Sonoco Products Co (SON) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the fourth quarter 2009 Sonoco Products earnings conference call.

My name is Chanelle, and I'll be your operator.

At this time all participants are in listen only mode.

Later we will conduct a question and answer session.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today's call, Mr.

Roger Schrum, Vice President of Investor Relations.

Thank you, Chanelle.

Good afternoon everyone, and welcome to Sonoco's 2009 fourth quarter and full year earnings investor call.

This call is being conducted on February 10, 2010.

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 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 introduction I'll now turn it over to Charlie Hupfer.

Thank you, Roger.

To date, Sonoco reported fourth quarter sales of $1.0019 billion and EPS of $0.46 a share.

The EPS of $0.46 a share is in conformity with US GAAP which means it includes restructuring expenses and one-time unusual gains and losses.

Base EPS was $0.58 per share compared with last year's $0.49.

That's a $0.09 difference and a year-over-year improvement of 19%.

Now, base EPS excludes those restructuring charges and any one time gains and losses.

Our guidance for the quarter and that's the guidance that we updated on December 4 at our analyst meeting was for a range of $0.49 to $0.52, so we came in $0.06 per share better than the high side of the guidance.

So obviously, we're very pleased with this quarter.

Compared with our guidance, taxes were a little bit more favorable than I expected them to be when I gave the guidance, or the revised guidance in early December, and that added about $0.03 more per share than what I was thinking at the time.

The other pleasant surprise was that volume in the US was stronger in December than we expected, and that also meant that productivity was good.

So in other words, we didn't see as much as the usual December slowdown as we usually see.

I'll start off now by reconciling as reported results to base results.

In the fourth quarter 2009, we reported restructuring charges of $9.1 million.

After-tax, that's $6.5 million or a rounded $0.07 a share.

The restructurings comprised largely of hold over items from previous quarters.

Also, in the fourth quarter, we took a $5.3 million tax charge related to a tax law enacted in November in Mexico that effectively eliminated consolidated tax returns retrospective all the way back to 1999.

This equates to about $0.05 per share.

So if you start with the EPS of $0.46, add back $0.07 for restructuring, and add back $0.05 for Mexican taxes, you get to the $0.58 per share base EPS.

Now, doing the same thing to last year, last year's fourth quarter included pre-tax restructuring charges of $22.2 million, after-tax that was $13.1 million or $0.13 a share, so if you start with fourth quarter EPS of $0.36 and then add the $0.13, you arrive at $0.49 base EPS for 2008.

So the comparison that we'll be making is $0.58 this year compared with $0.49 last year.

Now, with the adjustments that I've just mentioned to arrive at base earnings, let me read out to you an income statement that's presented on a base earnings basis, and I've got two columns; one is for 2009 and the other is for the fourth quarter of 2008.

Starting at the top, sales $1.0019 billion and that's up 7.2% from last year's $934.6 million.

Cost of goods sold is $808.1 million and that compares with last year's $776.4 million.

Selling, administrative and other costs in 2009 were $108.8 million and that compares with 2008's $82.4 million.

So therefore, earnings before interest and tax, EBIT, is $85.1 million in 2009 and that's up 12.1% from last year's $75.8 million.

Coming on down the income statement, interest expense, net interest expense is negative $9.5 million and that compares with interest expense last year of $11.2 million.

Taxes are a negative $21.7 million this year compared with $18.5 million last year.

Equity and earnings of affiliates is a positive $5 million this year compared with $2 million in 2008.

And non-controlling interest, what we used to call minority interest is zero this year compared with $1.1 million last year, so that brings us down to a total net income of $58.9 million in 2009.

That's up 19.9% from last year's $49.1 million.

And then from that, EPS is $0.58 a share, up 19.1% from last year's $0.49 a share.

As I said a minute ago, EBIT was up 12.1% year-over-year.

If you adjust for the incremental pension expense that we incurred all year that's a result of the 2008 pension performance, EBIT would have actually been up 28.1%, and that's of course on this sales increase of 7.2%.

Doing the same thing to net income, net income was up 19.9% but again, if we adjust for the incremental pension expense, net income would be up around 35% again on a sales increase of 7.2%.

The gross profit margin was 19.3%, and that compares with 16.9% last year.

You have to go all the way back to the first quarter of 2007 to find a higher gross profit margin.

And in fact, this is the fifth highest gross profit margin on a quarterly basis over the last six years.

So my point is that operations were solid at the gross profit and operating line.

The EBIT margin was 8.5% and that's compared with [8.1%] last year.

The EBIT percentage trend has been positive all year.

It was 8.1% in the fourth quarter of 2008.

That's when we started to see volumes drop precipitously.

It dropped to 6.5% in the first quarter of 2009.

The EBIT margin was 7.8% in the second quarter of 2009, 8.1% in the third quarter and of course now it's 8.5%.

The effective tax rate is exactly the same this year versus last year at 28.7%.

As I said a little while ago, the tax rate was a little more favorable than I expected and that's for two reasons.

One was there was a fourth quarter change in Canada to the tax rate that favorably affected our deferred tax balances.

And then the second reason is there was a more favorable domestic to foreign mix than I had expected, and that influenced the effective tax rate in the year.

