Sonoco Products Q4 2008 Earnings Call Transcript

| About: Sonoco Products (SON)

Sonoco Products Company (NYSE:SON)

Q4 2008 Earnings Call

February 05, 2009 11:00 AM ET

Executives

Roger Schrum - Vice President, Investor Relations and Corporate Affairs

Charles Hupfer - Senior Vice President, Chief Financial Officer and Corporate Secretary

Harris DeLoach - Chairman, President and Chief Executive Officer

Analysts

Claudia Hueston - J.P. Morgan

George Staphos - Banc of America Securities

Mark Wilde - Deutsche Bank

Christopher Manuel - KeyBanc Capital Markets

Joseph Naya - UBS

Operator

Greetings, ladies and gentlemen, and welcome to the Fourth Quarter 2008 Earning Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this call is being recorded.

It is now my pleasure to introduce your host Mr. Roger Schrum, Vice President of Investor Relations for Sonoco Products Company. Thank you and Mr. Schrum, you may now begin.

Roger Schrum

Thank you, Shreya (ph), and good morning, everyone and welcome to Sonoco's 2008 fourth quarter and annual financial results investor call. This call is being conducted on February 5, 2009. Joining me today are Harris DeLoach, Chairman, President, and Chief Executive Officer; and Charlie Hupfer, Senior Vice President and Chief Financial Officer.

Our financial results for the fourth quarter and the full year were released before the market opened today and are available via our website at sonoco.com.

Let me begin by stating that today's investor call may contain a number of forward-looking statements that are based on current expectations, estimates, and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties. Therefore, actual results may differ materially. Additional information about factors that could cause different results and information about the use by the company of non-GAAP financial measures is available in our annual report and on the company's website.

With that I will now turn it over to Charlie Hupfer.

Charles Hupfer

Okay thank you, Roger. Today, Sonoco reported fourth quarter EPS of $0.36 a share and base EPS of $0.49 per share. Base EPS of $0.49 per share excludes restructuring and asset impairment charges and is inside our revised guidance of $0.48 to $0.52.

The quarter was a little weaker than we expected when we revised guidance on December 5th. Industrial volume was especially weak in November and December and frankly that seems to have carried over into 2009. And it is reflected in our 2009 guidance that I'll talk about a little bit later.

Let me begin by reconciling GAAP net income and EPS to base net income and EPS. In the fourth quarter 2008 we took a restructuring/impairment charge of $22 million pretax. After tax that's 13.1 million or $0.13 a share. The majority of the restructuring charge and impairment charge represents restructuring that we announced on December 5th.

The big items were the closure of two paper mills and an asset impairment charge in Brazil. If we add the $0.13 to the as reported EPS of $0.36, we arrive at base EPS of $0.49 a share.

Last year in the fourth quarter we had 8.7 million in restructuring and we added 4.1 million to environmental reserves related to the Fox River for a grand total of 12.8 million. After tax that's 8.5% -- or $8.5 million or $0.08 a share. If we add the $0.08 to the as reported $0.54, we arrive at $0.62 EPS for the fourth quarter of 2007. So with those adjustments in mind, I'll read out to you a comparative base income statement starting with net sales which were 934.6 million, down 11.8% from last year's 1.601 billion.

Base EBIT is 75.9 million down 17.5% from last year's 92 million. Net interest expense was 11.2 million this year versus 14 million last year. Taxes were 18.6 million this year versus 19.8 million last year. And equity and affiliates which includes minority interest were 3 million versus 4.5 million last year. That leaves us with base net income of 49.1 million in the fourth quarter of 2008 versus 62.7 million in the fourth quarter of 2007, that's a decrease of 21.7%.

Base EPS was $0.49 a share versus $0.62 a share last year. Again that's a decrease of 21.7%. First let me comment on interest expense which was favorable to last year about $2.8 million. The majority of the year-over-year difference is due to debt reduction. Our balance sheet shows a year-over-year reduction of $160 million in total debt. Our commercial paper interest rate averaged 2.96 in the fourth quarter 2008 and that compares with 4.98 in the fourth quarter of 2007. Our CP balance at year end was only $95 million and our CP borrowing rate now is in the 1% range.

Now with the tax expense, our effective tax rate for the fourth quarter of 2008 was 28.7%. The effective tax rate benefited from a $2.5 million adjustment to reserve at our Greek subsidiary, otherwise the rate would have been a more normal 32 to 33%.

Last year's effective tax rate was 25.4%. Last year we adjusted tax reserves in the fourth quarter for fourth quarter's statutory rate reduction in Canada and in Italy.

Now let me turn to the segment reporting. Our segment reporting basically tells the same story that it did in the first, second and third quarters and that is a solid performance in the consumer segment offset by weakness in the other segments. So let me just walk down through the segments briefly. The consumer segment saw sales down two-tenths of a percent but profits were up 13.8%. Volume held up very well in our U.S. composite can business across most product lines. For example snacks, dough, concentrate, miscellaneous food, those volumes were all up in the 6 to 13% range. We did see a 22% decline in caulk and adhesives and we also saw lower net sales in the quarter.

