Sonoco Products Co (SON) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the fourth quarter 2010 Sonoco Products earnings conference call.

My name is Derek, and I'll be your operator for today.

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

Towards the end of the conference, we will facilitate 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 call over to Mr.

Roger Schrum, Vice President, Investor Relations.

You may proceed.

Thank you, Derek.

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

This call is being conducted on February 9, 2011.

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

Our financial results for the fourth quarter and full year were released 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 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.

As Roger said, this morning Sonoco reported fourth quarter financial results.

We reported sales of $1.1271 billion, and that's up $125.2 million, or 12.5%.

We reported GAAP EPS of $0.33 per share and base EPS of $0.59 per share.

The $0.59 base EPS compares with our earlier guidance of $0.57 to $0.61.

At our December analysts' meeting, I mentioned that the price cost squeeze that we knew we would see and would feel in the fourth quarter.

And so at that time I was projecting that we would be on the low side of our $0.57 to $0.61 guidance.

Well, the price cost squeeze did in fact materialize.

Taxes also were a little bit higher than we expected.

So at $0.59, we were very pleased with how the quarter unfolded.

Let me start with reconciling the difference between GAAP EPS at $0.33 and base EPS at $0.59.

First, we'll start with $0.33, and then we add back restructuring charges of $5.4 million pre-tax, $4.6 million after-tax, or $0.05 a share.

We also had $1.4 million of asset impairment related to the fire that destroyed the Bastrop, Louisiana molded plug plant.

And then the rest was just rollover costs related to a prior plant closings.

Next, we add $48.6 million pre-tax, $31.6 million after-tax, or $0.31 a share for the debt extinguishment related to the tender offer.

The tender offer was completed on November 23 when we bought back $244 million worth of our bonds.

$42 million out of that $48 million charge was just an interest rate make whole.

Last, we subtract $10.2 million, or $0.10 a share, for two income items that are in tax expense that are offsets against tax expense .

The first is $5.5 million to reverse last year's Mexican tax adjustment.

If you recall, late 2009, Mexico enacted a law that in some cases negated the effect of filing a consolidated tax return.

As a result of that, we took a tax charge last year of around $5.5 million that we treated outside of base earnings.

What happened this time was in late 2010, they revised the law to allow us to permanently defer that negative effect, and that allowed us to reverse that 2009 charge which we've done.

And we did that reversal outside of base earnings.

The second credit was to release $4.7 million tax reserve that we established in 2008 that related to capital loss carry-forwards, and there's no longer a need to have those tax reserves in place.

So we brought that back into income and again outside of base earnings.

So to summarize, if you start with EPS as reported of $0.33, you add $0.05 for restructuring.

You add $0.31 for the debt tender offer expenses.

And then if you subtract the one-time tax adjustments of $0.10, you arrive at base EPS of $0.59 per share.

Last year, base EPS was $0.58 a share after adjusting for $0.07 of restructuring and $0.05 for that Mexican tax adjustment.

So, the proper comparison in our minds is on a base earnings basis, and that's $0.59 this year versus $0.58 last year.

Taking all of those adjustments into account, what I'll do now is read out for you an income statement on a base earnings basis.

We'll start at the top with sales.

Sales are $1.1271 billion.

That is up $125.2 million, or 12.5%, over last year's $1.0019 billion.

EBIT, earnings before interest and tax, is $93 million.

That's up $7.9 million, or 9.3% over last year's $85.1 million.

Interest is a negative $9.7 million this year compared with $9.5 million last year.

So that would bring us down to profit before tax which is $83.3 million this year, up $7.7 million, or 10.2%, over last year's $75.6 million.

Now, our taxes this year are a negative $26.3 million.

Last year, taxes were a negative $21.7 million.

So that will bring us down to equity and affiliates and non-controlling interest of $3.8 million there compared with $5 million last year.

Net income then is $60.8 million, up $1.9 million, or 3.3%, over last year's $58.9 million.

And that's where we get the EPS of $0.59 compared with last year's $0.58.

Let me talk about the effective tax rate.

The effective tax rate in the fourth quarter was a more normal 31.6%.

It's actually a little more than a percentage point higher than the 30.5% that I was using in my December forecast, and that's because we had a higher proportion of higher tax domestic income than I had forecast earlier in the year.

But any rate, the effective tax rate 31.6%.

That compares with last year's effective tax rate of only 28.7%.

Last year's rate reflected a drop in the Ontario, Canada tax rate as well as a favorable international to domestic mix.

Just the opposite of what we had in this fourth quarter where we had more domestic relative to international pre-tax income.

So at any rate, last year's fourth quarter effective tax rate at only 28.7%.

Now, I mention that -- I sort of go out of my way to mention that because the difference in the effective tax rate is the principal reason why profit before tax is up 10.2% year-over-year, but profit after-tax is only up 5.8% year-over-year.

Now let me review the segment reporting.

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

Starting with Consumer Packaging segment.

Consumer Packaging segment reported sales of $457.8 million, and that's up 8.8% from last year's fourth quarter.

Now, the principal driver for the increased sales was the acquisition of APT.

Operating profits in the Consumer Packaging segment were $45.8 million, and that was 6.2% behind last year.

This quarter for us breaks a string of 11 consecutive quarters of year-over-year improvement in the Consumer segment.

The 2010 shortfall -- really, my mind at any rate -- has less to do with a poor 2010 than with a very strong 2009.

In fact, fourth quarter composite can volume was up 6.5% from third quarter levels.

So we did see the usual seasonality that we would expect to see with a stronger fourth quarter.

It's just that last year was a record -- or a near record in almost all the categories that we sell into like nuts, powdered beverage, and powdered infant formula.

Also in this segment, the St.

Louis plant -- Matrix of St.

Louis plant continues to experience start-up costs as they bring along several new plastic bottle projects.

Now, the Tube, Core, and Paper segment reported sales of $447.2 million, and that's up 17.4%.

And the year-over-year increase there in sales is a combination of volume, price, and the outside sales this year of corrugating medium.