Our effective foreign rate is only 19%, and that compares with a combined US federal rate of 39%.

So we had a little higher mix of foreign earnings to domestic earnings.

Interest expense is favorable because both the commercial paper rate and the outstanding balances were well down from last year.

Now let me turn to segment reporting and that's found on page seven of the press release.

When we look at the individual segments, the consumer segment sales were up 8% and EBIT, our earnings before interest and tax, was up 48%.

This represents the eighth consecutive quarter of year-over-year improvement in the consumer segment.

The tube/core paper sales were positive 9.7%, while EBIT was negative 18.6%, but if you adjust out the incremental pension expense, EBIT would have been positive by 1% year-over-year.

In the US, we experienced a price cost squeeze with prices down and wastepaper costs relatively flat in this quarter compared to the last one.

But what was especially gratifying was that in the tube and core volume in the US was actually up 4.5% in the fourth quarter compared with third quarter levels.

So while we were relatively flat year-over-year sequentially we saw a nice improvement over the third quarter, and now I'm speaking again of tubes and cores in the US.

The next segment, Packaging Services, sales were up 7.6% and EBIT was down 17.8%, which is much improved over the third quarter and the third quarter EBIT was down 33%.

If we adjust for the incremental pension expense, EBIT would have been flat year-over-year in Packaging Services.

And then in the category all other, sales were down 8% and profits were down 4.5%.

Again, absent that incremental pension expense, EBIT would have been up in this segment 19%.

So here we did see some nice year-over-year improvement in our molded plastics and our protective packaging operations.

Unfortunately our reels business is still soft.

Now let me turn to the sales bridge where we reconcile last year's sales of $934.6 million to this year's sales of $1.0019 billion and that's a difference of $67.3 million and it's made up of three categories.

The first is volume.

Volume is $46.8 million positive.

Price -- price is a negative $12.6 million.

And then the third category is foreign exchange/other and that's a positive $33.1 million.

So those numbers should add up to $67.3 million.

And I'll comment on each of the categories, starting with volume.

As I said, volume was up $46.8 million.

When I look at the consumer segment, volume was up overall about 3.7%.

We saw especially good volume in our matrix plastic bottle business.

Their volume was up in the 26% range, and that's on the strength of hand sanitizer and Five Hour Energy Drink volume.

Composite can volume was up roughly around 2%, and here we saw coffee can conversions and powdered infant formula conversions more than offsetting the declines that we've seen in previous quarters in coke and in snacks.

Tube core and paper segment sales were up an overall 7.5%.

European sales were up 7%.

Western Europe was up 2.6%, but where we really saw the boost was in what we call frontier Europe.

It was up 33%, and it was led by Turkey up 44%, Russia up 33% and Poland up 15%.

So some good strength in what we call Frontier Europe.

Now in the US in our tube core sales were flat.

I sort of implied that a few minutes ago.

They were flat year-over-year with textile volume and film volume up year-over-year, but paper mill core volume and specialty tube volume down, but again I'll reiterate that is up 4.5% from the third quarter.

So we like the trend in the fourth quarter going on into the first.

Asia volume was up significantly, more than 30%.

That's across the whole region that we sell into.

US paper tonnage was up 7%.

That allowed for our machine utilization to be 93% in this quarter compared with 81% in last year's fourth quarter.

I'll talk about that again when I talk about productivity.

And then total Packaging Services volume was up around 10% with year-over-year growth principally at CorrFlex in both the US and in Poland.

Now, price, as I said, was a negative $12.6 million.

Only the consumer segment showed positive year-over-year pricing and this was due largely to price increases early in the year to cover those higher tinplate costs that were incurred early in the year.

Tube/core and paper pricing was actually down year-over-year and that's due largely to OCC based contractual resets.

So for example, last year's fourth quarter pricing was set based on $110 a ton and this year's pricing for the fourth quarter was based on $80 a ton.

So that had the effect of pulling down all the OCC-based contractual pricing.

In Europe, paper prices were down 13%, while in the US prices were down 9%.

And then this last category, foreign exchange and other added $33 million to sales, about $31 million of that is just translation and it reflects the weak US dollar relative to the Canadian dollar and relative to the euro, and that had very little bottom line P & L effect.

Now, let me turn to the EBIT bridge and here we're reconciling last year's $75.9 million to this year's $85 million and that's a difference of a positive $9.1 million.

And the components of that $9.1 million are volume and mix was a positive $13.2 million.

Price/cost and remember we include energy and freight in this category now is positive $3.8 million.

Productivity a positive $23.9 million, and then all other -- that's sort of the catch all category is a negative $19.6 million.

And then, incremental pension expense is a negative $12.2 million.

So a positive $13.2 million, positive $3.8 million, positive $23.9 million, a negative $19.6 million and a negative $12.2 million should add up to $9.1 million year-over-year.

Let me comment again on each of the categories.

Volume at $13.2 million represents the profit impact of the sales volume increase that I talked about on the sales reconciliation.

That was a volume increase of $46.8 million so this works out to be a contribution margin of around 28%, which is a little lower than usual.

A little lower due to mix, some of our domestic paper sales had a higher proportion of lower margin edge board and tissue stock relative to some of our core board and higher strength boards.

