Sonoco Products Co (SON) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Sonoco earnings conference call.

My name is Katie, and I'll be your coordinator today.

At this time, all participants will be in a listen-only mode.

We'll be conducting a question and answer session towards the end of today's call.

(Operator Instructions) I would now like to hand the call over to your host for today, Mr.

Roger Schrum, Vice President of Investor Relations.

Please proceed, sir.

Thank you, Katie.

Good afternoon, everyone, and welcome to Sonoco's 2010 first quarter earnings investor call.

This call is being conducted on April 22.

Joining me today are Harris DeLoach, Chairman, President and Chief Executive Officer, and Charlie Hupfer, Senior Vice President and Chief Financial Officer.

Our financial results for the first quarter, at least before the market opened today and are available on 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 guaranteed for 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 nonGAAP financial measures is available on our -- in our annual report and on the Company's website.

Now with that introduction, I'll now turn it over to Charlie Hupfer.

Thanks, Roger.

Today, Sonoco reported first quarter sales of $935.1 million and earnings per share of $0.48 per share.

The EPS estimated $0.48 is in conformity with US GAAP, which means it includes restructuring expenses.

Base earnings per share is $0.50 per share and base EPS excludes restructuring.

This base EPS of $0.50 per share compares with last year's $0.29, so that's a 73% year over year increase.

Our guidance for the quarter, which we gave in February was $0.40 to $0.45 so we came in $0.05 above the high side of the guidance.

It goes without saying then that we were pretty pleased with the way this quarter unfolded.

The recovery that we thought started for us in the third quarter of 2009 has obviously carried forward through the first quarter of 2010.

Let me start now by reconciling as-reported results to base results.

The only difference this quarter is restructuring charges that total $3.9 million pretax.

The majority of the expenses are severance related to plant closings.

We also had embedded in that number a gain on the sale of property and France.

After tax the restructuring charge is $2.4 million or $0.02 a share.

So if you start with the EPS of $0.48 and add back the $0.02 for restructuring, you arrive at $0.50 per share.

First quarter 2009 restructuring charge is $7.2 million pretax, $6.1 million after tax or $0.06 a share.

The bulk of the restructuring related to the closure in this quarter was for the closure of the paper mill.

So adding back $0.06 the EPS gives us in the first quarter of 2009 base EPS of $0.29 per share.

The comparison then that we think is most apt is $0.50 this year versus $0.29 last year.

So with these restructuring adjustments in mind, let me read out to you an income statement on a base earnings basis.

I'll start with sales.

Sales were $935.1 million.

That's up 16.8% over last year's first quarter of $800.6 million.

Cost of goods sold is $759.4 million and that compares with last year's $659.8 million.

Selling, administrative and other costs were $96.1 million in this quarter compared with $89 million last year.

So that would bring us down to earnings before interest and tax of $79.6 million which is up 53.4% from last year's $51.9 million.

And after that following down the income statement, interest expense is a negative $8.4 million and that compares with last year's negative $9.6 million.

Taxes are negative $21.7 million compared with $14 million last year.

Equity and earnings of affiliates is a positive income item of $1.4 million compared with only $100,000 last year and then minority interest is $100,000 is a positive number so it's 0.1 compared with 0.9 or $900,000 last year.

So the bottom line net income is $51 million in this year's quarter up 74.9% up to last year's $29.2 million.

The gross profit margin in the quarter was 18.8%, and that's down slightly from the fourth quarter which was 19.3% , but it is well ahead of the first quarter of 2009 where gross profit was 17.6%.

In fact, after the fourth quarter of 2009, this quarter's 18.8% is the highest gross profit margin going back all the way to the first quarter of 2007.

So we were very pleased with just the operating performance of our division.

The EBIT margin is 8.5%, and that's consistent with fourth quarter of 2009.

Interest expense is $1.2 million favorable to last year.

$700,000 of that is the result of a fixed floating swap that we have in place that converted some of our fixed rate debt to floating-rate debt.

The rest is lower commercial paper rates and lower commercial paper balances.

And then the effective tax rate in this quarter is 30.4% compared with 33.2% last year.

Last year we had an unusual charge in Italy, otherwise last year's rate would have been 31% which is pretty much in line with this year's 30.4%.

This year we did benefit from a higher manufacturing deduction in the quarter as well as a favorable mix of lower tax foreign income.

Now let me turn to the segment, our segment reporting is found on page six of the press release.

Our consumer sales were $381.6 million, that's up 7.5% over last year.

Profits were $45.7 million, and that's up 15.9% over last year.

This is the ninth consecutive quarter of year-over-year profitability in the consumer segment.

In the consumer segment, volume growth was positive in all of our divisions and productivity was good.

The tube and core paper segment showed sales of $369.9 million, and that's up 28.3% and it showed profits of $21.5 million which was more than three times last year's profit level.