We didn't have those as outside sales last year.

Operating profits of $33.9 million increased by 42.4% year-over-year with volume being the biggest driver.

I think it is --- if it's worth noting, too, in the Tube, Core-Paper segment that the Bastrop, Louisiana fire that destroyed our molded plug facility probably cost us around $1 million in the quarter compared with last year and pulled the numbers down slightly.

Now, the Packaging Services segment is the next segment, we reported sales of $131.1 million, up 4.6%.

The majority of those sales are in the pack center-type operations that we have in Poland and in Mexico.

Operating profit, on the other hand, was only $1.9 million and that was 51.8% behind last year.

The profit shortfall that we've seen is due to mix, and let me explain that.

By that I mean, less high margin US volume and more lower margin either pass-through sales or just lower margin foreign sales.

And then lastly, the All Other category had sales of $91 million, and that's up 21.5% over last year.

And that can be attributed mostly to volume in our molded plastics in our Baker Reels operations.

Operating profit of $11.4 million was up 35.8%.

And again, that's due to principally volume and productivity in molded plastics and to a lesser degree in Baker Reels.

So in total our sales were up 12.5% year-over-year, and our profits were up 9.3% year-over-year.

Now let me move on to the sales bridge, and here is where we're reconciling last year's sales to this year's sales.

That's an increase of $125.2 million, and it's made up of four categories that I'll talk through.

Volume is a positive $27.7 million.

Price, a positive $42.6 million.

Acquisitions and corrugating medium sales added $59.4 million, and then foreign exchange was a negative $4.5 million.

So those should add up to a total of $125.2 million.

Now, starting with volume.

The majority of the $27.7 million in volume is in the Tube and Core and Paper segment as well as in the Other category.

In Tube and Core volume in the US -- or let's say North America.

That volume was up 6% with some modest share gain year-over-year.

Our Europe volume was up 4.3% with Western Europe up about 2.6%, and what we call Frontier Europe, or mostly Eastern Europe, up 11.6%.

Our paper trade volume was up 6% year-over-year and our molded plastics and our Baker Reels volume was up in a little more than 20% in both of those companies year-over-year.

Now as I said earlier though, composite can volume was down.

Even behind that though, while overall volume was down, sales of coffee canisters were up 25% and that's due to the launch of a private label brand, and powdered infant formula was up 8%.

So where we saw weakness was in things like juice concentrate, powdered beverage, and nuts category.

And again, that has more to do with last year's strength than with this year's weakness.

Matrix volume was down year-over-year though, as customer orders really slowed in late December.

There was no share loss, but we think that was just destocking at Matrix.

On the other hand, flexible volume was strong quarter-over-quarter.

Now, price added $42.6 million to our sales, and that's practically all an increase that's either OCC or OCC-related.

So just looking at the Southeast yellow sheet as a benchmark, OCC was more than double 2009 levels.

So for example, in October, November, and December of last year, OCC was $70, $70 and then $80 in December, whereas this year in October, November, and December, it was $145, and then moved up to $160, and then $160 a ton.

So OCC was more than double, and that had a knock-on effect in tube and core pricing as well as paper pricing.

Now, acquisitions-slash-corrugating added $59.4 million.

The acquisitions component of that is $45.1 million, and $38 million of that relates to our acquisition of APT.

Corrugating medium sales added $14.3 million, and foreign exchange a negative $4.5 million.

The dollar strengthened versus the Euro, weakened versus the Canadian Dollar.

And that's the net result, a negative $4.5 million.

So that's the sales bridge.

Let me move on now to the EBIT bridge, and here is where we are reconciling last year's EBIT of $85.1 million to this year's EBIT of $93 million.

That's a difference of $7.9 million.

The categories are volume, mix, and that's a positive $1.5 million.

Price cost is a negative $4.5 million.

Productivity, a positive $5.7 million.

All Other is a positive $1.9 million, and pension year-over-year is a positive $3.3 million.

And that should add up to a total of $7.9 million.

Again, start with volume -- this volume of $1.5 million.

That's the profit impact on the $27.7 million of sales volume that I talked about on the sales bridge.

Mix, and especially mix in Packaging Services, negatively affected these margins.

And I've already mentioned that this quarter we had less high margin domestic volume and more lower margin international volume in services.

Mix also negatively affected us in our metal ends business.

Now, price cost includes -- and that includes energy and freight, was a negative $4.5 million.

$2.4 million of that is in the Tube and Core and Paper segment, and that's due to higher OCC costs.

In the US, as I said earlier, our waste input costs were about double this year what they were last year.

And in Europe, they were up about 70%.

Price cost was also negative $1 million in each of the consumer segments and the other segment category.

That's due to higher film, higher resin, and lumber costs.

Now, productivity was $5.7 million which is certainly lower than we've seen in previous quarters.

Our Tube and Core North America productivity was slightly negative, and they're in the middle right now of a realignment of productive capacity in the Southeast in an effort to better focus the plants on specific products.

So I see what we're doing right now --- well what we are doing right now is creating some excess scrap and some inefficiencies and higher labor costs, but I look on that as an investment in future productivity.

The other sub-par performer this quarter was our domestic paper operations.

We ran our domestic paper operations practically full.

The utilization rate was 100.8%.

But because we started the quarter with low inventories, they had to compensate with too many short runs, too many grade changes, and that caused inefficiencies.

I will point out that by the end of the quarter, we built the inventories back to the more normal levels.

And so we expect productivity to be fine going forward in both the Tube and Core and the Paper side.

On the EBIT bridge, Other is a positive $1.9 million.

Other is our catch-all category.

That includes wage increases offset in this case by acquisition profits and fixed cost productivity.

And then lastly, pension.

Pension added $3.3 million of year-over-year EBIT.

Our pension has been positive year-over-year due to 2009's very good pension performance of 22% return plus the $100 million contribution that we made to the plan in late 2009.

So those are the components of the EBIT bridge.

Let me talk briefly about the cash flow.

The cash flow statement is found on page nine of your press release.