And in the Packaging Services segment we had more fulfillment sales at lower margins than manufacturing sales.

So mix played a part in the overall contribution of 28%.

Now price cost is reported as a positive $3.8 million, but when I look behind that, I see that price material cost is actually negative.

It's negative by approximately $2 million.

The year-over-year difference in freight and energy, however, was a positive $6 million.

So when you put the two together, we have a reported positive $3.8 million.

But the point here is that it's not really based on price material cost.

It's coming from lower year-over-year freight and energy cost.

Most of the negative price cost was in the tube/core paper segment, and that's due to how contracts reset plus the fact that OCC was declining in last year's fourth quarter, and it's been rising in this year's fourth quarter.

So to expand on that just a little bit, a lot of our contractual pricing for the fourth quarter will be set at September OCC levels.

Last year, OCC in September was $110 a ton and then it dropped to $95, $45, and then $25 in December.

So we saw a declining trend in OCC.

This year, September OCC was $80 a ton and that's what set the pricing for the fourth quarter.

It dropped to $70 in October, stayed at $70 in November and then went up to $80 in December.

So the trend going in a different direction.

Now, let me speak to productivity.

It added $23.9 million.

It was good across all of our segments.

It was especially good in the tube, core and paper segment and that was especially because of our domestic paper business.

And that's in part because we saw a much better utilization rate and we had a 56% reduction in down days in our paper mills year-over-year.

And then other-- the other category, as I said, that's our catch all category.

It's a negative $19.6 million.

Approximately $14 million of that $19.6 million relates to the year-over-year change in incentive and compensation related accounts.

Last year, we were reducing incentives and we were taking credits for stock related plans due to the falling stock price.

This year, the stock price is higher, so we're booking mark-to-market adjustments that are expenses and we're back to ordinary incentives, and so what most of that $14 million is is just a shift from credits last year to ordinary charges this year.

And then the last element is pension.

Pension is a negative $12.2 million.

We've talked about it all year and it stems from 2008's negative 24% investment performance.

So now with all that said, I'll turn to cash flow.

The cash flow statement is found on page eight of the press release.

Cash from operations in the quarter was $33 million but I will point out that that includes $100 million of pension contribution that we made in late December.

Cash flow for the entire year has also been outstanding.

Cash from operations, and again that's on page eight of the press release, was for the full year $391 million, and that compares with $379 million last year.

So that's a difference of a positive $11.6 million.

But again, this year includes the $100 million discretionary payment that we made at the tail end of the year into the pension plans.

And it also includes -- not this year, last year, it includes $40 million of insurance proceeds that were in the cash flow numbers last year.

So both the pension contribution and the insurance proceeds are pre-tax numbers.

So if I tax effect those, the true cash from operations year-over-year would be approximately $100 million positive.

And the way I arrived at that was to take the $11.6 million that is the stated amount of increase on the face of the financial statements and add $63 million, which is the after-tax impact of the pension contribution that was a discretionary contribution.

And then also add back the after-tax income for cash flow that we received last year from insurance proceeds.

And so I take $11.6 million plus $63 million plus $25 million to arrive at $100 million more operating cash flow this year than last year.

Turning to our balance sheet.

Our balance sheet remains strong.

That's also found on page eight of the press release.

Debt to total capital is only 29.6%, which is the lowest level that its been since at least the 1980s.

By comparison, debt to total capital at December 31, 2008 was 37%.

We had no commercial paper outstanding at year-end.

Total debt was $581 million and that's down $109 million from $690 million last year.

And cash on hand on the balance sheet was $185 million and that's up $84 million from last year's $101 million.

Now as I said earlier, we made $100 million discretionary contribution into the US defined benefit plan.

Our pension plan this year did earn a 22% return for the year, so we had a very good return performance.

We made that $100 million contribution, and then late in the year, we also saw an increase in the discount rate, up to 5.77%.

All that leads our funded plan, or our plan funded at a rate of 86%, and that compares with funded status of 69% last year.

And what it also does is it serves to reduce 2010's pension expense, and what that does is that leads me to now the 2010 guidance.

I'll pick it up where I left it off at our December analyst meeting.

At that meeting I said we would give EPS guidance for 2010 in the range of $1.95 to $2.05.

And that included an assumption that pension expense would be reduced year-over-year by the equivalent of $0.09 per share.

Now, since then, two things have happened since that December meeting.

First of all, pension expense should be further improved by another $0.04 a share, bringing that total $0.09 plus $0.04 to $0.13.

Our original $0.09 number assumed a pension contribution of only $50 million and in fact we made $100 million contribution.

In December, the fund had been earning around 18% and it finished the year at 22% and the discount rate moved from what we thought would be about 5.6% to 5.77% so all of that created less pension expense than we had otherwise expected.

The second issue is that fourth quarter volumes were stronger than we expected.

Volume always slows in December but, as I said earlier, it didn't slow as much as we had expected.

So as a result of all of that, we increased our guidance to $2.00 to $ 2.15.

To be honest the bottom side just simply reflects adding an incremental $0.05 and that's mostly for the pension differential.

The top side assumes that 2010 volume will grow a little bit higher from those fourth quarter levels.

