Sonoco Products Co (SON) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Q4 2011 Sonoco earnings conference call. My name is Greta and I will be your operator for today. At this time all participants are in listen only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Roger Schrum, Vice President of Investor Relations. Please proceed.

Thank you, Greta. Good morning everyone and welcome to our fourth-quarter and full-year results investor call. This call is being conducted on February 9, 2012. Joining me today are Harris DeLoach, Chairman and Chief Executive Officer; Jack Sanders, President and Chief Operating Officer; and Barry Saunders, Vice President and Chief Financial Officer. A news release reviewing the Company's financial results was released before the market opened today and is available on the investor relations section of our website at Sonoco.com. In addition, we will refer to a presentation that is posted on the investor site during this call.

I'll briefly remind you that today's 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 today's news release and on the Company's website. With that introduction I'll now turn it over to Barry.

Thank you, Roger. Before getting into the numbers I will mention that, as a result of the Tegrant acquisition, we have reevaluated our segment reporting which is very prescribed by generally accepted accounting principles. We have concluded that we will change our segments beginning with this fourth quarter.

If you have access to the quarterly update slide, you see on chart 3 that we will have four segments going forward; consumer packaging, paper and industrial converted products, packaging services, and protective packaging. The most significant change from our previous structure is that, given the significance of Tegrant, we've added protective packaging as a reportable segment, which includes our legacy protective packaging business, and of course, Tegrant as well. Prior to this change, we also had a group of businesses which was referred to as all other Sonoco that was not considered a segment. But after pulling out our legacy protective packaging business and putting it into protective packaging, we've determined that our reels business can be aggregated with the other businesses in the new paper and industrial converted products segment, and our injection molded plastics business could become part of the consumer packaging segment, which already included our other plastic's businesses.

Moving on to slide 4, you can see that this morning we reported earnings under generally accepted accounting principles for the quarter of $0.29 per diluted share and base EPS of $0.46 per share. The difference between GAAP and base is due to pre-tax restructuring expenses of $13 million, or $0.10 per share after-tax. These related primarily to additional charges of previously announced actions, including several plant closures. Acquisition related costs of $9.3 million were related to $6.3 million of fees, most of which were directly related to the Tegrant acquisition and $3 million associated with the impact of purchase accounting on the inventory step up.

Under US GAAP, inventory at the time of acquisition is written up to fair value less selling costs, so very little is earned by the purchaser on the acquired inventory. Given this is a one-time cost and distorts the operational run rate, as we have previously disclosed, we have excluded this impact from base earning. For the after-tax impact of the fees and inventory write up was $0.06 per share. We have a $3 million write off of the deferred tax asset related to a legal entity in Canada association with the decision to close a plant and transfer some of the business into the US. But we also had $4 million in insurance recovery, or $0.03 after-tax, related to fixed assets that were destroyed by a fire in 2010 and we've excluded this from base earnings.

Base EPS of $0.46 per share is in the middle of the range we communicated with our preliminary earnings release two weeks ago, but short of the guidance we had originally provided for the quarter of $0.59 to $0.63 prior to our preliminary release. The shortfall, as compared to the original guidance, was due to a significant fall off in activity in the industrial businesses in the latter part of the quarter and the higher effective tax rate. The results were also below last year's $0.59.

I will now walk through our base P&L summary found on slide 5. But before I go any further through the numbers, I will mention that the 2011 fourth quarter included six fewer accounting days than that of 2010, simply offsetting the six additional days we had in the first quarter this year. In terms of the base P&L compared to last year, sales were $1.129 billion, which was essentially flat with last year for the impact of the six fewer days and lower volumes was offset by higher selling prices and the impact of the Tegrant acquisition. Gross profit was $184.7 million, down $15 million which, you will see in the EBIT bridge, was due to numerous things including the impact of the six fewer accounting days, lower volume in the industrial businesses, even after factoring out the six fewer days, and essentially no manufacturing productivity to offset inflation. Price cost was the most positive story, but even it was not as favorable as expected given the drop-off in OCC prices during the fourth quarter. This resulted in a gross profit margin of 16.4%.