Our Phoenix Netherlands business was adversely affected by steel surcharges. However in this particular segment, the big year-over-year difference was the improvement in flexi -- our flexible packaging operation.

Now the Tube, Core and Paper. Sales were down 21.7%, profits were down 29.9%. The real story in this segment is volume in the tube and core part of our business and that drives volume in our paper operations in the U.S. and in Europe. In fact only South America showed any real year-over-year strength in Tube, Core, and Paper.

Packaging services, sales were down 15% and profits were down 51.9%. The year-over-year shortfall was at our CorrFlex operation and that's in the fulfillment side of our business which just simply reflects a slowdown in point of purchase advertising.

And then all other sales were down 8% and profits were down 19.5%. Businesses like our baker reels business and protective packaging have clearly been affected by the construction and housing markets. Now let me turn to the sales bridge, and this is where we reconcile last year's 1.601 billion to this year's 934 million, and that's a difference of $125.5 million. And the make up of that 125.5 million is volume, volume was negative $88 million.

Price; this would be price increases at the sales line, price was positive $14.2 million, acquisitions were slightly negative $1.7 million, and foreign exchange was negative by $50 million. So 88 -- negative 88, 14.2 price and negative acquisitions of 1.7 and negative foreign exchange of 50 million should add up to an overall negative of $125.5 million.

Let me start with volume. The volume shortfall is principally in two segments. It's in our Tube, Core and Paper segment and our packaging services segment. tube and core volume in the U.S. and Canada was down 15% overall and when we look back behind that into the segments that we sell into, textile volume was down 34%, film volume was down 22% and we did see our paper mill core volume down 5%.

Our internal reports that we prepare show that we did see a modest overall share gain in the quarter. So, we think this shortfall is all economy driven. Tube, Core and Paper in Europe was down 14% and we saw weakness there in both our legacy operations and in our frontier operations. Paper trades, sales were down 13% in the U.S. and they were down 7% in Europe. And as I mentioned earlier, our CorrFlex point-of-purchase and fulfillment business; there fulfillment volume was well behind last year approximately 25% down from last year.

Now the price. Price added 14.2 million to our sales. We experienced positive pricing in all parts of our business. Now I don't think this represents pricing activity in the quarter as much as just a carry over from prior quarter's activities. Sonoco recycling pricing was down, however. OCC averaged $55 a ton this quarter versus $125 a ton in the fourth quarter of last year. So that's an overall difference of $70 a ton and that's reflected in the pricing of OCC -- basically in the pricing of OCC as we sell it in the outside market. So what we saw there was OCC, and this would be Southeast yellow (ph) sheet in September with a $110, in October it dropped to 95, in November 45, and in December it dropped to $25 a ton and so that's what gives you the average of roughly $50 a ton.

In term of acquisitions, acquisition was a negative 1.7 million. All significant acquisition activity has been grandfathered. So this slight negative is largely related to the sale and closure of our operation in China, our Chinese paper mill. And then foreign exchange is a negative 50 million and that represents the stronger dollar year-over-year versus the Euro which is up 10% to the Euro, the pound 30% and the Canadian dollar 20 some percent.

As I mentioned that the outset, fourth quarter dollar sales were down 11.8%. When I look behind that October sales were down 8% year-over-year, November sales were then down 16% year-over-year and December sales were down 13% year-over-year. So there's no question that volume weakened during the quarter. The question for 2009 is how fast will it bounce back?

Now let me turn to the EBIT bridge when we reconcile last year's $92 million with this year's $75.9 million. That's a negative $16.1 million. And the makeup of that is volume is negative $33 million, 33.8 million. Price cost is a positive $11.9 million. Productivity is up negative 2.2 million and all other is a positive 7.9 million.

So that's -- those four numbers 33.8 negative, 11.9 positive, 2.2 negative and 7.9 positive should add to a negative 16.1 year-over-year difference. The profit impact of the volume shortfall as I said was 33.8 million. The biggest shortfall is in the Tube, Core and Paper segment where global trade sales were down year-over-year by 12%. Our inner company paper sales were down by a similar amount and that compounds the property impact for the Tube, Core and Paper segment.

The other significant short fall year-over-year was in the packaging services segment and again that related to the volume shortfall at our CorrFlex operation.

Price cost is a positive $11.9 million, I mentioned earlier when I talked about sales that prices were up 14.2 million which would imply the cost, and that includes freight and energy, were only up $2.3 million. That's certainly not the entire story when we get into the detail because embedded in the fourth quarter year-over-year cost is a favorable material variant due to our lower furnished cost of approximately $50 a ton. So, offsetting that lower OCC cost then which is reflected in this price cost number were higher metal and film costs in our consumer segment.