Operating cash for the quarter was $114.6 million, and that compares with $33.1 million last year.

But last year as I said, we made $100 million pension payment in the fourth quarter.

So the after-tax effect of that cash outflow would be about $66 million.

So if you added the $66 million to last year's number, you'd come up with about $100 million of cash flow last year.

So I'm doing that just for comparability purposes.

What that means is, is that we had about a $15 million year-over-year increase in operating cash just coming from operations.

I will point out that $15 million is net of $13 million of increased networking capital.

And that net increased working capital is all related to higher input prices and to improved volumes.

I will point out, too, that our working capital programs remain under good control.

Our average cash GAAP days in 2010 were almost three days less or better than last year.

Our accounts receivable compliance, and that's the percent that we're current within terms is world class at 90%.

So we feel real good about our working capital program and felt real good about our cash flow in the quarter.

Now, the balance sheet -- balance sheet is found on page nine of the press release.

The balance sheet is as strong as ever.

Debt to total capital was 29.2%.

That compares with 29.6% last year.

In the fourth quarter, we did renegotiate our back stop line of credit and we put in place a five-year, $350 million facility.

We did issue as well $350 million worth of 30-year bonds with a coupon of 5.75%.

We tendered and bought back $244 million worth of our existing bonds.

And as of December 31, we had spent $26 million in share repurchases buying back at that time 695,000 shares.

To date, I'll point out that we have bought back 1,280,000 shares for $43.7 million.

All right with that, I'll move on to the future, and let me talk about our guidance.

At this early December analysts' meeting that we provide ---that we have in New York, we provided 2011 EPS guidance of $2.52 to $2.62 for next year, and that guidance remains unchanged.

What we have added in this press release is our first quarter guidance of $0.55 to $0.60.

And this guidance for the quarter is based on our recently completed 2011 budget.

But what we did also do was poll our divisions to make certain that they felt comfortable that we would be in that $0.55 to $0.60 first quarter spread.

Like all budgets, there are a lot of pluses and minuses.

Let me mention a couple of things.

One is that foreign exchange will provide a drag on this year's earnings.

We calculate it to be about $0.04.

This takes into account the effect of a weak dollar year-over-year on sales coming from Canada into the US.

We're also assuming that the taxes will be a modest drag, probably costing us about $0.01.

And that's almost just rounding in our effective tax rate.

So those are two negatives that we bring into 2011.

On the positive side, we expect pension expense will yield about a $0.10 to $0.11 savings over 2010 levels, and this is due to several things.

One of them is our fourth quarter pension performance was good, and it brought the full year to 13%.

And that's certainly more than we were projecting in early December.

The second thing is that we've made -- in early January, we made an $85 million contribution to our pension plans, and that's factored into next year's expense.

And then lastly, we split the plan at the beginning of the year into active and inactive components in order to better manage those two pieces from an investment perspective as we work toward the 2018 freeze.

In terms of volume, we're assuming that volume in our industrial businesses will grow about 3.5%.

We are assuming that our consumer volume will take into account the fact that we've had some market share losses in flexibles and in Packaging Services, and those are the things that we talked about in the third quarter.

We're further assuming that productivity is budgeted at rates that are slightly higher than this year's level.

So we're looking for a good year in productivity.

We're assuming that price cost is relatively neutral, and we've built in inflation in the 2.5% to 3% range.

So all in all, we're looking for a solid 2011.

And so far, looking at January volumes, they seem to be holding up well.

The recovery seems to be continuing, and we remain optimistic about the year.

Now, as it relates to cash flow, just for your information.

Our cash flow projection is for operating cash for 2011 to be in the $425 million range, and that's before the after-tax effect of an $85 million pension contribution that we did make in early January.

We are also expecting capital spending to be in the $140 million range, and that's down slightly from 2010's $146 million.

So, I'll wrap up with that.

Let me go back to where I started.

With the price cost squeeze that we were experiencing in OCC, I did predict in early December that we would be at the low end of our guidance, around $0.57.

So again, we were very pleased with how the quarter unfolded coming in at $0.59.

And we're pleased with the way volumes are holding up so far this year, and that gives us a good bit of confidence as we move into 2011.

So with that, those are my remarks.

Let me turn it over now for

(Operator Instructions)The first question coming from the line of George Staphos, Bank of America.

Please proceed.

Thanks, hi, guys.

Good morning or good afternoon.

Hello, George.

Congratulations on the year.

I wanted to get into Consumer a little bit.

Can you comment to whether you were pleased with the volume trend that you saw in composite cans in the fourth quarter?

On the one hand, I remember you were expecting some recovery in Q4 versus Q3, if I heard you right you were still down year-on-year.

Can you comment as to whether you got the recovery that you were expecting and provide a little bit of color around that?

George, I would say we got the recovery we expected.

I think the comparison with the fourth quarter of '09 was a very difficult comparison.

I think in '09, third to fourth quarter was up -- Charlie, 8%?

It was up 8%.

And this year, we're up 6%.

So we had concentrate and some of those things in that recessionary environment of '09 going up.

So on balance, we were quite pleased, particularly with coffee growth.

We continue to have conversions in coffee, and powdered infant formula and [call call] were very, very strong.

As Charlie mentioned, concentrate was down, and the snack category was down.

But we are pleased with it.

Okay, if I look then at the revenue growth which I think was 9%, if I'm remembering correctly from your commentary and your release.

And I know a lot of that was driven by acquisition.

You still were down from an EBIT standpoint, year-on-year.

I realize your comparisons were difficult, but where were the biggest sources of leakage?

Where were you probably least happy with the performance in Consumer?

If you could provide a little bit of additional detail there, that would be great.

I think Charlie mentioned -- we've talked previously, George, about all of the business that we have coming into the plastics operations.

And Charlie mentioned that we have two large pieces of business coming into St.

Louis, and we're installing equipment as we speak there and had been.

So obviously, that was some leakage with the start-up there.

And just basically, the comparison of the two.

Charlie, is there anything else?