SNA was $100.6 million, lower year-over-year by $6 million due to fewer days in the quarter, and lower management incentives, partially offset by the addition of Tegrant's SNA cost. But this did not offset the lower gross profit, thus base EBIT was $84.1 million, down $8.9 million and EBIT percent to sales was 7.4%, versus 8.2% for the same quarter last year. The lower EBIT accounted for $0.05 of the lower year-over-year earnings per share, but more than half of that shortfall at the EBIT level was due to the fewer days. To round out the income statement, net interest expense of $12.8 million was $3.2 million higher due to the debt issued to finance the Tegrant acquisition and impacted results by $0.02 per share. Income tax expense was $27.8 million based on an effective tax rate on base earnings of 39%, which is much higher than last year's rate of 31.6% and our full year rate of 32.5%. Given the significance of the increase in the effective tax rate, I want to spend just a minute talking about taxes.

On slide 6, you see our base effective tax rate had been running in the 31% to 32% range in the first two quarters. It dropped to 29.1% in the third quarter, which is often lower due to the release of reserves or bond expiration of statute of limitations. In the fourth quarter, it jumped to 39%, bringing our full-year rate to 32.5%. The increase to 39% was driven by four discrete items in the quarter. We always have tax items, but is unusual when they are all one direction, on this quarter they were all negative. Two of the items are related to accelerated items for determining taxes payable that impacted the manufacturing deduction for qualified manufacturers and are somewhat counterintuitive. The manufacturing deduction is based on taxable income from a tax return perspective and not by booked tax expense. Therefore, if you have any accelerated tax deductions, your taxable income goes down so your manufacturing deduction is worth less.

For example, as a result of the fourth quarter decision to make a $30 million pension contribution in early 2012, we were able to consider this as a tax deduction in 2011. And therefore, reduced cash taxes payable by roughly $11 million. But it also reduced our taxable income subject to the manufacturing deduction by $30 million so our manufacturing deduction, which at a 9% deduction rate, came down with the tax impact being right at $1 million. Unfortunately, the pension contribution did not lower book tax expense, but the manufacturing deduction is recognized in our books at the same time and in the same amount as it affects our taxes payable.

A similar impact occurred when much greater than expected accelerated depreciation adjustments were recognized, we were able to get more than expected capital jobs closed and put in service which allowed us to take the 100% accelerated depreciation and notably reduce taxes payable. But again, did not have the same impact on book expense. Over time, assuming the manufacturing deduction is available, cash and book tax will be the same, but cash taxes will be much lower in the early years because of the accelerated deduction for pension and depreciation. We also had some impact from the true up of the mix of both domestic and international and state issues and some other items in the quarter that increased expense.

Now, back to slide 5, to round out the income statement, you do see the higher income taxes and the year-over-year impact of the higher effective tax rate for the quarter negatively impacted EPS by $0.05. Equity affiliates and minority interest was pretty comparable to last year, thus base net income attributable to Sonoco was $47.1 million, or $0.46 per share, $0.13 below last year's $0.59. Again, $0.05 from EBIT, most of which was due to the fewer days, $0.02 from interest, and $0.05 from taxes. And there is about $0.01 of rounding just to make up the difference.

Looking at the change in sales more closely on the sales bridge, on slide 7, you see that 2010 sales were $1.127 billion. Volume and mix was negative on the top line by $21.8 million. Selling prices were higher which increased sales by $37.1 million. Acquisitions added $61.7 million in sales, and exchange and other lowered sales by $74.5 million, bringing 2011 sales to $1.13 billion. As previously mentioned, the fourth quarter 2011 did include six less accounting days than the same quarter last year, offsetting six more days we had in the first quarter. To eliminate the confusion on volume trends, we've included the full impact of the fewer days in all other on the sales and EBIT bridges.

For the Company as a whole, trade volume was down modestly. Trade volume was flat for the overall consumer segment, as roughly a 2% decline in composite can volume in North America, a 1% decline in flexibles volume, and a 1% decline in thermoforming and injection molded plastics was offset by another strong quarter in blow molded plastics where sales were up 23% year-over-year. This was -- in the blow molded plastics group, this was driven by more than 100% increase in the food segment. Total trade volume was down only 2% in paper and converted industrial products as higher trade sales volume in paper, recycling, and reels notably offset lower trade sales in tubes and of cores.

More specifically, on slide 8, you see the volume trends for North America and Europe. Tubes and core average daily volume was running at 1,384 tons per day in North America and this includes US, Canada, and Mexico, in the fourth quarter of 2010, while volume fell off to 1,297 tons per day in the fourth quarter of 2011, representing a 6.4% decrease. In terms of serve market segments, paper mill packaging was flat, film and tape and specialty segments were each down 11%, and textile was down 12%. Of the total decrease, less than 1% was any share change, the balance was all due to demand by customers in those serve segments. Tube and core volume was also down 7% from the prior-year in Europe, with the legacy business in the West down 8%, while the frontier region was down by 3%. But just to kind of round out the volume discussion, tubes and core volume in Asia, which obviously is a much smaller operation for us, was down 16%, but that was due almost entirely to a flood that affected our plant in Thailand. The tube and core volume in South America was up 3%.