Productivity was a negative 2.2 million and that was not unexpected but it was still a bit of a disappointment for us. We had negative productivity in the Tube, Core and Paper segment and it's due entirely to our paper operations. There is basically no productivity when machines are taking down time and to give you an example of that, utilization in our U.S. paper mills was only 81% in the fourth quarter of 2008 and that compares with 95.7% in the fourth quarter of 2007. CorrFlex also had negative productivity due to the under utilization of their fulfillment operation.

And then lastly all other, that's a positive of 7.9 million and that basically comes from a couple of things. One of them is lower fixed cost due to plant closings and a second would just simply be tight control over discretionary spending. For example, our selling and administrative spending was down $5 million year-over-year.

Now I am not going to go into any details on the year-to-date results, but let me read out a couple of figures for you. For the whole year net sales were $4.122 billion, and that's up 2% over last year's $4.04 billion. Net income was $226.4 million and that's down 6.6% or $60 million from last year's 242.4.

EPS was $2.24 and that's down $0.14 or 5.8%. And net EPS of $2.24 is within our revised guidance of $2.23 to $2.27.

Let me just mention the bridges for the whole year and I won't make any further comment but sales overall were up $82 million. When I look behind that volume was a negative $161 million. Price was a positive 103 million, acquisitions added 71 million and foreign exchange added 69 million. When I look at the EBIT bridge, EBIT is down $19 million and the volume shortfall is a negative $75 million. Price cost was a positive $12 million; productivity, a positive 33 million; and all other, a positive 11 million.

So when you look at the year-to-date results just like the fourth quarter you can see that the issue is volume at both the sales and at the EBIT line.

Now I'm going to talk about cash flow. Our operating cash flow for the quarter was $69.2 million versus $187.2 million last year. That's a difference $118 million year-over-year. So there were really two big drivers, networking capital was one of them, networking capital provided $42.7 million of cash flow versus last year networking capital provided $100.9 million. So even though we had positive cash flow coming from working capital, it was still 58.2 million unfavorable to last year's change.

Last year, I'm talking about 2007; a lot of our working capital benefit came from managing accounts payable. This year we knew that the year-over-year improvement would have to come not from payables but from accounts receivable and from inventory.

When we look at our internal measures of cash GAAP days and cash GAAP days are accounts receivable plus inventory, minus accounts payable that those internal measures that we use show that significant year-over-year improvement until we got to November. So, I'll give you some examples of that. Just looking at the month of September, our cash GAAP day would calculate out to be 39.5 days. That moved up a little bit in October to 39.7 days and then it jumped in November to 43.1 day and then it jumped again in December to 47.4 days.

So, the difference between September and December is 7.9 days and that's a pretty significant increase. Some of that increase was to be expected at yearend. For example in 2007, we saw a two-day increase, so just the way the calculation works and the slowdown of business in the fourth quarter, now that number is going to go up. But it went up almost 8 days in this year's fourth quarter compared with just two days in last year's fourth quarter. A lot of that was just simply our inability to reduce inventories fast enough to match the slowing business condition.

The other big driver in cash flow is the other -- all other category which is largely made up of prepaid and accruals. A lot of the negative wages simply had to do with the way the calendar fell, for example with regard to payroll accruals. And also the fact that accruals for incentives and long-term plans were reduced this year compared with last year.

Now to our balance sheet. Our balance sheet remains strong. That was reduced year-over-year as I mentioned earlier by $160 million. And I'll talk about pension in a minute but as it relates to the balance sheet our unfunded or under funded pension position at 12/31 resulted in roughly a $200 million charge to equity. As a result of that, our debt to total capital increased to 37.2% compared with 37.1% last year.

Now I'd take a minute to mention that we've changed the calculation of debt to total capital to include only debt and equity just to make it a more straightforward calculation. In other words, we are not using differed taxes in the calculation as we've used them in the past.

So, on this revised method it would have caused our debt to total capital to go up. But debt to total capital as I've said is 37.2% at the end of December 31, 2008. Without the pension adjustment that I mentioned to take into account the under-funded pension plan, debt to total capital would have been 33.6%.

At yearend we had $95 million worth of CP outstanding out of a total debt at $690 million, our fixed floating ratio was 80% fixed, 20% floating right now. We had two CP dealers and we've had no trouble selling CP and as I said earlier, the rates have settled into the 1% range.

Now let me take a minute and talk about pension performance. Our U.S. plan had a negative return this year, this year being 2008, of 24.3% for the year. This drove us from an over-funded position last year of $40 million to an under-funded position in our U.S. plan of $266 million. The asset change year-over-year of $306 million and this 306 million is what drove the 200 million after-tax charge to equity. So we put that under-funded position on the books as a liability in the after-tax impact of that is a charge into the OCI section of the equity.