We saw a significant uptick year over year worldwide in our tube and core businesses.

Packaging services sales were $111.9 million, and that's up 20.5%.

Profits were $5.1 million compared with only $700,000 last year.

In this particular segment volume was good and mix leaned towards some higher value services.

And then, lastly, the all other category showed sales of $71.1 million, that's up 11.1%.

Profits were $7.4 million up 43.8%.

Both our injection molded plastics businesses and our protective packaging businesses showed solid year-over-year sales improvement.

Only our [Baker Reels] business hasn't really shown any particular sign of recovery yet.

Now let me move to the sales bridge where we reconciled last year's $800.6 million to this year's $935.1 million.

That's a difference of $134.5 million.

So on our bridge analysis the first element is volume.

Volume was positive $71.5 million.

Price was positive $16.9 -- $16.7 million, foreign exchange positive $37.1 million, and then other is $9.2 million positive.

So those numbers should add up to $134.5 million.

Let me start with volume.

Volume overall was up, as I said, $71.5 million or 8.9% year over year.

Looking at it in terms of our segments, our consumer segment volume was up approximately 5%.

Our composite can volume in the US was up around 2%, a little bit less than 2%.

That's lead by the coffee conversion, increased powdered infant formula sales, and dough volume.

It is interesting in this category, call cartridges were up almost 24% which suggests some year-over-year strength in the housing sector.

We did experience weakness as we have in the past in snacks, nuts, and in the concentrate category.

Metal end volume was up around 15% with growth domestically and especially good growth in Latin America.

We had exited Brazil about three years ago, but we're putting a renewed focus on Brazil right now.

We're serving some of those same customers out of the US, and that contributed to that 15% volume growth.

Our matrix plastic volume was up around 17% which speaks to the year-over-year improvement in the health and beauty aid category.

Our tube and core and paper overall segment volume was up around 12% in the US, and in Canada we saw nice volume increases.

Paper mill core volume was up around 5%.

Textile volume was up a striking 38%, and tape and specialty volume was up 9%.

So the year-over-year comparisons were real positive.

That's a comparison against the first quarter of 2009.

The first quarter generally is our weakest quarter from a volume perspective of the year.

So the comparisons I just gave you are valid comparisons.

If I go back and look against the fourth quarter of 2009, just the fourth quarter, all of the segments were flat or up except paper mill cores, and that's probably due to a big fourth quarter push on the part of the paper companies to get those black liquor credits.

So we take that as a real good sign that the recovery is still going strong, because otherwise we would have expected shortfalls in the first quarter compared with fourth quarter.

In Europe our tube and core volume was up around 18% in tonnage terms, a little bit less in unit terms.

Legacy Europe, which is largely Western Europe, was up 15%.

Frontier Europe was up 29% with places like Turkey up 38%, Poland was up 18%.

Our Asia tube and core business was up 35%, our South American business was up 13%.

And our domestic paper operations, and this is largely selling tissue and tile board, were up 13.5%.

So very good volume throughout the whole tube, core and paper segment.

Packaging services volume was up around 15% with increases in both the US and in Europe.

And then the all other category, volume there was up around 11% and that was lead by molded plastics and protective packaging.

Now the price.

Price overall of the [affected] sales was $16.7 million.

Virtually all of that is in the tube, core and paper segment.

$21 million of that $16.7 million, so more than all of it, was related to an increase in our US recycling operation and that's where we saw average quarterly prices up $112 a ton.

Just as a note, Southeast Yellow Sheet was $80 a ton in December , in January it moved up to $110, February it moved up to $140, and In March $175, and then in April , this would be the beginning of April, it dropped down to $145.

So if this first quarter while we were averaged roughly $140, about $142 a ton for OCC, well up from December .

We did see some modest price declines in the consumer segment and that's largely due to contractual reductions and year-over-year resin decreases.

Now, foreign exchange was a positive $37.1 million.

That's just simply the weak dollar versus all of the other currencies that we deal in, the Euro, the Canadian dollar and so on.

That's all translation.

It has really a negligible effect on net income.

We tried to calculate that and it comes out to probably no more than $1.5 million of profit impact.

And then the other categories that relates to sales is 9.2.

This is where we account for our corogating medium sales and it's also netted some acquisition and disposition activity.

Now to the EBIT bridge, and this is where we're reconciling last year's EBIT of $51.9 million to this year's EBIT of $79.6 million.

That's a difference of $27.7 million positive EBIT.

Volume mix the first category is $22.4 million of that.

Price/cost, and if you remember now we include energy and freight in that category, price/cost is a negative $13.5 million, productivity was $22.7 million, the all other category is negative $12.5 million, and the year-over-year pension difference is a positive $8.7 million.