Well, and also in that plastic business, for all practical purposes, volumes just dried up the last two weeks of December.

So the volumes were off.

We've lost no market share.

So those volumes appear to just be destocking which seems to be coming back in late January and on into February.

So I'd agree.

I don't know that there's anything fundamental other than the comparison, really.

Okay, can you provide any color on what the line start-up costs were in the quarter.

How should we expect that to trail off, hopefully, over the course of the year?

And was there any effect in the results year-on-year in terms of some of that share slippage that may or may not have happened within flexible?

Well, let me take flexibles first.

I don't think we saw any loss of that share in the fourth quarter.

We do expect, as we've said previously, to see a transition occur in that over the coming months, and that's baked into our guidance that we've given.

I don't know that we can get granular enough to say that the installation cost in St.

Louis cost us X dollars, George.

But it probably cost us $0.01 or so a share, I would say, is a fair assessment.

And I would expect that will continue to get better as we go into this year.

Okay, thanks.

I'll turn it over.

Your next question comes from the line of James Armstrong from Credit Suisse.

You may proceed.

Good afternoon, gentlemen.

Good afternoon.

Just as housekeeping first, what's your pension funding status at the end of the year?

At the end of the year, the status was around 84%.

It will go up to around -- if you put all of the plans together, all the funded plans together -- around 90% with that $85 million contribution.

Okay, and then switching topics a bit.

On new product development, what do you expect for new product development in 2011?

What type of magnitude are you building into your estimates?

Are you talking about sales?

Yes, sales.

New product, yes.

I would guess that number will be a little higher than this year.

I would think it will come in around $175 million.

I think this year we had something like $165 million as we had a lot grandfather off this year.

But I think this year ought to be in the $175 million range.

Okay.

And then finally, on the acquisition front, do you see any new opportunities opening up in 2011, any tuck-ins?

And what regions are you focusing on right now?

I do expect that 2011 will be -- whether we actually do something or not -- I can't tell you.

You never know until you get there, but I do expect the activity to be fairly brisk.

And I would have to say that, currently, we're looking at every geography that we do business in.

Asia, Europe, South America, and North America.

Is there any geography you would prefer to expand in over the others?

Or are they all equal targets at this point?

I would say they are all equal targets at this point.

Okay.

Thank you very much.

You're very welcome, thank you.

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

Baird.

You may proceed.

Hey, guys.

Good afternoon.

Good afternoon, Ghansham.

How are you?

Good, thanks.

Harris, as a follow-up to the last question.

Packaging Services has showed some volatility over time as it relates to customer churn.

Does this business need more consolidation over time?

And should we expect Sonoco to participate in that?

And can you also remind us what the split is for this business domestic versus overseas?

Thanks.

Let me take the first.

It is still a very fragmented business, and it does need some consolidation, particularly in North America.

And from a geographic perspective, there are certain places that we would like to be.

So I would expect us to participate as things become available.

Charlie Hupfer is trying to get the mix for you internationally versus domestically, and we'll get that for you in just a second, Ghansham.

So let me ask you another question if I could.

The big swing in OCC prices over the last couple years, understanding that resin and steel have also been pretty volatile over that time.

But is the volatility in OCC affecting your customers' decision as it relates to perhaps looking at OCC-based packaging as they think about packaging for new products?

Or has that not been a huge issue so far?

I don't think it has been an issue at all.

In fact, you look at the volatility of steel, and the steel increases are out there right now.

I would say we have more opportunities to convert into composites as evidenced by the coffee conversions that we have made, and we also have coming into this year.

I think it presents more opportunities for us, frankly, Ghansham.

Okay.

All right.

Charlie, do you have that?

I've got a good estimate because we've seen so much growth in outside the US, Poland and Mexico, it's about 50-50 right now.

50-50.

And Charlie just a clarification.

Have you included any sort of share buyback component for your guidance year-over-year in terms of EPS bridge?

No, we haven't.

Other than it just being incorporated in that $2.52 to $2.62 range.

It might have as much as about a $0.02 to $0.03 kicker as a result of the share buyback.

And that's already in that number -- or in that range?

That's correct.

Okay, thank you.

Your 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 doing terrific, thank you.

I wanted to start with kind of a follow on to where Ghansham was going with guidance.

If I look at where you laid numbers out in December, at that point in time you'd assumed flat pension.

And I think FX is a $0.05 of headwind.

As you updated it today, pension is a $0.10 to $0.12 benefit.

FX is a little bit less, maybe $0.04.

So there's $0.11 to $0.13 help and a little extra from the repo you got done early.

What else changed within there?

I don't think the tax rate changed and I thought that the components you talked about with flexibles and things we already knew about back in two, 3Q.

So can you maybe help us with what's changed within the bridge?

I don't know that an awful lot has changed, but the one thing is that we have gone through and we've refined that FX impact.

And that's about $0.04 a share.

The tax rate impact about $0.01 a share.

And so those are some of the effects that we hadn't taken into consideration.

I think some of the other is probably -- in terms of price cost, we don't have as much price cost built into this first quarter as we would have expected back at that time.

So those are the things that come to mind.

A little bit higher tax rate, the FX implications, some price cost, and then just further just refining through the budgeting process the volume levels.

I would say the price cost is the biggest factor that's (inaudible).

With the full year, you were assuming, I think, neutral before.

So at this point, you're assuming -- ?

We've got some negatives built in.

For the full year?

Yes.

Can you maybe expand a little bit too on the volume assumption?

If memory serves, I thought it was about 3% to 5% -- was your volume assumption for 2011 back in December.

Has that changed much?

I think you just gave us a component for industrial, but how does -- what's an all-in number?

Well, an all-in number, that's -- an all-in number would be around, I guess, 3% overall.

But I tell you that what we really have is when we look at volume, what we have is we've got 3.6% was the sales volume coming from the industrial side.

And then volume was more flattish on the consumer side, and that's because we have the flexible volume and you've got [porflex] or Packaging Services volume that's coming out.

So that actually pulls that down.