Paper North America had higher trade sales, which almost offset the notably lower inter company sales, thus their total volume was down about 2% year-over-year. Recycling volume was up 7% due to an increase in trade sales. Paper Europe total tons were down by 13% due to a similar decline in both inter company and our trade activity. On the bright side, volume in reels was up 24% due to strong demand for steel reels for the utility industry. Volume and packaging services was down as the loss of a pack center contract packaging customer was partially offset by more activity in our CorrFlex business. And in protective packaging, volume in our legacy protective packaging business was down 4% due to exiting one plant in China as a slight weakness in some of the US based businesses was offset by much better quarter this year in Mexico.

Now, back on the sales bridge, on slide 7, you can see that prices were higher year-over-year by $37 million with favorable variances in all segments, but since most price increases were related to higher input costs, it is really easier to discuss these when we review the price cost on the EBIT bridge in just a moment. Acquisitions accounted for $62 million of the increase in sales, with essentially all attributable to the Tegrant acquisition, partially offset by the impact of a disposition of our small injection molded plastics business in South America. All other was negative by $74.5 million, roughly $67 million due to the six fewer days in the fourth quarter, with the balance associated with the translation of sales in foreign currency associated with the overall slight strengthening of the dollar compared to the same period a year earlier.

Moving on to the EBIT bridge, on slide 9, as a starting point, 2010 base EBIT was right at $93 million. Volume and mix was negative and lowered EBIT by $9.1 million. Selling price increases, net of increases for material, energy and freight, was positive by [$6.6 million]. Manufacturing productivity added $1.2 million. The all other category was negative by $12 million, and pension expense was lower year-over-year by $4.6 million. All of which resulted in this year's base EBIT of $84.1 million. I will again point out that the impact of the six fewer days is included down in all other on the bridge, so the impact of the volume shortfall here is just a comparison on a same-day basis. Most of the $9.1 million EBIT impact from lower volume is driven by the industrial businesses, as I previously described. Higher selling prices more than offset higher material, energy and freight costs with most of the favorable variance in the industrial businesses associated with the timing of OCC movement.

Flipping to slide 10 for just a few seconds, looking just at the yellow sheet pricing for OCC in the Southeast, you see that many contracts in tubes and cores and trade paper sales in North America reset in September 2011 based on a $175 per ton OCC price. Then OCC actually moved lower through the quarter averaging $127 per ton, creating a favorable price cost spread compared to last year to 2010 when prices reset at $130 then moved to $155 on average in the fourth quarter. Although price cost was favorable, it was really not nearly as favorable as expected for three key reasons. The first being, that with the slowdown in volume, we used higher-priced paper in inventory for a longer period of time. Pricing in the regions outside the Southeast were also not as favorable as what we saw in the Southeast and lastly, some grades of recovered paper did not move as low as the change in OCC.

Going back to the EBIT bridge on slide 9, productivity was really negligible across all segments. And the drivers were pretty consistent with some of the issues we've experienced throughout the year and further exacerbated by the significant drop-off in volume in the fourth quarter. The most significant impact was associated with paper mill capacity utilization, which in North America was only 92% in the fourth quarter of 2011 versus 100% in the fourth quarter 2010, due to 124 more machine days down this year. European utilization deteriorated even more as the mills there were only 78% utilized in the fourth quarter of 2011, versus 95% a year earlier.

The all other category was unfavorable by $12 million, roughly $6 million of which was the EBIT impact of the six fewer days in the fourth quarter of 2011. The balance of the variance was associated with higher inflation, other than on the material energy's and freight, partially offset by lower selling, general and administrative costs due to lower incentives, and the Tegrant earnings, which were generally in line with our expectations. The impact of translation on net income was insignificant for the quarter of only about $400,000. And finally, pension expense, as mentioned, was favorable by $4.6 million.