So to sort of reiterate that, volume 22.4, price/cost negative 13.5, productivity positive 22.7, other a negative 12.5, and pension a positive 8.7 and that should add up to $27.7 million of positive EBIT difference year over year.

The volume at $22.4 million represents the profit impact on that volume that I talked about with sales bridge of $71.5 million.

That works out to be an integrated contribution margin of around 31%.

In terms of price cost, a negative $13.5 million, this is the net of that positive sales price that I talked about, that positive $16.7 million, less higher material costs which would be around $32.8 million, and then we did have favorable energy in freight of $2.6 million.

So it's the net of those three numbers.

Tube and core and paper makes up $11 million of the negative $13.5 million.

This is a year-over-year comparison.

Our US paper mills did see recovered paper costs increased by 52% percent year over year and in Europe they increased roughly 40% year over year.

There's no question that we got squeezed in the first quarter.

If you remember, the way it works for most of our contracts we set our first quarter 2010 prices based on the December Yellow Sheet and that was $80 a ton.

The Yellow Sheet for the quarter then, January, February, March, as I said earlier, averaged $140 a ton.

So we were squeezed and that's what you see in this price cost number.

This first quarter squeeze was mitigated by inventory rollover.

In fact, we had some inventories at the $80 and also increased profits in our recycling operation.

Now productivity is a positive $22.7 million.

That productivity was generally good across all of the segments and all of the divisions in the segment.

I think this is a tribute to our productivity program, to our scrap reduction program.

It's certainly also a tribute to just the good volume that we had.

And an example of that would be our paper mills in the US and Canada had a utilization rate of 101.7% in this quarter versus 87.1% last year.

In Europe the utilization rate was 97.1% versus 87.7% last year.

So the machines were running well, a lot of volume through the whole organization.

This was actually the second-best productivity quarter since we started reporting these bridges, and that's after the fourth quarter of 2009 which would have been the first productivity.

Now to other, that's a negative $12.5 million.

This is our catch-all category.

It includes $5 million for wages and salary increases.

We suspended wages and salary increases in 2009 and we reinstated them effective February of 2010.

This also includes more normal incentive accruals and other inflationary costs.

And then pension, $8.7 million.

This reflects last year's positive investment performance which was 22%, plus it reflects the impact of that $100 million pension contribution we made in late 2009.

I will point out here that our overall year-over-year savings in pensions or reduced pension expense is probably will the better way to say it, would be about $26 million, which means that we'll have proportionally less of a positive impact in the second, third, and fourth quarters.

Now let me turn to the cash flow statement.

We had another solid quarter in terms of cash flow, operating cash with $73.8 million, that's down slightly from last year.

It's down $1.7 million.

Two big reasons for the change year over year.

One's positive and that is after-tax profits were up roughly $25 million.

The second reason is working capital though was a use of funds of $23 million higher this quarter than last quarter.

We always have a working capital build in the first quarter of the year.

Last year that working capital build used cash of $21 million.

This year it was a use of cash of $44 million, so that's a difference of $23 million.

I will point out that this is entirely attributed to the higher level of business activity.

One of the ways we measure ourselves is on cash GAAP days which is days of receivables plus days of inventory minus days of payables.

Cash GAAP days were actually six days less this year's March versus last year and actually almost two days better than our December numbers.

Our global accounts receivable compliance rates 89% versus 85% last year.

Capital spending was $28.5 million versus last year's $34.6 million.

I still predict, though, that capital spending will still end the year about $125 million to $130 million.

Our balance sheet is strong.

The debt to total capital dropped from 29.6% at year end to 29.2%.

The total debt was down $3 million.

Cash was up, or increased, by $3 million.

Let me wrap up now with our guidance for the second quarter and for the year.

We're projecting the second quarter in the range of $0.52 to $0.56 and we're projecting the full year at $2.15 to $2.25.

This is based on a forecast we rolled up from our divisions in mid March and then we made some adjustments to reflect the bigger-than-expected drop in OCC which will significantly and positively affect our industrial businesses but it also assumes some higher paper costs that can't be recovered in composite cans until the second half of the year.

It also assumes a drop in packaging services income because we're projecting fewer launches and less high value added rework in the second quarter.

And also we'll have three months in the second quarter -- I'm sorry, yes, three months instead of two months for the wage increase, and probably that pension differential I talked about will be about $0.01 per share.

So when you put all of that together, we feel pretty comfortable with $0.52 to $0.56.

In short, we're forecasting a recovery to continue.

We're forecasting a strong second half of the year, especially the third quarter which is typically our strongest.

For the full year we expect to be between $2.15 and $2.25 and that is up substantially from our earlier guidance of $2.00 to $2.15 as the guidance we gave back in February.

I think the difference between the high side and the low side of the guidance is going to be how volume develops as the year progresses.

So those are my comments.

We'll turn it

(Operator Instructions) And your first question comes from the line of George Staphos from Banc of America.

