Sonoco Products Q4 2009 Earnings Call Transcript

Feb.10.10 | About: Sonoco Products (SON)

Sonoco Products Company (NYSE:SON)

Q4 2009 Earnings Call

February 10, 2010 2:00 pm ET

Executives

Roger Schrum - VP, Investor Relations

Charles J. Hupfer - Chief Financial Officer, Senior Vice President

Harris E. DeLoach Jr. - Chairman of the Board, President, Chief Executive Officer

Analysts

George Staphos - Banc of America/Merrill Lynch

Ghansham Panjabi - Robert W. Baird & Co., Inc.

Chip Dillon - Credit Suisse

Ariel - JPMorgan Chase & Company

Christopher D. Manuel - KeyBanc Capital Markets

Al Kabili - Macquarie Capital Advisors

Christopher Shunk - Deutsche Bank

Dan Khoshaba - KSA Capital Advisors

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Sonoco Products earnings conference call. My name is Chanel and I'll be your operator for today. (Operator's Instructions) I would now like to turn the conference over to your host for today's call, Mr. Roger Schrum, Vice President of Investor Relations.

Roger Schrum

Thank you, Chanel. Good afternoon, everyone, and welcome to Sonoco's 2009 fourth quarter and full year earnings investor call. This call is being conducted on February 10th, 2010. Joining me today are Harris DeLoach, Chairman, President, and Chief Executive Officer, and Charlie Hupfer, Senior Vice President and Chief Financial Officer. Our financial results were released before the market opened today and are available via our website at sonoco.com.

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

Charles J. Hupfer

Thank you, Roger. Today, Sonoco reported fourth quarter sales of $1.019 billion and EPS of $0.46 a share. The EPS of $0.46 a share is in conformity with US GAAP which means it includes restructuring expenses and one-time unusual gains and losses. Base EPS was $0.58 per share compared with last year's $0.49. That's a $0.09 difference a year-over-year improvement of 19%. Now, base EPS excludes those restructuring changes and any one-time gains and losses.

Our guidance for the quarter, and that's the guidance that we updated on December 4th at our analyst meeting, was for a range of $0.49-$0.52, so we came in $0.06 per share better than the high side of the guidance. So obviously we're very pleased with this quarter. Compared with our guidance, taxes were a little bit more favorable than I expected them to be when I gave the guidance or the revised guidance in early December, and that added about $0.03 more per share than I was thinking at the time.

The other pleasant surprise was that volume in the US was stronger in December than we expected, and that also meant that productivity was good. So in other words, we didn't see as much of the usual December slowdown as we usually see.

I'll start off now by reconciling as reported results to base results. In fourth quarter 2009 we reported restructuring charges of $9.1 million. After tax that's $6.5 million or a rounded $0.07 a share. The restructurings comprise largely of holdover items from previous quarters. Also in the fourth quarter we took a $5.3 million tax charge related to a tax law enacted in November in Mexico that effectively eliminated consolidated tax returns retrospective all the way back to 1999. This equates to about $0.05 per share. So if you start with the EPS of $0.46, add back $0.07 for restructuring and add back $0.05 for Mexican taxes, you get to the $0.58 a share base EPS.

Now doing the same thing to last year, last year's fourth quarter included pretax restructuring charges of $22.2 million. After tax that was $0.131 or $0.13 a share. So if you start with fourth quarter EPS of $0.36 and then add the $0.13, you arrive at $0.49 base EPS for 2008. So the comparison that we'll be making is $0.58 this year compared with $0.49 last year.

Now, with the adjustments that I've just mentioned to arrive at base earnings, let me read out to you an income statement that was presented on a base earnings basis, and I've got two columns; one's for 2009 and the other is for the fourth quarter of 2008. Starting at the top, sales; $1.019 billion. That's up 7.2% from last year's $934.6 million. Cost of goods sold is $808.1 million and that compares with last year's $776.4 million. Selling, administrative, and other costs in 2009 were $108.8 million. That compares with 2008's $82.4 million. So therefore, earnings before interest and tax, EBIT, is $85.1 million in 2009 and that's up 12.1% from last year's $75.8 million.