Turning to slide 11, you see a recap of the results by segment for the quarter, with the prior year, 2010, restated to reflect the current segment structure. Just as a reminder, absent any other drivers, sales and EBIT would have been down 6% due to the six fewer days. Consumer packaging sales were down 2%, while EBIT was down 6%, resulting in an n EBIT margin of 9.8%. Much of the margin percent decline is just due to the calculation where absent the change in days, sales are increasing due to higher prices but profits are not affected if the higher prices are just recovering related cost increases.

Paper and industrial converted product trade sales were down 5%, while EBIT was down 17.5% with the EBIT margin following 6.5%. The lower margin was driven by the lower volume and the related impact on productivity and the impact of a higher percentage of trade sales versus intercompany sales, particularly in our paper operations which increases reported trade sales really has no impact on profits. Sales in packaging services were down 18% due to the loss of the previously announced contract manufacturing customer and unfavorable mix, while earnings were down, but only $600,000 in dollar terms. Protective packaging last year just included our legacy results, while this year included 55 days of results for Tegrant.

Moving onto the balance sheet, which you can find on slide 12, the most notable drivers of the change in many accounts was the Tegrant acquisition. And also as expected, we did record an actuarial loss on our US qualified pension plan of $153 million pre-tax, resulting from lower discount rates and lower than assumed return on investment. The increase in liability does not impact 2011 earnings as the after-tax impact of this actuarial loss was recorded in equity as an increase in accumulated other comprehensive loss, but is the primary reason that pension expense will be higher in 2012. With the debt related to Tegrant acquisition, as expected, our debt to total capital increased to 47.4% at the end of the year.

To spend just another minute talking about pensions, on slide 13, you see that the direction and the magnitude of the change in both the liability and projected expense for 2012 are in line with what we described in December. As you might recall, we split the US qualified plan into an active and inactive plan at the end of 2010, but for simplicity I will just speak to the blended information. At the end of 2010, our funded status for the domestic qualified plans was 83%, but immediately following the $85 million contribution in early 2011, it would have increased to about 92%. But due to the actuarial losses, we are down to 80% funded status at year-end.

In terms of the discount rates, rates are down for the two plans on average, 75 basis points. And you can also see that the other part of the actuarial loss is coming from investment returns where we have actual returns of only 4.5% in 2011 versus a weighted assumed rate of return of 7.8% on average between the two plans. To complete the update on pension, I'll just point out that pension expense is expected to increase by $14 million in 2012, due primarily to the amortization of part of the additional actuarial loss that I just described, which creates right at $0.10 per share headwind we will be facing. And we are expecting pension contributions to be right at $76 million, including a $30 million payment made to our domestic qualified plans in early January.

In terms of cash flow, on slide 14, you see that we had cash from operations of $113 million for the quarter, bringing our full-year cash from operations to $245 million, which was about $15 million below what we had projected for the year, simply due to the lower earnings in the fourth quarter. This compares to $375 million in 2010, but pension and post retirement plan contributions were $141 million in 2011 versus $29 million in 2010, which accounts for much of that year-over-year difference in cash from operations. For the year, capital spending net of asset sales was $162 million, which has trended up as a result of growth projects in the consumer businesses, most notably in our plastics. Investments to lower cost in our paper mills, including some initial spending for the biomass boiler project in Hartsville, and IT related spending for systems upgrades. We paid out $115 million in dividends and acquired net shares of $28 million. And finally, we spent $566 million on acquisitions in the year, most of which was related to Tegrant.

In terms of our outlook for 2012, based on the updated earnings outlook, we are projecting cash from operations to be around $385 million, including the impact of expecting to make approximately $75 million in contributions to our pension and post retirement plan globally. Capital spending should be in the $185 million range and after paying dividends, would expect to have approximately $80 million in free cash flow, which could be used for debt repayment.

And lastly, turning to our forward-looking guidance for 2012, we are now projecting that base earnings per share will be between $2.32 to $2.42 per share for the full year. At the midpoint of $2.37, this is $0.15 lower than the preliminary outlook we provided in early December, due to a lower run rate in our industrial businesses, particularly in Europe, and due to a higher effective tax rate. We had used a 32% effective tax rate for 2012 for the earlier projections, and we are now expecting our blended rate to be 33.6% based on the projected mix of business.

In terms of guidance for the first quarter, we are projecting base earnings per share to be between $0.45 and $0.50. As you might know, we do experience some seasonality in some of our businesses and our first quarter is generally the lightest. In terms of the year-over-year comparison, it is down due to the headwinds we are facing related to higher pension costs, the higher effective tax rate, a slight negative impact from foreign exchange and the number of shares outstanding, as well as the headwinds we are facing from a lower run rate in our industrial businesses, particularly in Europe. And the fact that our packaging services business was particularly strong in the first and, in fact, the second quarter as well, in 2011, due to the activity leading up to the closure of the contract packaging account. That concludes my overview of the quarter and our updated outlook, and we will now open it up for questions.