If you take all of our plans together and that's our SURF plan, our foreign plan, the year-over-year change in funded status was $324 million. So it's clear that the U.S. plan at 306 million was the big driver in the year-over-year change.

The 2008 pension plan performance has a significant impact on our 2009 expense. Our calculation shows that incremental expense will be $59 million this year compared with last year; that's 2009 compared with 2008. And the increase is coming from two categories. The one category is just return on assets; the second one is the amortization of actuarial losses. On our 2009 projected return and that's our asset credit to the expense calculation is $29 million less than 2008's number. And this is nothing more than 8.5% times a much lower investment balance. The second category is amortization and here we expect expense to increase by almost $34 million and this is simply actuarial losses most of those are coming from the investment loss spread over approximately 11 years. We are in the process of making some changes to the U.S. plan that will reduce expense over the long term and reduce volatility.

But these changes won't have -- will have very little effect on our 2009 expense. So as a result of that pension expense will increase by approximately $35 million or $0.35 a share in 2009 over 2008 levels. And the first quarter impact will be $0.10 per share.

Our calculations actually the actuarial calculations show that there are no cash funding will be required in 2009, and that's because we have some credit -- carryover credits from supplier funding. Now at the December 5th Analyst Meeting we said that pension expense would be up $48 million. Now we are saying it's going to be up 59 million. The big difference is that Citigroup discount rates that we've used on the -- and it was calculated as of November 15th dropped from 8.4% to 6.1%. So 6.1% is the discount rate what we are using in these calculations and that further drove up the pension liability.

Now we return to guidance. Our EPS guidance before the incremental pension expense that I just talked about is $0.38 to $0.42 in the first quarter of 2009. After the $0.10 per share pension adjustment, it's $0.28 to $0.32. For the year EPS is $1.90 to $2.25 before the pension adjustment and after the $0.35 adjustment for the whole year it drops it to $1.55 to a $1.90.

We say in our press release and I quote here the unusually loss wide range in the guidance reflects the degree of uncertainty in today's business environment.

Let me expand on that a little bit, that the $1.90 of course it's really a $1.55 after pension, that scenario reflects business conditions as we see them today. In other words our industrial businesses stay relatively flat through the year. It does assume ordinary seasonality and projected contractual price increases in the second half of the year along with some volume growth in composite cans and in flexibles. It also assumes that the effective tax rate has increased to 32%.

The high side scenario 2.25, and then of course after the pension adjustment that's a $1.90, assumes general economic improvement in the second half of the year. Now, our cash flow projections at the low end of that, that would be the $1.90 scenario or $1.55 after pension suggests that we would have operating cash of $350 million assuming that the capital spending stays roughly at the $125 million level and dividends stay flat we would expect the free cash flow to be 115 million as we're defining free cash flow here. At the higher level, I'd expect that that the 2.25 level, I'd expect operating cash to be about 385 million and free cash flow to be about $150 million.

And now as we always finish let me wrap it up with just some comment on new products. We did have $41 million worth of new products in the fourth quarter of 2008 that compares with $29 million in the fourth quarter of 2007. The biggest year-over-year changes were first of all in the new technology, the SmartSeal reclosable flexible package, and also the Retortable Membrane.

So, with those comments, operator I will turn it over now for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentleman, we will be conducting a question and answer session. (Operator Instructions). Our first question comes from Claudia Hueston from J.P. Morgan. Please pose your question.

Claudia Hueston - J.P. Morgan

Hi, thanks very much, good morning.

Harris DeLoach

Good morning.

Charles Hupfer

Hi Claudia.

Claudia Hueston - J.P. Morgan

I was hoping, you could talk just a little bit more about the Consumer Packaging business and if could maybe break out some of the different product markets, composite can, flexible packaging and the like, and just talk about what's happened from a demand standpoint in those markets and maybe if there's any changes in competitive behavior there?

Charles Hupfer

I can certainly give you some -- a little bit more color on the volume and I think the important thing there is in our rigid paper and plastics business in the U.S. and that's largely composite cans. What we actually saw volume there was up slightly. It was up about little less than 0.5%, but that's a bit misleading because what we saw was and I think I commented we saw a range of 6% to 13%.

Our snack volume was up 6%; our dough volume was up 13%, concentrate which had been showing a steady decline for decade was up 9%. Miscellaneous food which includes -- was up 13% and that includes some of those coffee conversions we've talked about. And then we also had, and I don't have a percent number, plastic bottles sold to Abbott is a new product this year versus last year. So we have some sizeable increases in volume on the composite can side. But there were some negatives and I mentioned that caulk and adhesives were down 22%, and the nut category, I don't know what the percentage was, but it was a couple million dollars short of last year's number.