Coming on down the income statement, net interest expense is -$9.5 million and that compares with interest expense last year of $11.2 million. Taxes are -$21.7 million this year compared with $18.5 million last year. Equity and earnings of affiliates is a positive $5 million this year compared with $2 million in 2008 and non-controlling interest, what we used to call minority interest is zero this year compared with $1.1 million last year. So that brings us down to a total net income of $58.9 million in 2009. That's up 19.9% from last year's $49.1 million. And then from that, EPS is $0.58 a share up 19.1% from last year's $0.49 a share.

As I said a minute ago, EBIT was up 12.1% year over year. If you adjust for the incremental pension expense that we incurred all year that's a result of 2008 pension performance, EBIT would've actually been up 28.1% and that's of course on the sales increase of 7.2%. Doing the same thing to net income, net income was up 19.9%, but again if we adjust for the incremental pension expense, net income would be up around 35%, again on a sales increase of 7.2%.

The gross profit margin was 19.3% and that compares with 16.9% last year. You have to go all the way back to the first quarter of 2007 to find a higher gross profit margin, and in fact, this is the fifth highest gross profit margin on a quarterly basis over the last six years. So my point is that operations were solid at the gross profit and the operating line. The EBIT margin was 8.5% and that's compared with 8.1% last year. The EBIT percentage trend has been positive all year. It was 8.1% in the fourth quarter of 2008, that's when we started to see volumes drop precipitously. It dropped to 6.5% in the first quarter of 2009. The EBIT margin was 7.8% in the second quarter of 2009, 8.1% in the third quarter, and of course now it's 8.5%.

The effective tax rate is exactly the same this year versus last year at 28.7%. As I said a little while ago, the tax rate was a little more favorable than I expected and that's for two reasons. One was there was a fourth quarter change in Canada to the tax rate that favorably affected our deferred tax balances, and then the second reason is there was a more favorable domestic to foreign mix than I had expected and that influenced the effective tax rate in the year.

Our effective foreign rate is only 19% and that compares with a combined US Federal rate of 39%, so we had a little higher mix of foreign earnings to domestic earnings. Interest expense is favorable because both the commercial paper rate and the outstanding balances were well down from last year.

Now let me turn to segment reporting and that's found on Page 7 of the press release. When we look at the individual segments, the consumer segment sales were up 8% and EBIT, or earnings before interest and tax, was up 48%. This represents the eighth consecutive quarter of year over year improvement in the consumer segment.

The tube core paper sales were 9.7% while EBIT was -18.6%. But if you adjust out the incremental pension expense, EBIT would've been positive by 1% year over year. In the US we experienced a price cost squeeze with prices down and waste paper costs relatively flat in this quarter compared to the last one, but what was especially gratifying was that in the tube and core volume in the US, it was actually up 4.5% in the fourth quarter compared with third quarter levels. So while we were relatively flat year over year, sequentially we saw a nice improvement over the third quarter, and ow I'm speaking again of tubes and cores in the US.

The next segment, packaging services, sales were up 7.6% and EBIT was down 17.8% which is much improved over the third quarter and the third quarter EBIT was down 33%. If we adjust for the incremental pension expense, EBIT would've been flat year over year in packaging services.

And then in the category all other, sales were down 8% and profits were down 4.5%. Again, absent that incremental pension expense, EBIT would've been up in this segment 19%. So here we did see some nice year-over-year improvement in our molded plastics and our protected packaging operations. Unfortunately, our reels business is still soft.

Now let me turn to the sales bridge where we reconcile last year's sales of $934.6 million to this year's sales of $1.019 billion. Now that's a difference of $67.3 million and it's made up of three categories; the first is volume, volume is $46.8 million, price is a -$12.6 million, and then the third category is foreign exchange/other, and that' s a positive $33.1 million. So those numbers should add up to $67.3 million. And I'll comment on each of the categories starting with volume.