Please proceed.

Thanks.

Hi, guys, good afternoon.

I guess maybe a quick question to piggy back off the guidance discussion you're winding up here with, Charlie, and maybe you mentioned and I had missed it.

The high end of the range I think went up less than the low end of the range on guidance.

So what else might be behind your thinking in that?

I would just really tighten the guidance.

We gave that earlier guidance.

We used a pretty wide range just simply because of the uncertainty.

I think with each passing quarter we ought to be able to tighten that range a little bit.

So really the things that I talked about are just the only real differentials.

Okay.

Now, realizing that many of your businesses are quite short cycle given their nature, the nature of the products, are there any business -- and, therefore, your visibility longer term isn't perhaps what you would like it to be, although you've done a good job of forecasting so far, are there any businesses that are trending perhaps less well early in the second quarter than what you saw in the first quarter?

And just in general, if you walk around your various key products, how is second quarter starting out thus far?

Nothing is trending down.

I talked a little bit about some of the things that we expected to see.

Our rigid paper containers second quarter is going to be seasonally lower than the first quarter.

We would not expect to have the same level of profitability in our services segment.

All of those things were factored in, but none of those really reflect what you're getting at, and that is any fundamental changes in the trend of our business.

So when you look at our fundamental businesses and the general trend in composite cans, plastic bottles, tube and cores, there's nothing so far in April that suggest that what we were seeing in January, February and March and the fourth quarter and the third quarter before that has changed.

So the recovery still seems to be well intact for us.

And I would add to that, George, you're saying the same trends around the globe, whether it's South America, Europe, Asia or North America

Okay.

Thanks for that, Harris.

I guess the last question I have and I'll turn it over.

Just can you update us on how the reintroduction, if you will, of the medium out of Hartsville is doing in the market, how it's being absorbed?

Thanks very much

It's going very well.

I think we're sold out through the next couple of months, George.

Okay.

Thanks.

I'll turn it over

Next question is Claudia Hueston from JPMorgan.

Please proceed

Thanks very much.

Good afternoon.

Good afternoon, Claudia.

I just wanted to ask a little bit about your volume expectations for the year.

I think last quarter you talked about growth in the industrial business at the mid point of the range around 5.5% and in the consumer I think you were looking for about a percent and a half.

Are you still comfortable with that or given the strengths you've seen, are your expectations a little higher now?

We're still comfortable with that.

Our expectations are a little higher than that.

We're comfortable.

We've seen it continue to trend up, Claudia.

And if it continues, we'll be, we'll be better than that.

Okay.

That's great.

And then do you have any thoughts on what OCC will do for the next couple of months?

Let me see if I can get my crystal ball to work.

I think you will see OCC drift down in this month.

Speculation of anywhere of $10 to $20 a ton.

I think it's going to stay in that range, the $125, $135 range until the third quarter.

And then I think you'll see some seasonal, seasonality comes on, the collections come out, I think you'll see a drift down.

I still think you'll see OCC in the $100 range by fourth quarter.

That's Harris DeLoach's crystal ball.

Others are probably different

Okay.

That's helpful.

Thank you very much

Thank you, Claudia.

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

Baird.

Please proceed.

Just in terms of price cuts, surely, if you could, are you forecasting to be caught up on price by the second quarter on average?

On average that's right.

There's some things, a lot of the price costs that's in this quarter that I talked about is, some of it is just simply the 2009 effect.

So if we go into 2010 in the second quarter, we'll see a lot of that price cost flip on us.

So, for example, in the tube and core side of the business, we'll set prices at $175 a ton.

OCC is already at $145 a ton.

So I would expect we'd see a nice pickup there.

On the film side of our business a lot of that price cost stemmed from the dynamic of higher prices in the fourth quarter of 2008 rolling into 2009.

So the negative price cost is not so much the 2010 impact, it's the good price, it's the good price cost we had in 2009 that's reversed on us.

In the second quarter a good part of all of that goes away.

I didn't explain that real well, but the fundamental answer is that I think most of the price cost is behind us as it relates to 2010's second quarter and really then on into the third quarter

Okay.

I got you.

Then in terms of new product sales, obviously a nice improvement on the consumer side.

Can you split for us what percentage truly are new products for your customers versus just products that have been repackaged?

Do you have any way of doing that?

Gosh, I would say probably 100% of that consists of new products that probably we did not have before.

Okay.

Okay.

That's very helpful.

Thank you.

You're welcome.

The next question comes from the line of Chris Manuel from Keybanc Capital Markets.

Please proceed.

Good afternoon, gentlemen.

Hello, Chris.

How are you?

I'm okay.

Thank you.

A couple of quick ones for you here.

First, if I could back up or come back to the price cost discussion.