So the top side includes not just the $0.05 of incremental pension but it also includes another $0.05 that we would attribute to just higher volumes.

So I know when I give guidance like this, $2.00 and $2.15, that that's a wide range but I do expect to narrow that range as the year goes on.

Now our first quarter guidance is for EPS in the range of $0.40 to $0.45 a share.

So obviously all of our guidance is based on the 2010 budget which was just approved today by our Board.

The guidance that I'm giving you includes overall volume growing in a range on the low side of around 4.1% to about 5.5% on the high side.

It also includes significant new volume growth coming at our CoreFlex operation to replace business that's been lost there as a result of a bid.

This guidance also includes the cost of reestablishing our 401k and the wage and salary increases that we had deferred last year.

Wages will go up around 2.5% to 2.75% effective February 1 for most of our employees.

The guidance also assumes the successful transition of our corrugating medium operations from contract selling to open market sales.

But in my opinion, the big difference between the high and the low side of the guidance is just going to be what happens with volume.

Now in the first quarter I expect a modest squeeze coming from the higher OCC costs.

Our first quarter contract pricing was set based on OCC at $80 a ton.

That was the December OCC level.

In fact, OCC rose to $110 a ton in January and then it went up again to $140 a ton in February.

That's the yellow sheet southeast pricing.

So we're certainly going to see some squeeze in OCC in the quarter and that's contemplated in the $0.40 to $0.45 guidance that we've given.

So our guidance for the quarter, as I've said, $0.40 to $0.45.

This takes into account a modest price cost squeeze due to OCC.

It also takes into account contractual resets to reflect resin pricing.

It takes into account seasonality because the first quarter is generally our slowest quarter especially on the consumer side.

And we are assuming approximately a 31% effective tax rate.

So with those comments on the quarter and on the forecast, I'll turn it over for questions.

(Operator Instructions).

The first question comes from the line of George Staphos of Banc of America.

Thanks, hi everyone and good afternoon, and good luck on the quarter.

Congratulations on the year.

Very quickly, Charlie, can you define what modest means in terms of price cost for the first quarter.

It would seem that with OCC being where it is now and knowing the tons that you buy, could have a fairly meaningful effect in the quarter.

How are you offsetting that either -- I mean, if you are limited pricing wise until the second quarter, do you have anything in inventory that you're able to use at the present time and how is that more of a modest hit than a bigger hit?

George, this is Harris, how are you?

Harris, how are you?

I'm fine, thank you.

George, obviously we've got that part of the business is already set the contracts, and obviously that is what it is.

So we will have a modest squeeze there.

We announced a price increase on February 1 on both the board side and the converting side.

And I would say we're getting good traction with that.

We're looking at -- forward looking at OCC and what we think OCC is going to do over the next couple months and contemplating future increases.

And we'll probably be fairly aggressive with that.

I would say that we've always had a very strong productivity initiative in this Company.

The way I define productivity in broad form, we had about $120 million last year.

So as we look out in the first quarter, and we look at our productivity efforts, we look at our recovered paper.

We look at the contracts that we have in place.

We feel like that we will be able to mitigate that run up in the quarter and obviously that's reflected in the guidance that we've given and we term that modest.

So I'd like to say it's herculean and we're covering it, but it's modest in our ballpark.

It's probably only $0.02 to $0.03 a share.

Two to three cents a share.

Okay.

Appreciate that color.

Second question and I'll turn it over.

Your businesses especially on the industrial side are pretty short cycle.

Generally your customers don't like to build inventory.

Nonetheless, with it apparent that OCC was going to head higher into the first quarter, do you think any of the better than expected volume was around pre-buying.

And then turning the question around, yes you seem better than expected volume and that's great, but how sustainable do you really think it is given the fact that your businesses are fairly short cycle.

And where you're seeing relative strength either across consumer or industrial?

Thanks.

George, you basically asked two or three questions.

The first one was about an inventory build based on OCC and I don't think there's any of that, actually, on the converted side.

For no other reason than the OCC was such a record run up, I don't believe you would have had any anticipation of that.

You could have had some small paper sales as a result of announced paper increases but that's minimal.

As Charlie said, we saw good volumes or better volumes than obviously we've seen some time in the fourth quarter.

As I look forward into this year and into the January levels, clearly the first quarter is always somewhat our lowest quarter.

But having said that we've seen at least no greater downturn than we would have expected, and perhaps a little upside in January in both consumer and in industrial.

Okay, I'll turn it over, thanks.

You're welcome, George.

Your next question comes from the line of Ghansham Panjabi of Robert W.

Baird.

Hi, guys.

Hi, how are you?

Good.

On the volume increase and matrix, Charlie I think you said up 26%.

Most of your competitors in rigid plastics certainly weren't close to that number.

Was there a big customer added in that segment?

Can you give us some more color there, please?

We have added some customers in that area.

I don't know that it was one big one or two big ones but we've certainly grown that business nicely over last couple of quarters, and I think it's an accumulation of all that.

And we did have some pretty high volumes tied to the energy drink and to the hand sanitizers that Charlie talked about.

But I think it's just a cumulative effect of how we've been growing that business.