If we get adjusted for that, that volume would be up to about around 3% level as well.

So I guess in these numbers, the overall volume growth is going to be with the net about 1.5%.

Okay, that's helpful.

Last question I had was with -- as you look at this consumer business, it has done remarkably well over the last three, four, five years that it has grown.

And you're at pretty close to peak op margin levels.

Where the opportunity at least as we look historically is to get the margin up a little bit more or back restore it in the Tube, Core and Paper.

How do you feel about the opportunity to do so?

If we look at absolute levels of operating income, it has shown a nice recovery.

But we're still a good $40 million or so off of peak levels.

Where are we at with volume recovery?

Back to compared to peak levels, that type of stuff?

To kind of -- maybe a walk-through how we get to -- or is it possible to get back to peak levels?

Well I think there's not a single answer to that, Chris.

I think if you looked at North America, we're still not back at 2007 volume levels.

We are approaching volume levels in Europe, 2007 levels.

In South America and Asia, we are probably over those.

Charlie mentioned some consolidation that has been previously announced it's going on in the Southeast, and that really was a drag on margins.

And then we had a pretty significant price cost drag in the fourth quarter where we saw the OCC go up where we had, obviously, reset contract prices at $120 a ton, I believe, in September and went to $160.

So the combination of those factors put some drag on the margins.

We will obviously get -- had a reset in December where OCC and those contracts was reset at $160.

And we're starting to catch that up.

We have some price increases, obviously, we went out in the market with in October and November on the Tube and Core and Paper.

And we're getting decent recovery -- good recovery on that.

And I guess the real question is what is going to happen with OCC, and our people feel like while you've seen a decrease in OCC of $10 a ton in January and February, you're likely to see in March an increase of as much upward to $10 to $20 a ton.

So we're going to look real hard at that and those margins and be appropriately aggressive on price recovery as we move forward in that.

So I see no reason we can't get back to the kind of margin levels that are historically in that business.

Okay, thank you.

You're very welcome.

Your next question comes from the line of Alex Ovshey from Goldman Sachs.

Please proceed.

Good afternoon.

Hey, Alex.

How are you?

Doing well, thanks.

You mentioned that you were seeing nice momentum on the Tubes and Cores business to start off 2011.

Can you give us incremental color on how you're seeing that across the end uses for Tubes and Cores?

How are you seeing volumes into the textiles business?

Or what is driving that solid momentum?

Is it textiles, paper products, flexible films, general industrial?

I don't know that I have that kind of color for January and February.

Charlie probably has it for the end of the year.

But I was talking to someone in the industry the other day -- in the textile industry, and they were talking about how strong their business was.

This was a customer of ours.

And so I think that part of it is strong.

I think the paper mills did take a little down time at the end of the year.

They seem to have started up reasonably well.

Charlie, do you have any more color than that?

The color I have is the fourth quarter comparisons that textiles were up 6%, tape and specialty 7%.

Film -- we had some share gain in there, but if you take the share gain out it was up 14%.

So we generally saw across-the-board good volumes, solid volumes that averaged at 6%.

That's very helpful, and Harris, from a strategic perspective, longer term.

How do you think about the opportunity in the Packaging Services business?

How do you see the top line evolving between advertising and display business and the services business?

And longer term, what is the goal for the margin level in that segment?

Well clearly, it's no secret that the loss of the Proctor and Gamble business which we've talked almost ad nauseum about -- I have talked ad nauseum about you all haven't -- has affected us.

And we have gotten a lot of new growth into that business as we've diversified the product [mill], the customer mix.

But we haven't been able to totally offset that loss although we're making progress.

I view the services business as a integral part of our solution sell, and it's important to us.

And we saw a presentation this morning that we continue to expect a nice recovery of that business, and I think it's a business that ought to generate EBIT margins in the 8% to 10% range.

That's helpful, and just last question for Charlie.

In terms of other cash flow items that we should be thinking about, can you give us some incremental color on items like working capital, cash taxes, cash interest in 2011?

I really can't.

I don't have that kind of detail.

My recollection is that we thought that working capital would go up about $15 million.

So that would be a drag.

Other than that, there wasn't anything that stood out as I recall from looking at that projected cash flow statement.

So again, it was about $425 million before the after-tax effect of the $85 million contribution.

But that would have included about $15 million.

The taxes, I think, just sort of work themselves out year-over-year.

And $140 million of capital spending, and then an assumption around the dividends.

Thank you very much.

I'll turn it over.

Thank you.

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

You may proceed.

Hi.

Good afternoon, thanks.

Hello, Al, how are you?

Good, thanks.

Harris, or even Charlie, I just wondered if you could elaborate a little bit more on the EBIT contribution from volume and mix only being $1.5 million relative to the $28 million or so of volume sales growth.

And I understand that there was some lower margin fulfillment in that, but still seems a little bit lower than I would have expected.

Can you just talk a little bit about what the drags were?

And how we should be thinking about that going forward?

Charlie, you want to?

I can certainly try.

We certainly had -- as I mentioned when I talked about the sales bridge.

We had positive volumes in Tube and Core and Paper and in that All Other category, and I went back and looked at the profit component of those relative to the sales.

And they showed the ordinary margins that we would have expected which would be in the Tube and Core side, they tend to run into the mid-30 -- 30% to mid-30% range as a contribution margin.

So what we saw then was we saw a volume decline that I talked about in Consumer, and that obviously pulled down the profitability.

But the mix issue was really around the two things.

And $3 million of that was in the Packaging Services segment, and that deals with the mix I was describing.

And then there was another $1 million that was in the consumer side that dealt with metal ends.

And those were the two big items that stood out in terms of mix that pulled down what you would expect to be a more ordinary profit margin on that $27 million worth of sales.

Those are the things that stand out in my mind.

And I think the other thing, don't underestimate the amount of impact the OCC had on us in the fourth quarter.

While -- as Charlie said in New York that we're facing some pretty significant headwinds.

We did see that OCC that set at $120 go to $160 a ton in December.

So that was not insignificant.

Okay, understood.