(Operator Instructions). George Staphos, Bank of America Merrill Lynch

Maybe a bigger picture question to start, obviously volume did not transpire as you'd expected. You are not alone in that regard in the fourth quarter and for many periods during 2011. That was a big factor in terms of your productivity being, perhaps, not where you had wanted it to be. Having said that, do you think that 2011 was also impacted by just the fact, and related to productivity, the fact that there was so much going on at Sonoco with the Tegrant acquisition, with some of the capital initiatives, and I guess to some degree, given that the Company itself has grown in its scale and diversity, do you think that at all is having any impact in terms of management's ability, the folks reporting to you, their ability to get productivity out of the business? Is there too much going on at Sonoco, do you think, or was that the case, perhaps, in 2011?

George, clearly volume impacted '11, which you knowledge. I wouldn't say that the acquisition activity last year probably took some focus off of productivity more so than we realized at the time. It was not only Tegrant, but there was a lot of other acquisition activity in the year that actually didn't come to fruition. I would clearly say there was some disruption that could cause some of that lack of productivity. I don't think Sonoco is any more complex today than it was in 2010 and '09 and '08 and '07, I think we have certainly the management team to handle the productivity and drive the productivity back to historical levels and that is what I would expect in 2012. Jack, you want to comment?

The only thing I would add, is that I think that it was also true that 2011 was a year of unusual inflation, especially during the first half of the year. It was extremely strong and that creeps into our productivity calculations in ways that we can't actually see and calculate, but that definitely was a factor. As well as, if you will recall, the winter of 2011 was quite severe versus this nice weather that we are having now, but it had an impact on our operations throughout the north and northeast in the first quarter.

You mentioned in your press release and commentary that you don't anticipate further reductions in industrial volumes from the fourth quarter level. If I paraphrase that correctly, could you provide some details? You mentioned energy inflation within the consumer segment. Could you remind us why there would be unusual energy impact in consumer in the quarter, if I capture that correctly, given packaging converting business don't generally consumer a lot of energy?

Specifically, George, I guess to the run rate situation not being lower than the fourth quarter, I would tell you that US run rates today are better than December. And actually have probably rebounded a little bit more, maybe a little bit stronger than we actually anticipated. We feel good that our projection forward now is pretty stable, at least for the foreseeable future. Europe, certainly, also, saw improvement from December, but is probably not as strong as we would like. Again, we factored all of that into our guidance going forward. Our mill utilization is certainly better during the first part of this year. Everything seems to indicate that what we've factored into our forecast for now seems to be realistic for what we expect. As far as energy on the consumer side, I would tell you that freight is a part of it, but also there is energy consumed in blow molding, which is a little bit different than our portfolio has been in the past, as well as in flexibles.

Philip Ng, Jefferies.

From a very high-level standpoint, the macro did it coming out of the USA, would probably suggest things have improved on the margin, but it seems, at least in your tubes and core business, things have softened. Trying to get a sense what is the disconnect, are you seeing leakage in your business into other forms of packaging?

How about repeat that question. I'm sorry we didn't get the whole thing, it broke up on us.

The latest macro data coming out of the US would suggest that things have actually been picking up a little bit. But your tubes and core business has obviously softened. Just want to get a sense of what the disconnect is there and have you been seeing any leakage in your business into other forms of packaging?

No, this is Jack. I think that what would explain that is the GDP isn't an exact barometer for our business. It is more the markets we serve. When we look at textiles, when we look at tape, film and specialties, all those markets were down year over year and even quarter over quarter. That is really what drives our tube and core volume. I think we said earlier that paper mill was flat, but the others were down and that's really what drives the volumes. I don't see leakage into other forms of packaging. Is just a matter of our served markets really being down.

Okay and then noticed you guys have announced some price increases, particularly in your paperboard business in Europe. Is that more a reflection that demand is coming back a little bit or just simply a cost plus here?

It is a reflection of cost.

Are you getting more abnormal pushback, just as a macro has been challenging out there?

Well, it certainly we are very early in the process and I would tell you I expect pushback, but it is an increasing cost and we're going to push hard.