Okay and then one thing that seems to be emerging is some of the big branded food beverage and consumer staple customers seem to be more aggressive in defending share against private label.

Has that benefited you on the branded side as it relates to your consumer business.

And also has that helped improve some of the backlog in Packaging Services too?

We certainly to the extent we have seen the defense of the branded products we will benefit from that.

We are benefiting and we will continue to benefit for it.

We also have some private label business which is obviously growing as well.

And we are seeing some pick up in the services side as I think we're certainly seeing more promotions in the fourth quarter.

And we've seen more promotions at least early in this year.

Okay, thanks a lot, Harris.

You're welcome.

Your next question comes from the line of Chip Dillon of Credit Suisse.

Yes, good afternoon.

Hello, Chip.

Charlie, I had a question for you.

Maybe I'm missing something but it looked like you might have shifted like $10 million in revenue from the consumer segment to services after the third quarter.

Did we get that right?

Was there a restatement there in revenues?

There might have been a modest shift and I don't have a number for that, but we do have a business.

It's our Trident business which does advertise (multiple speakers) -- brand management.

And we did physically move that into a different manager that had the effect of dropping that into the Packaging Services.

Okay, that might be it.

It's an amazing catch.

We try to do our homework.

Let me ask you this.

It's interesting how a lot of people that are subject to buying corrugated OCC out there are very nervous or at least guiding down their first quarter.

And is it just fair to say that your ability to move that pricing is much more realtime, if you will, because you're not making boxes?

In other words, what you got in January stuck in January?

I think, Chip, the strength of our ability goes back to our integrated system where we obviously have our collection facilities, which gives us a significant leg up because we are selling to the outside world and covering some 40% or so of that run up.

That, plus the way we manage the business with contracts, with pass throughs, and just the way we fairly aggressively move pricing.

If you look back historically, you look back over the last three years, five years, eight years, 10 years, we historically have had positive price costs.

And as a result of all of those things -- and the model is working the way it should.

Got you, and last question.

In light of maybe what's happened in Europe and maybe that's not going to be a big deal and just in general, is there any risk or are you concerned that maybe some of the strength you saw in December -- and I know this was asked differently, might have been sort of a buy ahead?

And it looks like you are taking it rather conservatively.

You aren't really bolstering the guidance that much beyond the pension.

But could we actually see it go the other way a little bit in the first quarter?

Or are your backlogs making you feel like no, that wasn't just an accelerated buy in December?

Well, obviously that was question that I think George Staphos asked earlier, and the answer is we see no indication or pseudo indication of a buy in.

Now, our order cycle is a pretty short cycle.

We don't carry a lot of inventories, our customers don't carry a lot of inventories, and what we see talking to our customers is their business is improving; continues to improve.

And we are seeing that in our business and we don't see any indication of an inventory build frankly anywhere around the world.

Got you, and then the last thing is it kind of rung very clearly and now that you touched on this a little bit in December.

But with your balance sheet again being the strongest position its been in decades, do you still see as I think you suggested back in December that there's still some good solid assets or businesses out there that you could see buying this year as people look at what might happen to their personal tax situations, et cetera?

I think that situation still exists, Chip, and I'll be very disappointed if we were sitting here in 2011 and Sonoco was sitting here with the same debt-to-capital ratio that we have today, and had not made taken advantage of some of those opportunities that I am certain will be there.

Thank you very much.

You're very welcome.

Your next question comes from the line of Claudia Hueston of JPMorgan.

It's actually Ariel sitting in for Claudia.

How are you?

Hello, how are you?

I'm doing well.

I had a question on the consumer business.

Your margins have improved -- I think they were up almost 300 basis points year-over-year.

Just was wondering of you see any type of a margin squeeze there from resin prices going up?

Obviously, we've seen resin prices escalate in the last couple weeks but most of our plastic businesses, they are under longer term contracts that have pass throughs.

And while we may lag or get ahead in the quarter, generally they reset over time.

I would say that if you look at the whole consumer segment and you look at that margin increase, we've had a lot of start ups in that business that it's all been dragging let's say for the last 18 months or so.

Those businesses, those operations are up and running close to expectations now and so that has clearly improved the overall margins of that sector.

And just a follow-up on that.

Can you be a little more specific on what consumer businesses have ramped up?

Well, we had several start up plastics businesses and you start up a business, obviously it doesn't hit full speed in day one.

So they are pretty mostly hitting up close to full speed and we've had a small operation in Asia that was a start up and it's performing much better.

So overall, obviously the sector is up and we're seeing improved margins but I don't see anything that's going to squeeze those margins in the short-term.

Okay, thank you.

You're welcome.

Your next question comes from the line of Chris Manuel of KeyBanc Capital Markets.

Good afternoon gentlemen.

Hello, Chris how are you?

Oh, just another exciting day.

A couple quick questions for you, first more of a bookkeeping one for Charlie, I think.

In equity affiliates that seemed to jump up quite a bit.

Was there anything unusual in there or is this, can you give us a little more color just on that specific component?

There really wasn't anything unusual.

There was the equity component -- Conitex is a Company that we have a joint venture with whenever we joint ventured our tube business from a decade ago, and their business was much improved.

