks. Hi, guys. I will try to ask in sequence since we are getting late in the call. A couple of questions. Harris, in the industrial business, given all the restructuring that you've been doing and the further productivity moves that you have underway, do you think you should be able to manage the upturn that we hopefully are in relatively well? Said differently, is there a level of volume pick up that would begin to impact your efficiency within tubes and cores and the industrial business overall? And then a related question -- I don't know if it is the number of emergency orders you get or lead times, or whatever metric you use to guage this, but does it feel like a normal recovery at this juncture given those metrics that you'd look at?

George, we have plenty of capacity. As we went through this realignment restructuring, we made certain that we had plenty of capacity to handle an uptick back to what we would consider would be a normal level. So capacity is not an issue with us, even our Millside or our converting side on tube or core -- or any of our businesses, for that matter. George, I don't know whether it is emergency orders. I don't think that's the right term. But clearly it feels like there is a slow uptick taking place in all of our businesses. I said earlier, we saw sequential improvement in all of the businesses, and that has continuing on into the October -- at least through yesterday and probably this morning.

So it feels like an unimprovement. I think we will see our customers -- as they approach the holidays, I believe last year they were expecting a much better holiday season than obviously they had. So I think a lot of the November and December slow down last year was anticipated, was because of inventories they had built that obviously were not moving. They have been pretty cautious this year in building that inventory and pulling it down, so I don't think there's a lot of inventory out there, and to the extent that we keep it this level we will continue where we are. If there's an improved consumer continuing to improve, we will continue to see an uptick.

It's kind of like a hand to mouth recovery, it sounds like.

It really is, I believe.

Harris, two last ones. One, in terms of the priorities for CapEx next year, do you think they are more new product or productivity driven? And then what is the latest with the GP arrangement? Thanks. Have a good quarter.

I think the bulk of the capital next year will be more new product than basically maintaining the productivity capital. We haven't gotten through the budgets yet, but the early signs say it's the case. The GP arrangement, we are in discussions now on a contract -- some contractual arrangements with the, and I think it would be a bit premature and presumptuous for me to comment more on that, George.

Okay, thanks, guys.

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, Shay. As Harris and Charlie mentioned, we want to extend an invitation to all interested investors to join us on Friday December 4th for Sonoco's Annual New York Analyst Meeting. The meeting will be held at the New York Grand Hyatt.

However, because of growth in participation, we are going toi hold our meeting in a larger conference room on the salon level of the hotel. The meeting will be webcast for those of you who cannot join us in person. As we have done in the past, Harris and Charlie and other members of our senior management team will be on han to provide you with an update on the Company's business performance in 2009, and offer an outlook for 2010. We will also supply you with information on new business developments, and have on hand some new products that we will be launching in 2010 as well. We will be sending out electronic invitations later today regarding the specifics of the meeting. If you are interested in attending, please RSVP us in advance so we have a better idea of total the number of participants.

As usual, the meeting will begin with breakfast starting at 7:30 a.m. and presentations will begin promptly at 7:50 a.m. The meeting should be concluded before 9:30 ,depending upon questions. Again, thank you all for joining us today. We always appreciate your interest in the Company. And always, if you have further questions, please don't hesitate to contact us. Thank you.

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