So when you roll it all up it was... and the volume was up modestly in rigid paper and plastics but really pretty good volume in the basic snack, dough, concentrate, the core part of that business. The matrix business that's the plastic bottle business, their volume was down a little less than 5%. But that's mostly coming out of the Canadian plant and it's really the one customer and FX related. And then risen -- composite cans in Europe was down 7%, that's a little bit of lost market share and the decline in dough business there and then our Phoenix business was relatively flat in dollar terms year-over-year. So, there's some pretty good strength in the consumer side of the business in both the sales side principally volume and also in the -- and then all -- that trips over into the profit side, price cost was good in that segment. Price cost that we did had to absorb a bit of a year-over-year at any rate, metal cost and film cost but we did and so profitability was strong as well.

Claudia Hueston - J.P. Morgan

Okay.

Charles Hupfer

Harris might want to give some color to this.

Harris DeLoach

I think that's fine Charlie.

Charles Hupfer

Okay.

Harris DeLoach

That is good. Paula, you need something else?

Claudia Hueston - J.P. Morgan

Maybe just your confidence in recouping the tin plate cost inflation that you mentioned Charlie?

Harris DeLoach

As Charlie said we did see some of the increase in the fourth quarter of which we absorbed most of as you know most of that is contractual pass through. If we pass through, I don't know what percentage of it was 50, 60% of it the first of the year. The balance of it will come in the second quarter and I think we'd fully recover it by the end of the second quarter of the year.

Claudia Hueston - J.P. Morgan

Okay. That's helpful. And then just finally Charlie, I don't know if you have the foreign exchange impact on sales just in by segment or at least in the sort of two larger segments. That'd be helpful if you have it.

Charles Hupfer

Well, next to none of it in the packaging services and the other segments. So it's probably two-thirds is in the Tube, Core and Paper segment and about one-third is in the Consumer Packaging segment.

Claudia Hueston - J.P. Morgan

Great, thank you.

Harris DeLoach

Thank you.

Operator

Thank you. Our next question is coming from George Staphos from Banc of America. Please pose your question.

George Staphos - Banc of America Securities

Thanks, hello and good morning.

Charles Hupfer

Hello George.

Harris DeLoach

Hi George.

George Staphos - Banc of America Securities

Okay. I guess first question would be when you look at the change in guidance from December to current time, is most of that negative variance coming within tubes, cores and paper and I guess some fall along within packaging services. And is there any change, if we could have seen what you were thinking about back in December, any improvement that partly offset that within the consumer segment. How would those shake out as you revise your guidance?

Harris DeLoach

George I would say that probably 95% of net down were guidance was a result of the tube and core and paper operations globally where we have seen as Charlie talked about do we sort of put in perspective we were going through the year through the first 7, 8 months and we were down 4 or 5% year-over-year. We got into September as you may recall I think we said it was down by 8%. October was down about 10% and then it fell off pretty dramatically to the high teens and then in December it was in the mid 20s% year-over-year comparisons. And that was around the globe as Charlie said except for South America.

As we looked into January, and had visibility obviously on in the January, we have not seen any improvement in North America over the December run rates. They too have been cold. So I would say that going back to my original statement probably 90% of that is a result of the tube and core business. On the offset that we have seen continued accelerating gains in a couple of sectors that Charlie talked about. Concentrate, I think, was up 9% for the year and that's continued to grow, dough has continued to grow, which says to be once again that the consumer is moving down that value chain, trying to get more value for the dollar, but also staying at home and eating and we continue to see that trend going on into January.

George Staphos - Banc of America Securities

Thanks for that Harris.

Harris DeLoach

Okay.

George Staphos - Banc of America Securities

Now as we think about January, so there's no improvement versus December. Has it deteriorated versus December?

Harris DeLoach

No, it has not deteriorated. I would say it's basically right on target with where December was George, and I'd carry that a step further We haven't seen any further -- we haven't seen deterioration anywhere but clearly the tube and core volume has not improved.

George Staphos - Banc of America Securities

Okay. Now in packaging services, have you seen any incrementally intensified competitive activity since either the fourth quarter or earlier in 2008? Obviously some of the performance that you're seeing reflects previous share losses and apparently you've now anniversaried. So help us -- give us some details in terms of what might be happening or not relative to competition there.

Charles Hupfer

Okay, let me start off by saying we have not seen any increased competition in that business and you are quite correct that the year-over-year reflects the bid that we've talked about a lot; and that we lost some shares on. And that is now grandfathering. Actually we had picked up some nice new business that some of which we've talked about, some of which would be a bit premature to in fact talk about. But we have seen a continuing weakness in that sector with customers and we have delaying launches without getting to specific customers, we had a launch in the December timeframe that was set up for let's say a 100, and they call back and cut it back to about 50, simply because of economic pressures that they were seeing particularly from the larger retailers that didn't want to take that much inventory into their system at this point in time.