Showa Products is our Japanese affiliate and their business was much improved and then RTS which is the partitions joint venture that we have.

I think that they all just showed improvement year-over-year and I think that reflects the same sort of trend we saw in the industrial side of our business.

So there really wasn't anything special there but it was a nice pick up.

So this is probably then a reasonable run rate to consider for 2010?

It's probably on the high side, but nevertheless not far off.

There's always some year-end adjustments, but by and large, that would be on the high side but reasonable run rate.

That's helpful.

And the next component I wanted to maybe get into a little bit was I missed some of the volume numbers that you gave out.

You talked about matrix being up 25, 26%.

Could you run through a few of the other key components, composite can, tube core et cetera, as to how those did in the quarter.

Where specifically maybe some of that upside came from?

Sure, and matrix volume was up and I think that just reflects some of the changes that we've talked about.

Composite cans volume was up probably in the 2% range.

And where we saw there was the food can and that's principally the coffee can conversions were a big part of that, as well as there was still some year-over-year growth in powdered infant formula, that conversion.

So we were up significantly in those two major conversions that have taken place recently.

And they were offset by snacks, which have been down year-over-year, and caulk cartridges, the paper caulk cartridges that sell into the housing industry have clearly been down year-over-year.

So we had a net that netted out about 2% positive with all the positive really coming from coffee conversion; PIF conversion.

But then there was some other categories, motor oil was up, nuts were up.

All in all it was a good volume quarter for the domestic composite can business.

In Asia our volume was up, rigid plastics volume was up.

So we had good volume increases generally in the whole consumer segment.

And on the tube and core side?

On the tube and core side, Europe was up around what did I say, 7%, 7.3%, and in the US it was flat.

But that was a mixed bag because some of our volume like textile volume was up 21%, film volume was up 6 but paper mill core volume was down year-over-year, which I think just reflects what's going on in the paper industry.

Our Asian tube and core volume was up significantly, it was up about 30%.

We were up 14% in Latin America.

All of our regions except Venezuela were strong.

Paper was up both in the US and in Canada.

Paper recycling was up.

So as opposed to the first, second and third quarter, this was a nice turnaround where I'm talking about volumes up.

Volumes were up as I may have said in the Packaging Services overall $11 million.

And was down some of that pass through volume was down.

So our CorrFlex volume was up $16 million, so generally good volume increases.

That's helpful, and then kind of as we translate that into 2010, I think you kind of if memory serves laid out the volume assumptions that you originally had of -- I want to say it was 6% or so in the consumer side and 3% in the industrial side with half of that being the corrugated stuff.

Could you maybe update us and give us the new ends of those ranges would represent with your extra volume in there, embedded into your guidance please?

Sure.

I can come close to that.

In the guidance, we would have assumed that the industrial side of our business is probably up let's just say 5.5%.

And now of course some of that is already in the bag because we obviously had a good fourth quarter and we're assuming that we're growing from those levels.

Volumes in the consumer side, and I'm speaking generally now, would have been up about 1.5%.

But I did talk about just a moment ago about the loss of some business due to a bid.

If we took that into consideration, volumes there would have been up about 3%.

And if we put it all together, the blended average would be somewhere between 4 and 4.5%, and then that goes up on the high side of the guidance more like 5.5%.

Okay, so 4% to 5.5% for consumer, that's what's in your 2010 guidance assumptions?

Correct.

Consumers, well no, blended is about 4%.

Industrial would be higher, more like 5.5% and consumer more like 3%.

Of course, we're talking about year-over-year comparison so the consumer side of our business wasn't down as much as the industrial side.

Okay, that's helpful, thank you.

You're welcome.

Thank you, Chris.

Your next question comes from the line of Al Kabili of Macquarie.

Hi, good afternoon guys.

Thanks.

Hello, Al, how are you?

Good, thanks.

A question I guess on how the corrugated medium sales to external customers outside of GP -- how is that ramping up?

Al, I would say it's positive.

We have a ramp down with GP over four quarters but the outside sales are going -- I would say above expectations.

Okay, and so are you sold out at this point, of I guess what is it the 25% in the first quarter, that you'd be selling externally?

We're sold out through February.

Okay.

And then switching back to CorrFlex a little bit, the lost bid that you highlighted, was that something that occurred new in the fourth quarter or are you talking previously?

It occurred in the late third quarter, fourth quarter.

And then how should we think about the sales impact or rough order of magnitude, how much of a head wind this presents as we look to 2010?

And what's your outlook for CorrFlex?

Are you seeing any signs of more promotional activity on the display business?

We've made estimates that there's about $40 million at risk, probably a little bit less of that will affect 2010 but that's a pretty good order of magnitude.

Okay, and then how about the outlook?

How is bidding activity shaping up?

Are you seeing more opportunity in terms of bids?

About the same?

We've not only seen it, we've picked up some nice new business particularly from our corporate customers without naming which ones.

And we fully expect to cover that $40 million, Al.

Okay.

Great and then final question is on the tube and core business; the better seasonal trends which were surprising.

Any sense as to whether some of that might be share gains at all or do you see your share relatively stable at the moment?

If I had to guess I would say the share was relatively normal.

That could have been a small amount of share gain.