Okay and just lastly, on your consumer packaging business. Order patterns were a bit choppy last year and part of that I would imagine volumes were depressed by food inflation. Have you seen promotional activity pick up a bit for your customers and just thoughts on the demand profile from your customers on the consumer business.

No, not -- it is really too early for us to see any type of promotional type of activities, but I will tell you that coming out of the box, we are pleased with consumer. I think that the projections that we've got in our reel forecast are solid. And I feel good about that, as well as our protective packaging business. Both of those we feel good about.

Ghansham Panjabi, Robert W Baird

Just curious on how Tegrant performed intra quarter on a volume basis perhaps relative to your internal plan?

If I were to look back in the October, November time frame, it was probably lighter than they had anticipated in our original plan. They would -- they told us that there was probably some destocking in their customers. As Jack was alluding to just a moment ago, January was much better and actually was over what our expectations were for January in terms of volume. And so, I would say on balance it's probably doing as we expected or perhaps a tad better.

Harris, how would you qualify the visibility in that business? How much lead time do you have, based on what your customers are seeing and how that flows through to you guys?

You're talking about Tegrant? I'm not sure I have a good feel for that. Do you Jack have about visibility in the customer? I think it is too early for us to know that contribution, to be perfectly honest.

I would also add to that, when we picked up Tegrant, we were fortunate I guess, we got them over the New Year's -- I mean the Thanksgiving holiday and the Christmas holiday and certainly that is a period all businesses have to deal with.

And then on the consumer business, your comments on volume being flat in that business, how has the ownership news flow on Pringles effected volumes in that category?

Actually, Pringles volume year over year was up nicely and we were managing Pringles like we always manage Pringles. We are very close to the team at P&G that runs the Pringles business, we have nice expansion plans with them and a lot of productivity initiatives with them. Business as usual with Pringles with us and whatever happens with the proposed acquisition, it is what it is and we will manage it accordingly.

On '12 a quarterly variances on accounting days, is there anything that we should keep in mind as we think through the quarterly progression?

I don't think there is anything on a day basis. I think there is one day added in one quarter of the other. I would remind what Jack said, or Barry, one or the other, there is a certain amount of seasonality in our business where the first quarter is always the lightest quarter of the year. And we would expect that, obviously, in 2012 as well.

Phil Gresh, JPMorgan

Obviously, 2011 was a challenging year from both a volume standpoint and otherwise. Harris, as we think about your guidance for 2012, could you share with us what you would see as perhaps the biggest non-macro related upside or downside opportunities available?

I think the biggest opportunity obviously, Phil, is macro and we have baked into our guidance basically the run rate that we anticipated coming out of December on the industrial side of the business and I think that is the real wild card. We were reasonably cautious and I think with good reason with Europe, and we still don't anticipate a strong rebound in Europe, at least in the first half of the year. We've got a lot of things going on and obviously execution is critical to them. We have a lot of consumer products coming on. We have the completion of the new blow molded plan in Columbus, Ohio coming on and we've got the new products coming on as well.

I think the real key is going to be getting back to historical levels of productivity and I can tell you that Jack and his team are very well appropriately focused on that and I have high confidence that, that will in fact happen. The other, I think -- I don't know what were going to see on raw material costs, inflation, that Jack referenced, but we will see something. But given our historical market position, historically the way we manage the business, I would expect us to manage price cost in a positive fashion as we always do. When I come back to it, it probably is the macro that probably gives us the most upside and perhaps downside as we go forward in the year.

And just looking at the bridges, I noticed if I look at the full year, the contribution from volumes was about $16 million, but the hit to profits was about $18 million. I would assume you would get volume leverage, so therefore, the majority of that is a mix related and if I do the math on it, it is somewhere around $0.10 to $0.15%, or about 5% of EPS. It is not that small. I was wondering if you could maybe share what you think the biggest drivers of that are and whether that is something that we are neutralizing at this point as we head into 2012?

Certainly we didn't mention it as a big issue in this quarter, but in previous quarters we have talked about mix being a pretty significant part of the reason that the volume was off in many businesses, whether it was in our paper operations, export sales, or in our consumer business where there was a change in mix of composite cans, et cetera. Most of that difference that you are looking at is due to mix and again, primarily more of what we were seeing earlier in the year versus what we saw in the fourth quarter.

As you think about capital allocation priorities as you're working through the integration of Tegrant, how are you thinking about the uses of cash this year?