If we could talk a little bit about the metal ends.

With tinplate prices going up at the beginning of the year, how do you see -- is there any kind of a delayed recovery in that?

Or do you feel you're going to get that through -- passed through right away?

I would expect that we'll get that passed through fairly quickly.

Okay, and then as far as to clarify as well on the OCC and the price increases and the price costs commentary that you've had.

Given that we're down $10 per ton sequentially in January and another $10 in February, I know your expectations are that March will be up.

But at current OCC prices, is it fair to say at this point that your price cost would be even slightly positive at this stage?

Or are you still just trying to catch up with some of the previous inflation?

I would say that we're close to being positive at this point.

Okay, great.

And then last question is on -- I guess, Charlie, just quickly on the share count.

Can you give us what the ending share count was in the quarter?

Sure.

Diluted shares, if you have it?

I do.

It would be for the quarter 103,123,000.

Okay, and that's not the average, that's the ending?

That's the average.

I can get you the quarter -- the ending right off the 10-K.

Do we have it on the 10-K?

Haven't put it on yet.

We haven't put it on yet.

That's probably close enough.

I'll get that.

We'll get it for you.

That's as good as I can get right now.

Sorry.

Okay, thank you.

Your next question comes from the line of Mark Wilde with Deutsche Bank.

Please proceed.

Good afternoon, Charlie, good afternoon, Harris.

Hello, Mark, how are you?

Good.

Harris, just back on the cost pressures.

I wondered if you could give us just a general sense of where you see the big inflation threats for your business in 2011?

Mark, as I look out in my crystal ball, I think OCC is going to continue to be, I think, a little volatile in the first half of the year.

I think at $150-$160 a ton, maybe $170, it's coming close to peaking.

It may go a little over that.

We are obviously seeing resins go up fairly significantly in January and February.

And obviously, we saw tinplate go up, and those are the -- that with aluminum are the biggest cost components that we incur.

But by and large as you know, historically, we handle those reasonably well through -- on the OCC side through contracts and raising prices and converting businesses.

On the consumer side, on most of the resin businesses, we have resets on the contracts that are either quarterly or in some cases monthly.

So while we may lag on those or get ahead of those, they generally equalize themselves out.

And in response to, I think, Al's question.

On the tinplate in our closures business, we generally are able to pass through those increases pretty promptly, and we have basically set those prices for the year.

So recovery ought to be pretty quick on those.

And on the composite can side, we have those resets as well.

So while we're seeing the volatility, it's clearly not something that is of great concern to us because we had the mechanics in place to manage it.

And the OCC side of course we have our recovered paper operations that generally cover about 40% of the increase until we can get it through in the market.

So while I do think inflation is going to be an issue, I think it's going to be a bigger issue in maybe the non-raw materials where we see it creeping in.

And we normally try to cover that and normally do cover that through enhanced productivity and that makes the productivity bogey that we have this year and every year even more important this year, actually.

Do things like freight -- I mean, with oil prices and diesel prices up so much.

Is that a significant cost issue for you if we look across the year?

It is a cost increase, Mark.

It's no question about that.

Whether the word significant is the right word or not, it is a cost increase.

It has to be covered either by productivity -- enhanced productivity -- or either some type of price increases, surcharges or some kind of price increases, and we haven't really addressed that question at this point in time although we're looking at it.

Okay, and then can we turn to the acquisition market.

You talked about this a little bit earlier.

I'm just curious about what you're seeing out there in terms of whether there are more people now willing to sell as the economy and business is picking up?

And what your sense is of value expectations?

I'm not sure the value expectations, and I underline expectations, have changed at any time in the last four or five years.

What one is willing to pay has probably changed somewhat during the past few years.

Actually, we are seeing more activity.

We saw more activity starting probably about this time last year, but clearly in the third and fourth quarter, we've had more discussions probably than we've had over the last couple of years.

I do think as people are seeing the rebound in business, they are more bullish on what they think their businesses can do.

And I still think -- as I've said before -- that there's still an underlying concern in this country about tax policy and what taxes are going to do.

And now that business has gotten better, the results look better.

And they're looking at potential tax increases.

People are rethinking if I'm going to sell the business, now may be the time to do it since I've got probably a two-year reprieve to do it.

So I think we are going to see more activity, Mark.

And Harris, still safe to assume that we're going to see you look at more small to mid-size businesses that either put you in new markets or put you in developing markets that you can then grow off of?

I think you're going to see us continue to look at acquisitions that allow us to further consolidate markets that we're in around the world, and I think you will look to see us make acquisitions that support the strategy that will be small bolt-on acquisitions in our businesses.

I've talked before that one of our businesses -- talked to many of you investors that one of our businesses that we see opportunities in is our protective packaging business.

And we will continue to kick tires there to see if something that fits and expanding that business.

It's a nice business for us.

Very good.

Listen, good luck in the first quarter here and through the year.

Thank you, Mark.

Your next question comes from the line of Sara Magers from Wells Fargo.

You may proceed.

Good afternoon, gentlemen, and congratulations on a nice year.

Hello, Sara.

How are you?

I just want to expand quickly on Mark's question.

On the Q3 call, you had noted that you had a full pipeline of acquisition opportunities, and you said you had about four or five targets, I guess, in holding positions.

So what's the status of those?

I know you can't talk specifics.

Have there been any that have dropped out due to valuation?

I'm just kind of wondering what your pipeline looks like right now?

Sarah, I don't think any of the ones that we talked about in the third quarter conference call have dropped off, and I would have to say that they're still moving along.

And I can't talk anymore about it.

Okay, thank you.

And then to switch gears a little bit, I'm wondering about OCC collections in Q4?

And then how they're trending so far in Q1?

OCC what?

Collections.

Collections, okay.

Well, collections in the fourth quarter were pretty strong, and the volume -- the purchasing volume was pretty strong up until about December.

I think what we saw is a lot of our OCC customers -- the large paper mills -- had basically building up inventories.

And I think in anticipation, rightly so, of a difficult first quarter from a weather perspective.