I think the gratifying thing to me is I think we've certainly seen a market pick up.

And as Charlie mentioned wherever we look around the globe, we are seeing it.

Whether it's Asia or whether it's in Frontier Europe, Western Europe, South America or North America, we are seeing improvements in those market segments which is obviously not only helpful for Sonoco but for everyone in general.

Okay good, and then lastly on use of free cash flow.

Given the strength and your leverage, I know the priority is acquisitions but have you considered more on the share repurchase front at all?

And I guess given you just got out of a Board meeting, any hints on what you might do with the dividend this year, thanks.

Well, we approved the dividend which I think was announced earlier this morning or last evening.

So going forward, we've always said that historically we look at the dividend in April and we will do that.

There's always a bias, we have 26 or 27 years of increasing dividends.

There's no guarantee of what we will do, but we will clearly look at it and do what's appropriate for our shareholders.

The cash, you hit the nail on the head.

Our first priority is going to be to grow the business.

And I said earlier to someone I'm going to be very disappointed if we don't take advantage of our cash position, our leverage position and make some nice acquisitions this year.

But we're not going to be foolish about it.

We will stick to our criteria of being accretive in the first year and returning our cost of capital in a three to four year period of time.

So we've always said at the end of the year if we haven't made acquisitions we would look at a share buyback.

Historically we've done that in the past and I wouldn't rule it out, but it's clearly not our first priority.

Okay, great.

Thank you.

Thank you, Al.

Your next question comes from the line of Christopher Chun of Deutsche Bank.

Thanks, good afternoon guys.

Chris, how are you?

Great, thanks.

Charlie I was wondering if you could give us a few more details on the pension plan.

I think you mentioned that it was 86% funded now but can you give us some specific numbers on what the fair market value and the projected benefit obligations are?

The total plan, we're talking about the US defined benefit plan, which we have really curtailed last year at this time, 10 years out.

So the plan will be in decline but the total portfolio at December 31 was $782 million and that compares with $605 million last year.

We were 86% funded in this year, 69% funded last year, and we have a pretty balanced portfolio and overall came in at 22% for the year, 3% in the fourth quarter.

Okay, and then what will the actual expense be in 2010?

Well, what we were saying is that the actual expense is about $55 million this year, and I had projected it would go down about $21 million or $23 million as a result of the changes that I talked about.

That's the $100 million.

That earns us at a rate of 8.5%.

The 22% we earned versus an 8.5% assumption will earn us something else and then the discount rate changes as well.

So those three factors alone amount to about $0.13 of year-over-year improvement in EPS terms in the pension plan.

I'm looking for some notes that I made that I sort of reconciled that on the back of an envelope to see if I could -- here they are.

I think that I have got them right here.

What we would expect to see is a combination of the asset performance at 22% and the $100 million contribution should provide us with a $15 million pre-tax savings year-over-year from the return component.

And then because we assume in our calculation that we'll earn 8.5%, we actually earn 22%.

And that creates a difference as well that gets amortized and that's over 11 years, which I think is about right.

And so that would give us another $7 million of year-over-year improvement.

So when you put it all together it's about $22 million of year-over-year improvement on a pre-tax basis times the tax rate -- we've been using 39%, so after-tax 61.

So that's $0.13 a share.

Okay, and then on the cash side, do you plan to make a contribution this year?

Well we didn't have to make a contribution.

We had assumed we would have to make contributions beginning in 2010, 2011, 2012, 2013 and on out.

But in September when the IRS changed the rules and gave us much more flexibility on the discount rate, it put us in a position where we did not have to make a contribution in 2010.

And so we really pre-funded for obviously for different reasons but that $100 million serves as a credit.

So it's entirely up to our discretion whether we would fund in 2010, probably on into 2011 and 2012.

Okay, and then on the acquisition front, I was wondering, Harris, if you could give us some more guidance about the types of things that you would be looking at either in terms of size or type of business that you're looking at or how important those strategic considerations are versus just financial discipline.

Well, the strategic considerations are critical to it.

And that is one of the gates.

It's got to be strategic to our businesses.

Now, and having said that Sonoco doesn't need another platform.

I think our business model that we have today is what we need.

Will support our growth clearly over the next four or five years.

But the bent would be to we've said we want to grow our consumer businesses.

So the bet would be on the consumer side of the business.

Having said that, as we see opportunities to further consolidate the tube and core market around the world, we'll certainly take advantage of that.

As to size, I'd like to make one or two large acquisitions and not have to make small ones.

But in our space, so many of these companies are small in the $50 million to $75 million range.

I suspect that we'll see some $50 million to $100 million acquisitions.

As far as geographies, you shouldn't be surprised to see something in Europe.

You shouldn't be surprised to see something in South America, and you shouldn't be surprised to see something in North America.

So I guess what I'm saying is we've got at any time discussions going on around the world and that's certainly the case as I sit here today.

Okay, thanks for your help guys.

You're welcome, Chris, thank you.

Your next question comes from the line of Dan Khoshaba of KSA Capital.

Hello, Harris, Charlie.

It's good to see my old friend Chip Dillon can still find them.