So as you go here from 1Q now into 2Q, what have you embedded with respect to price costs for both 2Q and for full year in your expectations?

Let me see if I can tell you what I think, and I'm going to let Charlie give you what's embedded in the numbers.

Well, your crystal ball has been pretty good so far.

Well, thank you.

Clearly we saw, as Charlie -- as we all know, we saw OCC go up pretty dramatically.

Charlie mentioned the fact that our contract customers on the tube and core side reset as of the 1st of April at $175.

So obviously we've got recovery and benefiting from that going down.

For noncontract customers we have two price increases in the marketplace, one as of I think February 1, and we've gotten good recovery of that.

The second one we've gotten certainly some recovery from that as well.

And I expect in the second quarter and certainly as it roles into the third that we will have recovered that.

On the consumer side that was mainly plastic resins and film which we saw increase in the first quarter.

We have prices in the marketplace plus we have contract resets.

And I think the estimates were the middle of the second quarter we would have recovered that and become price positive going into the balance of the year and that's basically where we are.

That was the negative part of the price cost, Chris.

Now, what was actually embedded, Charlie, you may have a better feel than I do.

Well, we can't get at it that way, probably wouldn't even want to, but what we did was when we rolled up the forecast in March, it would have had assumptions around price costs.

We did make an adjustment for the fact in April OCC dropped and we added some to price cost and buried that into the guidance as we should.

So I really don't know how to answer that, but a big part of the answer is as we look forward, we don't have a lot of price costs other than what I just said billed into the second quarter, and that's because it really is the way things unfold.

Depending upon how prices, for example OCC, go up or go down, it gets caught up in the next, that's right, when the next calculation, whenever we reset prices.

So we wouldn't build into our reforecasts in the third and fourth quarter anything significant in terms of price cost largely because we never get very far away from a reset that mitigates that up or down number.

So, if I can maybe summarize, it sounds like 2Q you're assuming price costs to be a positive contributor as opposed to negative in 1Q, but --

Positive as opposed to negative, that's right.

Neutral to positive.

Neutral to positive, okay, but for full year probably if I were to look at all 2010, probably pretty much a neutral, is that -- ?

I would say that's fair.

In our numbers that's right.

Okay.

That's helpful.

And then as we look at the volume trajectory, clearly very strong here in 1Q and I know it's difficult, I'm going to ask you a difficult question.

But as you look at your customer's customers, how much of this do you think is restocking or rebuilding up folks' inventories that were just grossly depleted and how much do you think is end-market demand or, in other words, do you think we continue at this pace for a while or have we kind of gone through that reinflated the restocking bubble?

Chris, you talk about our customers' customers.

You almost have to look in your own pantry to see how much you've restocked.

But traditionally there's not a lot of stocking or restocking that goes into it.

There's some obviously, but we have generally two or three weeks' lead time.

Our customers don't carry a lot of inventory and most of this clearly is customer demand or consumer demand that we're resulting from.

And I don't see any signs of that changing.

And when I talk to our customers, as I have a lot in the last 30 days or so, they're not talking about it.

They're seeing demand and expected to continue and hopefully we'll see the same seasonal effect that we always see resulting in the first quarter obviously being the last -- the lowest quarter of the year.

So we're pretty bullish about the balance actually.

Okay.

That's helpful.

And just the last question I had was as we sit here today in late April, are you thinking about uses of the cash as the year goes on?

I saw you bumped the dividend yesterday, but how should I think about uses of free cash as the year goes on?

It looks like you've got your commercial paper lines all fully paid off.

What would you anticipate?

Well, as we've always said, Chris, our first priority is going to be on growing the business.

We are clearly seeing a lot more organic opportunities than we've seen in the last 18 months or so.

And Charlie and I were talking this morning that our guidance is still $125 million to $130 million for CapEX.

I would not be surprise to see us go forth off that if these opportunities continue to present themselves.

So we will obviously fund those.

We're always looking for acquisition opportunities that fit our criteria and our portfolio and we obviously are looking at those around the globe today and there's probably more activity there than I've seen in the last 12, 18 months.

And those will be our primary uses of cash that being our primary uses.

Thank you.

Good luck.

The next question comes from the line of Joseph Naya from UBS.

Please proceed.

Good afternoon.

I was just wondering in the services business obviously you had a few challenges there over the past year or so.

What are your thoughts in terms of the rate of recovery?

It sounds as though you maybe have a little bit of a step-back here in the second quarter with fewer launches but kind of looking out through the rest of 2010 and out to 2011 and beyond?

Well, Joe, as we've said, that is at least for Sonoco the large business and the fulfillment -- the POP business is basically a second and third quarter business.

And, of course, the pack services is this consumer demand.

And obviously we saw good volume in both of those in the first quarter of the year as we saw more launches in the first quarter of the year.