So, clearly we have seen a slowing on that side of the business not as a result of competitive pressures but what I would characterize as more economic pressure George.

George Staphos - Banc of America Securities

Okay. Is that leading to any changes in your customers' expectations from marketing support for products that utilize your consumer packaging?

Charles Hupfer

Actually, I think it -- what we are sensing and seeing some of is that some of our consumer -- customers are in fact reducing their cost of design, marketing and are relying more on us to provide some of those services which we view as an opportunity going forward.

George Staphos - Banc of America Securities

Okay. I will turn it over, thanks.

Charles Hupfer

Thank you George.

Operator: Thank you. Our next question is coming from Mark Wilde from Deutsche Bank. Please start your question.

Mark Wilde - Deutsche Bank

Good morning Harris, good morning Charlie.

Harris DeLoach

Hi Mark.

Charles Hupfer

Hi Mark, how are you?

Mark Wilde - Deutsche Bank

Good. I wonder just first globally if you could differentiate at all away from just the comments you made about Latin America being a little stronger. You've got a big position in Europe, variations there and variations in the other places if you do business globally?

Harris DeLoach

Mark, I'll take that and I'll let Charlie get into some specific numbers. What we saw in the fourth quarter in Europe was almost a mirror of what we saw in the U.S. in terms of volume decline year-over-year. Now, we didn't see that in Europe as early as we saw in the U.S. they tended to follow us and we started seeing the softness in Europe probably in the October timeframe particularly after they came out of the vacation time of the summer. Asia has been slowing on the tube and core side, I would say, since mid-year, and Charlie referenced, I referenced both South America being stronger but I will say that in December we started seeing the slowing in South America, particularly Brazil as well. And Charlie, you may have some color on the numbers but -- that I didn't give.

Charles Hupfer

Well and then of course, Europe would be the, besides U.S., the next biggest operation and their volume -- their overall volume was down 14%, I said earlier. The legacy operations and that would be the U.K., France, Germany, Finland, those old mainstay operation at Sonoco were down 11%. But the frontier operations were down 21% and that's unusual for us that we've been seeing good strength there. Turkey was down and that's textile related probably about 17%. Greece was down almost 39%, that's probably economy and strikes. But we generally saw a weakness across all of the regions which -- with really does reflect what Harris said pretty significant drop-off when it occurred.

Mark Wilde - Deutsche Bank

Okay. And second question I have in the two big core business, you've got a competitor that has a big financial maturity coming up in the second quarter. I just wondered whether you're seeing customers who may want to move business around because they're nervous about that.

Harris DeLoach

Mark, let me cautiously answer this -- that question.

Mark Wilde - Deutsche Bank

Okay.

Harris DeLoach

Simply by saying there's a lot of interesting things going on in that market and we are having a -- probably a unusual -- more unusual enquiries about RFPs and customer interest than we've seen in the past.

Mark Wilde - Deutsche Bank

Okay, I appreciate that it's a sensitive issue here, but I think it's also a pretty obvious issue.

Harris DeLoach

Well, I want to be sensitive in that. We are seeing more activity and more interest coming to us than perhaps we have in the past.

Mark Wilde - Deutsche Bank

Okay, that's fine. The last question I had, you mentioned, Charlie mentioned that the OCC prices were down like $25 in December? Can you just help us understand, at what point does this just get to be completely uneconomic to go out and gather the stuff?

Harris DeLoach

Well, it fell to $20 a ton in December, it popped back up on the 1st of January -- and January $20, it snapped back up to $25. I think that we use to see when we would get a lot of people collecting it, when it got to that level these people quit picking it up because of the economics that you bring out and it starts going to the landfill, then you -- as the economy picks back up it creates quite a spike in it. But I think you are at level where we are having a lot of telephone calls from small independent dealers that are saying, hey, maybe I don't want to be in this business.

So this is part of the cycle that you normally see. It's been a long time since I have seen OCC in the $20 and $30 range. But what we are seeing today follows the patterns of the past. So you right on target.

Mark Wilde - Deutsche Bank

Okay. I guess actually just one other follow one. Just -- can you talk about how you're kind of dealing with credit issues now vis-à-vis your customers?

Harris DeLoach

Well Charlie's got some numbers, 0.5% of current is the -- hasn't fallen off at all. It's where it needs to stay obviously least where it needs to be, we are staying on top of it. We do have a few customers that have dead bullets like you described with other people. And obviously we all -- we're watching those and dealing with them appropriately as we move forward. But we don't have any concerns at this point about our receivables, and we think our percent is where it should be, and I don't know the required number, Charlie does. But we think we are fully reserved against where we need to be in that regard.

Mark Wilde - Deutsche Bank

Okay. Very good, thanks Harris.

Harris DeLoach

Thank you Mark.

Operator: Thank you. Our next question is coming from Chris Manuel from KeyBanc Capital Markets. Please pose your question.