Well, we -- our thoughts about cash really hasn't changed that much, Phil. We will generate good cash flow, we've got a higher CapEx in 2012 driven somewhat by the Hartsville master plan project of the biomass boiler that we talked about in New York in December, as well as some systems cost for our Oracle implementation. And then we've got the dividend that is very important to our shareholders, so we do that. The cash flow, we will use our free cash flow probably this year to pay down some debt that we acquired with the Tegrant acquisition and position ourselves to move forward in that arena probably in '13.

Chris Manuel, Wells Fargo

I think the direction George was going earlier with respect to what volumes are going to look like in 2012 versus '11 and partly versus maybe where expectations are. I think what you indicated was you had reforecast based on where things were in December and I'm just trying to understand what that necessarily implies for full year as I think through some of the segments. If memory serves, you had originally expected that you're consumer business overall would be roughly flat. If you give us a sense of where that would be now embedded into your numbers versus your expectation previously, and I think tube and core might have been kind of flattish for that globally as well. Could you help us maybe update us on where you are in your current numbers for those post December?

Yes, Chris, I was -- first of all, no, we did not based them on the December run rate. Consumer basically, yes, we see that is going to be flat year over year. I think that what we did was revise based upon what we saw in the December. I think tube and core North America we're seeing is going to be down about 3% year over year and Europe down about 6% now year over year, which is not what we originally wrote out, but based upon what we saw in the fourth quarter and our best estimates looking forward, that's where volumes -- that's where we see volumes.

How much do you feel, certainly, all the data that we look at from Europe and from other regions is clearly more negative now than where it was recently, let's say. How much of the reduction do you think is maybe permanent, how much is maybe temporary, with respect to some destocking going on, given tougher credit conditions for your customers over in Europe? Does it -- at what point do you take a step back and maybe reassess for potential restructuring for sizing your business?

Well, go ahead --

Chris, my crystal ball is not as accurate as you probably would like. I don't think that this was -- there is obviously some destocking went on in December and November, December and early January. I think it was just pure demand in that European business that drove that down. And I would say to you that Jack and his team have already looked at contingency plans in Europe and will probably pull a couple of triggers and are prepared to pull a couple of more is it is a permanent change, but I frankly think it is more temporary than it is permanent.

Chip Dillon, Vertical

First question is just as we look at 2012, I was noticing that if you take a birds-eye view, the 45 to 50 would basically represent, I believe, the lowest first quarter since probably going back to 2006. Six years ago, and yet when I look at the last three quarters, so let's say you hit -- let's call $0.47 the midpoint, so if you do the midpoint of the year, to call it $2.37, that would be an incremental $1.90 in the back nine months, which is a number you have never done before. We're kind of going from a quarter that would be kind of a six-year low point to an all-time sort of best last nine months. Maybe you haven't specifically looked at it from that high of a level, maybe you have, but it would seem that you are being fairly optimistic in terms of how much a lot of the business snaps back and I just want to know if you could give us a little viewpoint on how you see that unfolding as we go through the back nine months of the year?

I'd be happy to. And actually we have looked at it from that level as well. I want to start off reminding everybody for the second time that there is a certain amount of seasonality in our business and the first quarter is traditionally the lowest business. And to Barry's point, this year we've got a fairly significant headwind on pension and tax compared to other years.

As I look out for the balance of the year, and we are quite comfortable at least at this point with our guidance for the full year, we've got a fair amount of consumer growth that is baked in that is already in the pipeline that will come on in the balance of the second half of the year. One piece of it is the completion of the blow molded operation in Columbus, Ohio, which I previously had mentioned to serve health and beauty customers. We've also got, in the pipeline, about $150 million or so of new products that I expect to come on at various stages in the year. We also, in response to someone's question, I guess it was George's, about productivity getting back to historical levels, which I'm comfortable the plans in place to do that. I also think in the year, we were chasing margins with higher raw material costs through the year, through '11 and I expect that not to be the case this year. Then we, obviously, are controlling costs pretty tightly in the Company. We are quite comfortable with the guidance that we have given. Jack has a comment.

Obviously, Tegrant is in the mix now and the contribution we expect from Tegrant is part of that increase.

And when you look at the blow molded business, which obviously had a big jump last year, how do you think about the growth rate there? Should that stay at significantly above the Company average, more than say a couple of years? Do you see a runway where that can happen? To reverse gears, do you think in the industrial business that as we -- I don't know, maybe you could update this for us, but I know a number of your tubes and cores do find their way into the paper business where they wind the paper on the reels, on the cores, and with lower demand in some of the printing grades, is that something that you feel might continue to push that volume down on the tube and core side gradually over time?