But starting in about December, we started building a fair amount of inventory in our paper stock operations, and I think we actually ended the year into January with up pretty significantly.

So the inventories are pretty high, but we're starting to see that inventory build that took place in the mill and our customers start to come down some.

And the Asians with Chinese New Year getting ready to wind down, I expect them to come back in.

So I think when you're going into a low generation time now, and particularly from now until certainly Easter which would be late this year.

So I think you're going to see some increased pricing in March and April is my crystal ball.

Okay, and just to expand on that a little bit.

Can you give us an idea what kind of raw material expectations you have embedded in your guidance?

Specifically for OCC and resin?

How do you see those two materials trending through the year?

I'm not sure.

I think we budgeted OCC at $140 a ton for the full year.

I'm not sure what we actually did with resins, and most of that is passed through pretty quickly.

But I don't know what the assumptions were there, Sara, to be perfectly honest.

Okay, great.

I can get that for you, and get it for you if you'd like.

The real issue always is just the timing because our pass-through provisions will generally always allow us to recoup it.

So it's really just a function of when those increases occur at the beginning of the quarter or at the end of a quarter that make a difference.

Okay, great.

Thank you very much, and good luck in the quarter.

Thank you, Sara.

Your next question comes from the line of David Leibowitz from Horizon Asset Management.

Please proceed.

Thank you, and good afternoon.

Hello, David.

How are you?

Okay.

A few quick ones.

Unrelated.

One, the earnings estimate for this year that you gave us, Charles?

Is that on a constant currency or based on the January rates?

That's what we would assume for 2011, and if I was a little bit confusing, I was really trying to level set the -- level set what 2010 looks like in terms of 2011 FX rates.

But it would clearly be what we would expect to be our as-reported and base -- well, as our base earnings numbers for next year.

Secondly, how much of your cash on the balance sheet is held overseas at the moment?

Probably about $150 million of cash is held outside the US right now, and we bring that into the US from time to time.

Or we were able to under the tax laws to bring it in and offset our outstanding commercial paper, but that's a pretty sizeable amount right now.

On a product basis, what percentage of new product sales -- [not by percentage].

Do you believe that new product sales will be higher in the first half of this year than they were last year as you define your new product sales?

That's a timing issue, David.

I don't know.

I generally look at them for the whole year.

I think it will be up, but I look at it for the whole year.

And I think the whole year will be up.

Speaking of the back half of the year, do you have many firm commitments at this point vis-a-vis a year ago?

Firm commitments of?

For new products.

Yes, we do.

It's bigger this year than a year ago at this time?

Yes.

Great.

Getting back to an earlier question, how large a price increase would you need today to get your margins back to what they were in '07?

I don't have an idea at all, David.

I don't really look at it like that.

Maybe I should because the business is so disparate.

I've got to look at it on a business by business basis, and that's the way I really look at it.

And I don't look at it just on the whole Company.

Okay.

And lastly, nothing was said today about the recycling aspect of the business, both for yourself as well for customers.

Is there anything you can tell us that's new?

Well the recycling -- our recycling business continues to grow.

The S3 continues to grow.

I think one of the Proctor and Gamble plants we have a celebration this week if I'm not mistaken or next week where we've accomplished absolutely zero landfill for them.

Actually, our major customers are very aggressively pushing us to get into the plants to move this S3 forward, and that obviously means -- or generally means, not obviously -- generally means more OCC collections for us which is positive for us.

And I think the other thing it does is the customers that we're performing this for are major customers of ours, and it makes our relationship with them a much stronger relationship which is obviously very important to us.

And my last question, do you have any new major projects involving your putting the packaging and taking over an entire Company's -- or an entire plant's distribution for the parent?

I don't know that we have anything on the drawing boards.

We're always trying to do that around the world, and so I know there are discussions going on.

But I can't say with certainty today that we have one that we will announce in the next 30 days, 90 days.

Thank you very much.

Thank you, David.

Your next question comes from the line of Steve Chercover from D.A.

Davidson.

Please proceed.

Thanks, and good afternoon.

I would hope that most people would agree that there is less uncertainty about the global economy today than there was a year ago.

So I'm wondering, is your guidance today as conservative as your 2010 guidance turned out to be?

2010 guidance -- when we were putting that together in 2009 in September and October, it was a -- there was a great deal of uncertainty around that.

There's a good deal more certainty, I think, in what we put together this time.

But your numbers were very conservative.

So I guess I'm hoping that lightning can strike twice.

(laughter)

They proved to be conservative, and probably even by this time in 2010, we were seeing that they were conservative numbers from what we had expected back in October and November time frame.

I would not expect to see that same kind of uplift this time.

I think when we started the budget process we were probably more conservative than we are now, and we baked that more optimistic into these numbers.

But I hope you're exactly correct, Steve, that we are being very conservative.

I actually told all of our general managers that I thought they were being conservative, and now I'm going to confirm that again.

Okay.

Well, let's hope.

One other quick question on the new product pipeline.

I can't imagine you're going to talk about customers, but can you really discuss which substrates you're focused on, please?

Well, we've got some new product introductions for coffee that's coming on.

We've got a number of which are composite cans, obviously.

We've got some plastic operations that are -- plastic products that are coming on that will roll on throughout the year.

Great, thank you.

You're welcome.

Your next question comes from the line of George Staphos from Bank of America.

Please proceed.

Thanks.

Hello, Harris.

I wanted to follow-up on David's question from earlier on what kind of revenue opportunity do you see over the next two to three years from businesses managing the customer supply chain?

Managing sustainable solutions?

Obviously, your recycling business.

How big can that business grow to do you think?

Alright maybe not the next two or three years, maybe four or five years out?

George, I don't know that I can sit here, and maybe I'll try to do this for you.

I will try to do this for you.

I will try.

I will do this for you for the first quarter conference call to try to bracket that if I can.

But we view that business as one of our growth businesses in the Company because from the MRF that it's doing to this S3 to other quite creative things they are doing with recyclables and with our customers, I think it can be a big business for the Company generating reasonably good margins.