As I said, volume was up $46.8 million. When I look at the consumer segment, volume was up overall about 3.7%. We saw especially good volume in our matrix plastic bottle business. Their volume was up in the 26% range and that's on the strength of hand sanitizer and Five Hour energy drink volume. Composite can volume was up roughly around 2% and here we saw coffee can conversions and powdered infant formula conversions more than offsetting the declines that we've seen in previous quarters in caulk and in snacks.

Tube, core, and paper segment sales were up an overall 7.5%. European sales were up 7%. Western Europe was up 2.6%, but where we really saw the boost was in what we call frontier Europe. It was up 33% and it was led by Turkey, up 44%, Russia up 33%, and Poland up 15%. So some good strength in what we call frontier Europe.

Now in the US, our tube core sales were flat. I sort of implied that a few minutes ago. They were flat year over year with textile volume and film volume up year over year, but paper mill core volume and specialty tube volume down. But again, I'll reiterate that is up 4.5% from the third quarter so we like the trend in the fourth quarter going on into the first. Asia volume was up significantly, more than 30% and that's across the whole region that we sell into. US paper tonnage was up 7%. That allowed for our machine utilization to be 93% in this quarter compared with 81% in last year's fourth quarter. I'll talk about that again when I talk about productivity. And then total packaging services volume was up around 10% with year-over-year growth principally at CorrFlex in both the US and in Poland.

Now price, as I said, was -$12.6 million. Only the consumer segment showed positive year-over-year pricing and this was due largely to price increases early in the year to cover those higher template costs that were incurred early in the year. Tube, core, and paper pricing was actually down year over year and that's due largely to OCC based contractual results. So for example, last year's fourth quarter pricing was set based on $110 a ton and this year's pricing for the fourth quarter was based on $80 a ton so that had the effect of pulling down the OCC-based contractual pricing. In Europe, paper prices were down 13% while in the US prices were down 9%.

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

Now let me turn to the EBIT bridge and here we're reconciling last year's $75.9 million to this year's $85 million and that's a difference of $9.1 million. And the components of that $9.1 million are volume and mix was a positive $13.2 million, price cost and remember we include energy and freight in this category now is positive $3.8 million. Productivity is positive $3.9 million, and then all other, that's sort of the catchall category, is -$19.6 million and then incremental pension expense is -$12.2 million. So a positive 13.2, positive 3.8, positive 23.9, a negative 19.6 and a negative 12.2 should add up to 9.1 year over year.

Let me comment again on each of the categories. Volume at 13.2 represents the profit impact of the sales volume increase that I talked about on the sale reconciliation. That was a volume increase of $46.8 million, so this works out to be a contribution margin of around 28% which is a little lower than usual, a little lower due to mix. Some of our domestic paper sales had a higher proportion of lower margin edge, board, and issue stock relative to some of our core board and higher strength boards, and in the packaging service segment we had more fulfilment sales at lower margins than manufacturing sales. So mix played a part in the overall contribution of 28%.

Now price cost is reported as a positive $3.8 million, but when I look behind that I see that price material cost is actually negative. It's negative by approximately $2 million. The year-over-year difference in freight and energy however, was a positive $6 million so when we put the two together we have a reported positive $3.8 million. But the point here is that it's not really based on price material costs, it's coming from lower year-over-year freight energy cost.

Most of the negative price cost was in the tube core paper segment, and that's due to how contracts reset, plus the fact that OCC was declining in last year's fourth quarter and it's been rising in this year's fourth quarter. So to expand on that just a little bit, a lot of our contractual pricing for the fourth quarter will be set at September OCC levels. Last year OCC in September was $110 a ton and then it dropped to 95, 45, and then 25 in December. So we saw a declining trend in OCC. This year, September OCC was $80 a ton and that's what set the pricing for the fourth quarter. It dropped to 70 in October, stayed at 70 in November, and then went up to $80 in December so the trend going in the different direction.

Now let me speak to productivity. It added $23.9 million. It was good across all of our segments. It was especially good in the tube, core, and paper segment, and that was especially because of our domestic paper business and that's in part because we saw a much better utilization rate and we had a 56% reduction in down days in our paper mills year over year.