Christopher Manuel - KeyBanc Capital Markets

Good morning gentlemen.

Harris DeLoach

Good morning, Chris how are you?

Christopher Manuel - KeyBanc Capital Markets

I am okay thank you, couple of questions for you. First as you take a look through your different businesses and having seen an incremental downturn from where you were October and even November, when you were taking a look at restructuring. What additional steps have you taken as you look to the businesses that you could potentially share with us. Have you taken out more temp personnel things of that nature? Have you or are you contemplating further restructuring action should volumes persist at this level for another quarter or so. Can you maybe show us a little bit of the thought process?

Harris DeLoach

Chris, you obviously asked several questions in that. I think that I saw I remember the other day that basically we were about $14 million year-over-year our S&A down from 2007. And against plan we were down some 35-$34 million. So, I think cost control in the company from a discretionary spending standpoint has being climbed down and it continues to climb down.

We started last year with some contingency plans which we implemented in the first and third and fourth quarters. We have started as we were in the budget process following then we started with some contingency plans. Some of our businesses have already implemented those as already this year simply because of volume levels which you talk about.

We have in place other plans if in fact volume continues to drift down from where we are then we will in fact to execute, we have taken temporary employees out of the system where they need to be out. We have taken a significant amount of downtime in the system not to build inventories. For instance of that is we took our in our mill systems 770 days of downtime in 2008 and of that 769.6 to be exact 70% of it was in the last five months of the year. And that was even compared to '07 there were pretty more paper machines in the system in '07.

So, we've taken a significant amount of downtime which has resulted in us for allowing people do in that period of time to control costs and not to build inventories. We have continued to do that in January where we have taken a downtime in our mill systems. So we will continue to match our cost structure to the revenue level that we are experiencing.

Christopher Manuel - KeyBanc Capital Markets

Okay. I guess, let me ask one follow on to that. Does there come another point at which you beyond taking downtime, you have to take another layer out of overhead and close another mill or two somewhere around the globe and a few plants, things of that nature.

Harris DeLoach

Chris, we have in those plans and I talked about contingency plans to take that to another if that is necessary those plans, sit on my desk and in my factory what we need to do it.

Christopher Manuel - KeyBanc Capital Markets

Okay. Second question I had was, you said that the cash for 2009, it sounds like Charlie you're going to still have a chunk of free cash flow out even after some lower earnings. What are the plans as you look here today? The debt levels are lower they have been? You do have a pension that sounds like you could use a little money. In the press release, it sounded like you're looking at opportunities and things as well. You may be flush out a little of the thought process?

Harris DeLoach

Chris, you are correct. We'll still have good free cash flow next year, good operating cash next year, even reduce levels that we describe to you. We... projections show that we will be out of our commercial paper program sometime in the second quarter or third quarter depending on the earnings level. Frankly, we will continue to conserve that cash and look for opportunities. Don't see us, there is no reason for us to fund this pension plan this year and I don't anticipate using that cash issue.

We'll have some payments in 2010 depending upon the degree to which the market comes back and sort of dictate what we would have to do. But I think we will continue to do as we have done in the last 12 months. And that is, watch our cash, debt levels for your point is the lowest level have been in 25 or 30 years as debt to capital and we will look for opportunities which I am reasonably convinced they're going to present themselves in the next few months.

Christopher Manuel - KeyBanc Capital Markets

Okay. Thanks very much.

Harris DeLoach

Thank you, Chris.

Operator

Thank you. Our next question is coming from Joseph Naya from UBS. Please pose your question.

Joseph Naya - UBS

Yeah, I was just curious. Obviously, quite a bit of I guess the weakness that we're seeing here has been coming in the industrial operations. I was wondering if you were looking for any particular signs or things that might indicate that we would be seeing a turn there?

Harris DeLoach

Joseph, I think you look at just GDP spending. Our GDP basically numbers that are coming in. We are in my mind at least, generally a leading indicator. Somebody described Sonoco to be the other day, so if you'd kind like the canary and the coal man and I'm not sure what the canary is doing right now. But as I look at our various sectors traditionally as most of you on the phone know our customers don't keep a lot of inventory.

And we basically don't keep a lot of inventory either so, when we do see a turn around that canary stops revising, Joe we revise pretty quickly and Charlie made the point that volume comes to, I think $34 million the effect of volume on EBIT was about $34 million in the quarter. When that comes back, that comes back pretty quickly.

And so I would watch at least I'll the watch daily of the weekly numbers coming out of our industrial products business across all those sectors being textiles, film, and generally that's basic industry and when we start to see that turn, it only turn pretty quickly. But I can't give you much more color on that. Hello?

Operator

(Operator Instructions). Our next question is a follow-up from George Staphos from Banc of America. Please say your question.