Well, that's the reason why I asked the question, Harris, because you've obviously spent a lot of time and effort on this over the last couple or three years.

So you have to have some idea how big it could be.

I realize it's also a strategic business for you.

It gets you a lot of other benefit other than just revenue.

And it's one that, frankly, you're pretty uniquely positioned in versus peers.

But to the extent that you can give a little bit of color without giving up proprietary, I think, would be helpful.

I will do that for you on the next conference call, George.

Okay, appreciate it.

In terms of the productivity initiatives for this year --if you mentioned it on the call, I had missed it.

Can you remind us what is in your budget this year?

And what sorts of projects seem to be most coming -- or most came in from the funnel last year for 2011?

The manufacturing number in this year is about $66 million.

That's right.

About $66 million which is higher than this year's $57 million.

So we're looking for a good year in productivity.

Although again, I think that productivity was depressed a little bit in the fourth quarter for the reasons that I mentioned.

So we're looking for that to provide a turnaround in the second half of the year.

But productivity is -- each year is built on top of the previous year.

So to get $66 million, that represents new projects and new programs.

Understood, and any particular areas where you're finding that manufacturing productivity?

Is it energy consumption?

Or other input cost reduction?

Or labor?

George, I would say that probably put it in two or three buckets.

One is obviously some plant consolidations, and Charlie mentioned the cost that we've had in the Southeast in the tube and coil business as we consolidate some of those plants.

And that will be a nice productivity kick in the second half of the year.

And then you've always got the material substitution that goes on as well as just -- you mentioned energy.

We're always looking at energy, particularly in our paper mills and our flexible operations where we can enhance equipment there to save energy.

But it's not unlike what we've done in other years.

And as you know, we've talked about this a lot of times.

All of these are specific projects.

It's assigned to someone.

Capital has been assigned to it, and we monitor it on a monthly basis.

So we have a pretty high degree of certainty we will hit these productivity numbers.

Now you hear me from time to time talk about another number other than just the manufacturing productivity, and obviously, that's logistics and other which we will be hopefully on top of that.

Okay, I appreciate that, Harris.

Last one, and I'll turn it over.

Recovery rates?

Why are recovery rates going to be difficult now if I heard you correctly, and box volumes have been picking up.

Obviously, we have another tough month or two to get through weather-wise.

But shouldn't recovery rates be heading higher now?

You generally peak, George, the third or fourth week in January as you get all of the pick-ups from the holiday season and all that.

And then you sort of have a drop off until around the next holiday, which is generally Easter.

And I do think there's a lot of pent-up recovery, and that's a new, ingenious word I've used.

But you've had a lot of recovery, a lot of collection in the Northeast.

And where we've had a lot of snow, it is sitting there and whether it's useable OCC or whether it's gone or not I think is the $64 question for some of this.

So I do think you're going to see OCC go up in March and April.

Okay, and Consumer EBIT should be up this year despite the loss in flexible?

How should we think about it?

Thanks, good luck in the quarter.

I would expect Consumer EBIT to be up this year.

Okay, thank you.

Thank you, Harris.

Thank you, George.

I have one follow-up question coming from the line of Mark Wilde from Deutsche Bank.

Please proceed.

Yes, just a couple of details on a recycling business.

Harris, have you picked up any kind of a share?

Any volume in this business?

Because it seems like there has been a lot of turmoil among some other companies in the waste paper business over the last two or three years.

We've had some bankruptcies and things.

You know, Mark, it's hard to say whether we've gained share because of that.

We have clearly grown our volume in that business significantly year-over-year.

Whether it's share gain, as you talked about.

I don't know that.

But we put the S3 in.

Interestingly enough, that 75% to 80% of what we collected in this S3 initiative has been OCC.

It was going to the landfill.

So that really wasn't a share gain.

It was OCC that was going to the landfill.

We've done some fairly unique things with regard to some landfills where we are collecting OCC at one place before it goes into the landfill.

So once again, it was going in the landfill.

We've opened two new MRFs, and so that's municipal collection that again was going in the landfill.

So we picked up some share, but a lot of it was just stuff that was going in the landfill.

So that's a win-win-win for the whole system.

Yes, great.

Just on the OCC side, just knowing that forecasting this stuff is kind of a black art.

But I remember back in '94 and '95, OCC for a little while got up to $200.

Maybe a little north of $200.

And I just -- I look at the growth in the Chinese paperboard industry which all runs on OCC and is probably 35 million tons bigger today than it was back in the mid-'90s.

Is it goofy to talk about a $300 OCC cost at some short point in time?

I would think that the people that use OCC that can switch from [emergent] fiber to OCC and back and forth would be somewhat of a ceiling on that that would keep OCC from going that high.

Now in April of last year I believe it was, we actually were selling some OCC for $195 to $200 a ton.

But then it fell off as people were able to get in the woods and collect more wood chips.

I think that's basically the ceiling.

I think, clearly, we are reaching the peak of collection in this country of OCC and old news unless we do ingenious things to keep it from going to the landfill.

And that's where I was talking about earlier is that while I think our collections have grown clearly -- well they have grown clearly.

Most of that has come from us doing unique things rather than going out and trying to simply buy more tons.

Okay.

Well listen, good luck in the quarter.

Thank you, Mark.

At this time, I'm showing no further questions in queue.

I'd like to turn the call back over to Mr.

Roger Schrum for any closing remarks.

Thank you again, Derek.

As a reminder, Sonoco's annual shareholder meeting will be held on Wednesday, April 20, starting at 11.00 AM Eastern Time at the Center Theatre which is located at 212 North Fifth Street in Hartsville, South Carolina.

For those of you who are unable to attend the meeting in person it will be webcast on our Investor Relations website.

In addition, our first Quarter 2011 earnings conference call will be conducted at 11.00 AM on Thursday, April 21, and our earnings release will be issued before the market opens that day.

Let me again thank you all for joining us today, and we appreciate your interest in the Company.

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

Thank you again.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.