We would expect the second quarter would be step back some because traditionally the beginning of the second quarter, April and May, we don't see that many launches.

But certainly we saw more demand coming in that business in the fourth quarter, late third quarter and fourth quarter last year and carried over to the first quarter.

I would expect the contract packaging to carry over to the second quarter.

So we're anticipating certainly a much stronger year than we had last year.

In 2011 I'm not sure I'm into that yet.

Okay.

And kind of looking at the tax rate, it looks like it came to a little bit better than expected.

Was there anything in particular going on there?

And kind of going beyond that, it seems as though some folks have been talking about actually seeing higher tax rates as a result of the health care reform.

Do you have anything built into your numbers around that?

I'm going to let Charlie answer that.

One more thing on the pack services.

We've previously said that we had lost a customer that would be phased in on the second and third -- first and second and third quarter this year in the pack services arena and we obviously will be seeing that.

We've recovered probably three-quarters of that volume we've recovered at this point, but we will still have the effect of that as we go through but we have positive signs for that business obviously through the balance of the year and into 2011.

Charlie, do you want to talk about the tax?

The tax, you're right, the rate is down a little bit and I think it's really coming from two things.

One is we saw with higher pretax profits a higher-than-expected or at least higher than we had previously projected manufacturer's deduction.

That was a part of it.

And the other part of it is, as I mentioned, the international mix.

We did some restructuring of our businesses in order to do some tax planning, which favorably affected that rate.

So going forward I would expect a rate of more like 30% in the second, third and fourth quarter on average.

And so some of it is the manufacturer's deduction, some of it is some of the tax planning that we put in place at the very tail end of 2009.

You also ask about the Healthcare Reform Act, and we did not have any impact in the Healthcare Reform Act in the first quarter and do not anticipate having any as a result of that.

We do not take any subsidies, so that's not what we've been reading in the paper doesn't affect us at all.

Okay.

And then looking beyond 2010 on the tax rate, what should we be thinking about there?

Beyond 2010?

Yes.

I would guess that a more ordinary rate probably is the 31%, 31.5% kind of rate but that's actually a little bit past my planning right now.

We feel pretty comfortable with a 30% rate through the rest of the year.

And, frankly, if you go back and just look at the last several years, we have been running in that high 29% to 31% range, if I recall correctly.

So I wouldn't feel uncomfortable with anything in that general area.

Okay.

Thank you.

You're welcome.

Thank you.

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

Please proceed.

Thanks.

Good afternoon, guys.

Good afternoon.

How are you?

I'm great.

Thanks.

And congrats on a very nice quarter.

I just wanted to ask about your operating margin in consumer packaging.

If I look back at the last five quarters or so, your margins have been meaningfully higher than they were in the years -- in 2008 and prior.

I was wondering if you can talk about what drove that margin expansion and whether there might be anything of a temporary nature.

First of all, I don't think that anything of a temporary nature.

I think they're sustainable.

If you look back the last couple of years, we had a number of startups of new business in there, there were plastics, and there were basically mostly plastic operations but also some composite can operations in Asia and other parts of the world.

And as we've gotten those up to our normal operating levels, obviously those lower operating levels improved.

And, also, just general productivity in all of our business has just been quite good the last couple of years.

And I would say the combination of all of those resulted in the higher margins.

Okay.

Great.

So you don't see anything as of now that would cause margins to retreat back to -- ?

I don't see anything on April 22.

I don't see anything now that would create problems with those margins.

All right.

Fair enough.

Thank you.

And then in terms of what happened with OCC, I was actually a little bit surprised that you weren't hurt even more than you were in terms of price cost there.

Can you remind us about how much you collect and how much you might sell to the outside versus using internally?

I'll be glad to.

Well, we said at the time we gave the guidance for the first quarter there was probably $0.03 or $0.04 of OCC embedded in that guidance because when we gave it in February, we knew that OCC, we already knew the January and February numbers.

So clearly we were impacted by OCC in the first quarter, there's no doubt about it.

But Sonoco's system worked -- integrated system worked like I would expect it to work in that we collect about somewhere over 3 million tons of OCC and use about 1.5 million or so on a global basis.

So as we see OCC going up, we're selling that excess to the outside world and making a profit on it as it goes up.

Those outside sales, the profits on those outside sales help buffer the increased costs that we've got.

Traditionally, we buffer about 40% or so of that going up.

Between that and raising prices, the contracts plus inventories that we may have on hand, as Charlie said, some inventory, we were able to do that.

But I think it speaks to the strength of our integrated system and if you go back and look at passed run-ups in 2007 and otherwise, it's not different than what we've had in the past.

Okay.

Great.

And then my final question concerns depreciation.

If I'm looking at it right, it seems that that number was relatively flat year over year, but it came down significantly quarter over quarter.

I was wondering what drives the quarterly variation there and what we should use for our modeling for 2010 and 2011?