Let me first talk to the blow molding piece. We have experienced some solid growth in blow molding. We will experience it again this year with the opening of the beauty park operations in Columbus and we continue to work on numerous projects with our customers to continue to expand our presence, there. A lot of that is conversion from other packaging formats, many times glass, et cetera. We expect to continue to try to drive growth in blow molding and look forward to do so.

On the tube and core side as relative to paper, certainly there has been a decline in the coded printing and writing and newsprint and that does impact our volumes. I will say that the volumes on the brown board side, however, have remained pretty solid. I'm not seen that type of decline and working to gain share and position ourselves to be the best supplier of cores into the brown board segment is on our radar screen, as well as growth in film that is helping offset some of that decline which has been historical over the last several years. Yes, high end paper, down but there are other opportunities on the tube and core side to offset that.

Mark Wilde, Deutsche Bank.

Harris, I wondered if you or Jack could just give a little more color on this weakness in industrial packaging. Maybe draw some comparisons or some contrast between North America and Europe. Also, just as an observation, it seems like some of the public and private companies that I deal with in industrial packaging saw this a little bit earlier in the year than you guys did, like starting to crop up some time mid to late summer, maybe you can speak to that.

Mark, I think that as we -- the story of the fourth quarter was December. Certainly we saw the traditional slow down in August in Europe and then had some -- the normal return to volumes that we see. To give you little bit of color in the picture, we had 143 down days in our mill system in the US 2011. 143 more in '11 versus '10. 124 of those were the fourth quarter. The bulk of that pushed into December. In Europe, we had 100 more down days in the fourth quarter than we did in the fourth quarter of 2010 and prior to that, it was basically flat on a year over year down day basis. For us, it just occurred. That's the way it occurred to us. Again, I go back, it has to do with the end markets we serve. We just did not see the drops in those market until the fourth quarter and then in the fourth quarter, it was well into December before we saw those significant fall offs.

Just on the cost side, is it possible, Jack, to get the little of your perspective on this bounce that we are seeing in both Europe and North America in the OCC prices and thoughts about how that will affect you in the first and second quarter?

Well, we certainly see OCC drifting up in Europe and that is why we are out with a price increase. OCC has remained flat now for two or three months, if I'm not mistaken. Four? Actually, four months. And the expectation is -- my expectation is that it is going to follow its traditional pattern and will begin to rise here shortly and if it does, we will be out and push price. I'm not expecting a runaway year. I'm kind of expecting that same type of flow that we had in 2011.

Finally, Barry, just can you tell us what you are assuming in terms of FX in 2012?

I think CapEx is $185 million in 2012--

Wrong X, Harris. I am interested in your foreign exchange assumption.

Mark, our outlook was put together around the dollar being slightly stronger on average, but again impacting earnings for the full year by about $0.04 or so compared to 2011.

Alex Ovshey, Goldman Sachs

Can you just remind us the Company's top line exposure to Europe and just the breakout of that exposure by each of the segments?

We've got about 17% of our total sales, it actually may be a little bit less than that with Tegrant in the mix in Europe in total, and most of that is in the paper and industrial converted businesses.

Can you talk about the competitive landscape in composite cans just in the trade and hearing that companies in some of the other paper packaging substrates are targeting some of the end markets that would overlap with composite cans? Are you seeing any incremental competitive pressure in any of the composite can end market?

Alex, I would simply say that we have a very strong position in composite cans. Our technology in composite cans is significantly advanced and we feel very good about that. And we think the composite can has a lot of strengths against other formats and we are going to continue to push and pursue that. We feel good about our position in the composite can.

Maybe last question, talk about what you see as the biggest upside and downside risk to OCC prices this year?

I think the biggest upside and downside is going to be macroeconomic conditions and that's going to drive demand and that will be the biggest driver of OCC.

At this time there are no more questions.

Thank you very much, Greta. As a reminder, Sonoco's annual shareholders meeting will be held on Wednesday, April 18 starting at 11 AM Eastern time at the Center Theater which is located at 212 N 5th Street here in Hartsville, South Carolina. For those of you that are unable to attend the meeting in person, it will be webcast on our investor relations website. In addition, our first-quarter 2012 earnings conference call will be conducted at 11 AM on Thursday, April 19 and our earnings release will be issued before the market opens that day.

Again, let me 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, very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.