George Staphos - Banc of America Securities

Thanks, Harris when you look at the business and talk about it, we are hearing a number of comments meaning as your customers don't carry inventory, you don't carry a lot of inventory and I am referring most to your core business. You are also from your data and maybe be picking up a little bit of share and as you're answering Mark's question earlier again given some of the trends that of an out for a while perhaps you are getting even more share of your piece out there.

How do we reconcile all that with the downturn that you're seeing in volumes in tubes and cores down 15% on average and 15 to 25% in the most recent months, I mean if the customers don't carry inventory it doesn't reflect de-stocking, so is it purely demand driven and consumption driven?

Harris DeLoach

All right. George, I think it's purely demand driven and consumption driven. I was at a meeting last week with it's a sector of one of our largest sectors in the industrial side of our business, it uses our obviously our cores. And they're leading producer of this particular product, stated to the group said, our fall off in demand in November, December was unprecedented in our industry. And that was echoed by the other six CEOs that were sitting around the table in this particular industry.

And I also have an occasion earlier this week to be with another sector. And I heard the same sort of thing about the demand of their products. I think it's purely demand driven. I have been around in Sonoco 20 something years and generally what we see in this downturn is, vis-à-vis downturn of 10-12% sort of see it from the... to the top of the cycle. And this is much deeper than that. And we are clearly are seeing more follow up and so this is deeper than we typically see.

Joseph Naya - UBS

Okay. I appreciate the color there. I guess then well maybe this is a way off in the future, how do you prepare then for that alternate, we hope pick up where the canary starts tripping again. And we know the vinyl (ph) will come back fairly quickly when it does but we also know that the cost can recover fairly quickly too. And so when you hope that you're finance and earnings acceleration, you loose a little bit in terms of spread. What are you doing in advance or is that so far out that you worry about when you have to?

Harris DeLoach

Well, you worry about you do what you can now and obviously there are some things that you can do on the waste paper side and look at that because that is our largest cost and we are in fact preparing for that uptick. I think we are known in Mark's question obviously raises as we look into these projections as Charlie said we are looking at business continuing on the industrial side as it is now. And that's a low end of our guidance and upper end obviously there is a second half recovery.

I think we are known in that is, what happens in this market with the weakness of some of the competition and what kind of opportunities that does present itself to take advantage of. And I think that's frankly the upside in this argument, if there is a upside.

George Staphos - Banc of America Securities

Do you think there is more opportunity in conversion or do you think there is may be more opportunity in getting your... way to phrase it... building more flexibility into your supply of furnish and access to it anyway.

Harris DeLoach

Well I think it's a little of both here George, I think improving your access into furnish obviously improves your cost situation. So I think the converting side opportunities obviously drive the volume and that's what all can we drive as looking to profitability. If you have the volume, everybody have volume, you probably wouldn't have 20-$25 OCC, but if you have the volume 20 to $25 OCC this is all the very money in the process.

George Staphos - Banc of America Securities

We'll look forward to buying some umbrellas. Thanks Harris.

Harris DeLoach

Thank you, George.

Operator

Thank you. Our next question is a follow-up coming from Mark Wilde from Deutsche Bank.

Mark Wilde - Deutsche Bank

Yeah, Harris. I'd like if I could just for a couple of minutes just take maybe two or three steps back. If you think about what Sonoco has been trying to do over the last, for a decade and more, of really kind of shifting the company from kind of an industrial packaging the more of a value added consumer packaging focus.

It's a strategy it seems to me that we've seen some other companies both kind of small and mid-size companies pursue some with more success than others. And I just wonder, when you look at your own experience in trying to go through this metamorphosis and you've seen what other folks have accomplished or not accomplished, as they've tried to do it. What are the two or three kind of main lessons you take away from that?

Harris DeLoach

Well I think, Mark, I'll just add to that saying that I think the company's business model is working new way. I would expect it to work in this environment. The industrial is down more from a volume standpoint and I would have expected in a recessionary environment and more than we've ever seen in a recessionary environment. But nonetheless it is working the way I would expect it to work. Both OCC following and we have down from basically a 60% industrial, 40% consumer we flipped that where its about 50-50 today. And obviously, as Charley pointed out the consumer side is up nicely year-over-year.

I think the learning's in that is probably if we could move it faster and we should and would like to have done that. We generate a lot of cash on that industrial side of the business. We continue to generate a lot of cash on that even it's lower levels. So with moving it faster and its always in my case I think that there is always opportunities to execute better in particular places and so I think those are the two focuses moving faster and continue to improve execution.

Mark Wilde - Deutsche Bank

Okay, very good thanks.

Harris DeLoach

Thank you.

Operator

Thank you. At this time we have no further questions, I would like to turn the call back over to speakers for any closing comments.

Roger Schrum

Thank you again Shreya. Again let me thank everyone for joining us today. We certainly appreciate your interest in the company. And as always if you have any questions, please don't hesitate to give us a call. Thank you again.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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