Restructuring would be one of the things that we'd take out.

Restructuring as we take out some of those assets, impairments and/or restructuring, that number would be coming down, also just the number of days in the quarter would have been a part of that effect as well.

But I think overall there's probably nothing to read into a change in depreciation.

Okay.

And then looking at the rest of 2010 and 2011, do you expect depreciation to be roughly flat with where it was last year or to be changing meaningfully?

We -- I'm looking at sort of a back-of-the-envelope cash flow forecast that we made after this last forecast.

And last year 2009 the total year depreciation was $174 million and the number that's on this page is $170 million.

So I think it's fair just to use a flat number year over year.

Yes.

It sounds like flat to maybe down slightly.

That's fair.

Yes.

Okay.

Very good.

Thanks for your help, guys.

You're welcome.

The next question comes from the line of Al Kabili from MacQuarie.

Please proceed.

Hi.

It's MacQuarie, but thanks, guys.

How are you?

Good, thanks.

I wanted to circle back on the 2Q guidance a little bit.

Understanding that price costs switches from certainly sizeable head wind in the first quarter to flattish in 2Q and broadly seasonally 2Q is usually stronger, understanding there's a bit of a step back in pack services, but with the price costs and with the typical seasonal strength, I'm wondering what might be some of the other offsets again that lead you to kind of guide $0.52 particularly at the low end to $0.56 relative to the $0.50 you did in the first quarter

Again, the wages will be -- we really had two months, not three months.

So we'll have a full three months' worth of that wage increase.

In absolute terms that was 5.-- I believe it was $5.3 million year over year for the two months.

So you could extrapolate that out.

And then that pension differential is a penny.

So some of the mechanic mechanical differences right there are a couple of pennies from what you're doing.

Pack services we talked about and the composite can business just the seasonality.

So we really didn't build in anything out of the ordinary other than the roll-up from the division's result.

So the volume that we would have expected, and we talked about that earlier, is built into that number.

And those were the few things that I could pick out that I'd say would be a real quarter-over-quarter difference.

Okay.

And on the tubes and core side I think the some of the contract is customers seeing a price increase coming.

Any sense for what level of pre buy may have occurred in 1Q and do you have any kind of early read in terms of April on that front?

April's levels, I think we said earlier to a question, seemed to be holding up, I mean, March levels seemed to be holding up, I mean, at the March levels or greater-than March levels.

As far as free buys, there may be a little of that, but tubes and cores take up so much space, you traditionally don't have to revise cans of tubes and cores because of so much (inaudible) it just doesn't happen generally.

Okay.

Okay.

Good.

And then final question is in terms of the matrix business, in terms of what your health care end market well above the overall industry, can you just talk a little bit about the growth there and the opportunity as well and maybe expanding more into private label where you're a little bit underpenetrated versus the general market?

Thanks.

Al, I think we've seen nice growth in matrix.

Some of it has been in the obviously to personal care.

We've also seen some food movement there.

And I think we've invested in new equipment and have some new technologies.

So basically we're picking up business with new products that we didn't have before.

And I think that trend we certainly seek -- not conversions, but we certainly see movement to Sonoco and that will continue over the next couple of quarters, certainly through the year end.

The private label is, I think I've said before, about 12% of our total consumer sales are private label.

We have discussions going on with a couple of retailers at this point in time about conversion to private labels, not a lot to really talk about at this point, but it's something we are focusing on and I think will bear some fruit in the future.

Okay.

Thank you.

You're welcome.

Thank you

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

Please proceed.

Good afternoon, gentleman

Hello, Chip.

The first question is I notice the working capital ate up most of the cash flow in the first quarter, and obviously there's the recovery aspect of that just in the business certainly, but was there -- is there also a seasonal pattern where you normally see a working capital build that we should pay attention to in the first quarter?

It is, but I'll let Charlie --

It is and you saw it.

It's the first quarter.

Typically what happens, and we'll see a nice turn turnaround of that in the fourth quarter, business will tend to slow in December, inventories will come down, receivables will come down, it will flow into cash and then some of that will turn on us.

And so that's exactly what we saw and that's why it took a little bit of pain to point out the measures that we use in terms of things like the compliance suggest that we're collecting receivables as good, if not better, than we did last year.

And the overall inventories -- well, receivables inventories and payables in today's terms is better than last year.

So, but no question that the dollar, in fact, itself was a negative almost $23 million.

And, in fact, that will certainly influence our cash in terms of 2010 for the whole year because I notice when we look back at 2009 we actually had a positive cash coming from working capital and in 2010 we certainly will not.

And, again, it's just going to stem from the higher level of business activity which translates into higher receivables and higher payables.

Got you.

And then --

And overall cash flow, over all cash flow for 2011, I didn't really speak to that.