Anyways, Charlie, you had said I believe last quarter that there would be some provisions that would result in a little bit of a step down on some of the film or flexible packaging products.

If we take that apart, what's your expectation -- or take that and remove it let's say from your flexible division; the contractual declines in pricing.

What is your expectation for price and have you guys been impacted at all by this move towards private label?

I know you're a big supplier to P&G and a lot of the big global brand names.

What's taking place there?

Clearly, as you look at the marketplace and you read and any time we go through a recession such as we've been going through, you see the consumers taking advantage of the private label and you're seeing retail food chains pushing their private label.

I think today about 16% to 17% of the US market is in private label.

For instance, I think Kroger has about a 35% of their total sales.

So clearly it's growing place for the business.

About 12% of Sonoco's consumer sales are to private label companies and that grew in 2009 or 2008 about 9% year-over-year.

I suspect it probably grew greater than that last year although I don't have the numbers, but we have a plan to benefit from that growth on the private label side and clearly we are seeing that.

Well, that was my second question.

And so as you think about -- you answered it without me asking, but I guess when you look at acquisitions and capital expenditures within the film flexible packaging industry, are there specific areas where you'd like to see a little bit of a better balance whether it's private label or confectionary.

How do you think of the end market opportunities opposed to just the overall segment of flexible packaging?

Well clearly we segment that as cookies and confection side.

We're doing some pouch making, we're doing some pouches, we'll continue to see that grow.

And I'm not prejudiced whether it's branded or whether it's private label.

I'll take either one that makes sense and gives us the returns.

Okay, great.

Last question, just real quick.

There was a February resin price increase and I don't know if it stuck.

I know that resin costs went up a little bit in December or January.

There was some talk that resin suppliers might not be in the favorable spot as they were at the end of the year only because exports have trailed off a little bit, and demand is still relatively soft overall for a resin.

What's your view on polyethylene prices, both in terms of the February announced increase and going forward.

Dan, we think that in the short-term, you're going to see some resin price increases.

We think that probably by March, mid-March, April, you probably should see some tailing down on it.

There's been a lot of capacity taken out of the resin side with down time.

And as that comes back I think the supply side will probably drive that down.

Okay, great.

That's how I read it for what it's worth.

Good enough.

Good quarter guys.

Thank you, Dan.

Thanks.

And your final question comes from the line of George Staphos of Banc of America.

Thanks, hi, guys.

A couple quick ones hopefully to finish up.

Charlie, you mentioned what your capital spending was going to be this year, if not could you remind us?

And how do you see that trending between the larger businesses?

Well, I can give you our estimate in total.

For the year, 2009, we were at $104 million and we've assumed that we would be more like $125 million to $130 million in 2010.

Last year, 2008 was $123 million.

So sort of an ordinary run rate might be in the $125 million, so that's what we're expecting to go back to; $125 million to $130 million.

That answers the numbers part of the question.

George, obviously, we went through this in the budget session and I don't have it in my mind but clearly, we've got a lot of growth projects in the pipeline, particularly on the consumer side of the business.

I would have to guess that the majority of this spending, the growth capital is clearly on the consumer side of the business.

The maintaining is whatever the maintaining is.

Is it fairly evenly split, Harris?

No, I don't think it is, George.

I wasn't finished, between geography, so are you growing the domestic consumer as quickly as you're growing international consumer or do you think you are --

We are growing the domestic consumer more rapidly than we are the international consumer.

Okay, I appreciate that, and--

We can give you more color to that but I just don't have it off the top of my head, George.

I understand.

I guess the last questions then, are there any things that Rob Tiede is doing now that he's back in packaged services that might help the performance on a go forward basis?

And as we think about consumer excluding package services and CorrFlex, are there any larger contracts we have to be aware of whether it's composite cans or flexibles that could come up in 2010 or 2011?

Thanks very much and good luck in the quarter.

George, Rob went into that business in June, the first of July.

Rob is obviously very experienced.

He's been in that business and we have seen improvement in the third quarter and the fourth quarter compared to year-over-year under Rob's leadership.

So clearly Rob is making the impact and I expect that to in fact continue.

I'm not aware of any big contracts that come up this year.

We have contracts that come up all the time.

We may have a Pringles contract that is in the process of being renegotiated as we speak that terminates some time in the Summer for North America.

But off the top of my head, that's about it, George.

Thanks very much guys.

Thank you very much.

And there are no further questions in the queue.

Thank you.

As a reminder Sonoco's annual shareholder meeting will be held on Wednesday, April 21 starting at 11 AM Eastern Time at the Center Theatre which is located at 212 North Fifth Street in Hartsville, South Carolina.

For those of you unable to attend in person it will be Webcast on the Investor Relations website of Sonoco.com.

In addition, our first quarter 2010 earnings conference call will be conducted at 11 AM on April 22.

Our earnings release will be issued before the market opens that day.

We'll be sending out electronic invitations regarding the specifics on the Annual Meeting webcast and the first quarter earnings conference call.

Let me again thank everyone for joining us today.

We appreciate your interest in the Company.

And as always, if you have further questions please don't hesitate to contact us.

Thank you again.

Ladies and gentlemen, that concludes the presentation.

Thank you for your participation.

You may now disconnect.

Have a great day.