Again, we tried to make some back-of-the-envelope calculations, but I would expect operating cash flow calculations, but I would expect operating cash flow to be in the roughly the $410 million to $420 million range.

That's for 2011?

That's for 2010

2010, right.

And I would expect that capital spending in 125, 130, although as Eric pointed out, if the opportunities came there, we'd spend more.

And, of course, dividends about 112.

So we're going to generate a good deal of free cash flow again in 2010.

But, again, operating cash probably in the $110 to -- I mean $410 million to $420 million range.

Oh, okay.

And it's interesting.

I get some questions about your strategy to build up the services area because the margins look lower, but it looks like to me that the capital involved in expanding that business is much less than that acquiring in your other -- or building up in your other segments.

And as time goes on do you expect, excuse me, to see the cost of expanding the services area, especially as you I guess implement the total solution strategy that you'll still see good or at least company average returns on capital even though the margin may be a little bit lower?

No.

The margin may be lower because of the nature of the business.

The strategy and the packaging services segment would always continue to be next to no capital investment.

So while the returns are low, I mean while the profit margin is low, the return is extremely high.

And frankly what we're doing is, you know, this is not capital intensive business.

It's people intensive.

And managing that process is the real trick to being profitable there.

But it's not really managing capital.

So capital -- return on capital will remain strong.

Got you.

Thank you.

Thank you, Chip.

And you have a followup question from the line of George Staphos.

Please proceed.

Thanks.

Hi, guys.

I want to ask a couple of questions on the longer term margins within the businesses and kind of a longer term picture.

I guess first off within tubes and cores and paper as manufacturing and centers of gravity for manufacturing around the world change, do you think your position now, Harris, with converting capacity and, for that matter mill capacity, to be able to serve your customers or any places where you have any kind of constraints on their conversion or paper.

And then a related question, some of the numbers that you refer to in the US I believe for tubes and cores suggest that perhaps anyway comparison of reason -- I mean manufacturing back to the US, are you getting any signs from your customers that they're thinking of or they're seeing manufacturing coming back to the US from where we've been, say, the last two or three years?

George, you did ask two or three questions.

The first let me address about paper capacity.

I think clearly in the South America, North America and Europe we have sufficient capacity to do what we need to do and handling most anything that comes.

Asia as it grows we will probably supply those markets out of Europe, South America or North America but we do have a joint venture as well in Indonesia as well as in China.

So around the world we have sufficient capacity from a paper standpoint to grow substantially more than we have today in the tube and core side and the can side for that matter.

On the converting operation, our footprint for today and for the foreseeable future, we have plenty of footprint, but as opportunities present themselves, we clearly have the ability to move equipment and we can set up a new tube and core composite can operation around the world for pretty amount of capital.

As far as business coming back to the US, there is some textile business that I don't know whether it's come back or whether it's business that has just stayed here and is housing and automobiles come obviously pick back up, that volume is picking back up in the United States.

But traditionally when most of our customer business moves wherever it goes, it doesn't come back.

And we do pick up that business, whether it's in Mexico, Asia or South America or Eastern Europe, we pick it up, but it generally doesn't come back.

Okay.

On margins, two questions and I'll turn it over.

And I think we're now more than 10 years after the graphic deal.

Are the flexible margins where you'd like them to be at this juncture?

Have we used it as a threshold?

Have you gotten to over 10% margins within flexible packaging?

And then, if I look back at pack services right after the core flex deal there were a couple of years, actually three, where you were right around $40 million, $45 million of EBIT, obviously we had the great recession and things were a lot worse, things became a lot worse for that business.

Are there any structural challenges where you couldn't get back to that level of profitability in pack services down the road?

Thanks and good luck in the quarter.

Thank you, George.

George, flex hold is doing much better than it has in the past and it continues to improve.

It is not in the 10% EBIT margin at this point in time.

I expect it to continue to improve, but it is not there today.

The packaging services market I think will improve as the economy improves.

I think there are some structural changes that have taken place in our customer base there, but our long-term plan for that business is still quite successful and certainly returns what we expect it to return and I expect it to continue to improve.

Okay.

I'll turn it over.

Thanks, Harris.

Good luck in the quarter.

At this time we have no other questions.

I'll turn it back over to management for closing remarks.

Thank you, Katie.

As information, Sonoco's management will be participating in a number of investor conferences and meetings during the second quarter.

These include meetings in Ohio, Texas, New York, Chicago, Boston and Atlanta.

For more details about these conferences and meeting dates, please go to the Company's investor website and review our calendar of events.

Finally, our second quarter 2010 earnings conference call will be conducted at eleven am July 22.

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

Let me again thank all of you for joining us today.

We always appreciate your interest in the Company.

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

Thanks again.

Ladies and gentlemen, thank you for your participation in today's conference call.

You may now disconnect.

Have a wonderful day.