And then other, the other category as I said that's our catch-all category. It's -$19.6 million. Approximately $14 million of that $19.6 million relates to the year-over-year change in incentive and compensation related accounts. Last year we were reducing incentives and we were taking credits for stock related plans due to the falling stock price. This year the stock price is higher so we're booking mark to market adjustments that are expenses and we're back to ordinary incentives and so what most of that $14 million is it's just a shift from credits last year to ordinary charges this year.

And then the last element is pension. Pensions a -$12.2 million. We've talked about it all year and it stems from 2008's -24% investment performance.

So now with all that said I'll turn to cash flow. The cash flow statement's found on Page 8 of the press release. Cash from operations in the quarter was $33 million, but I will point out that that includes $100 million of pension contributions that we made in late December. Cash flow for the entire year has also been outstanding.

Cash from operations, and again that's on Page 8 of the press release, was for the full year, $391 million and that compares with $379 million last year. So that's a difference of $11.6 million. But again, this year includes the $100 million discretionary payment that we made at the end of the year into the pension plan and it also includes last year, $40 million of insurance proceeds that were in the cash flow numbers last year.

So both the pension contribution and the insurance proceeds are pretax numbers. So if I tax affect those, the true cash from operations year over year would be approximately $100 million positive. And the way I arrived at that was to take the $11.6 million that is the stated amount of increase on the face of the financial statements, add $63 million which is the after-tax impact of the pension contribution that was a discretionary contribution, and then also add back the after-tax income or cash flow that we received last year from insurance proceeds and so I take 11.6 plus 63 million plus 25 million to arrive at $100 million more operating cash flow this year than last year.

Turning to our balance sheet, our balance sheet remains strong. That's also found on Page 8 of the press release. Debt to total capital is only 29.6% which is the lowest level that it's been since at least the 1980s. By comparison, debt to total capital at December 31st 2008 was 37%. We had no commercial paper outstanding at year end. Total debt was $581 million. That's down $109 million from $690 million last year, and cash on hand on the balance sheet was $185 million, that' sup $84 million from last year's $101 million.

As I said earlier, we made a $100 million discretionary contribution into the US defined benefit plan. Our pension plan this year did earn a 22% return for the year so we had a very good return performance. We made that $100 million contribution, and then late in the year we also saw an increase in the discount rate up to 5.77. All that leaves our plan funded at a rate of 86% and that compares with a funded status of 69% last year. And what it also does is it serves to reduce 2010's pension expense and what that does is that leads me now to 2010 guidance and I'll pick it up where I left it off at our December analysts meeting. At that meeting I said that we would give EPS guidance for 2010 in the range of $1.95 to $2.05. That included an assumption that pension expense would be reduced year over year by the equivalent of $0.09 per share.

Now since then two things have happened since that December meeting. First of all, pension expense should be further improved by another $0.04 a share, bringing that total $0.09 plus $0.04 to $0.13. Our original $0.09 number assumed a pension contribution of only $50 million and in fact we made $100 million in contribution. In December the fund has been earning around 18% and it finished the year at 22%, and the discount rate moved from what we thought would be about 5.6 up to 5.77 so all of that created less pension expense than we had otherwise expected.

The second issue is that fourth quarter volumes were stronger than we expected. Volume always slows in December. As I said earlier, it didn't slow as much as we had expected. So as a result of all that we've increased our guidance to a range of $2-$2.15. Now to be honest, the bottom side just simply reflects adding an incremental $0.05 and that's mostly for the pension differential. The topside assumes that 2010 volume will grow a little bit higher from those fourth quarter levels so the topside includes not just the $0.05 of incremental pension, but it also includes another $0.05 that we would attribute to higher volumes.

So I know when I give guidance like this, $2-$2.15 that that's a wide range, but I do expect to narrow that range as the year goes on. Now, our first quarter guidance is for EPS in the range of $0.40-$0.45, so obviously all of our guidance is based on the 2010 budget which was just approved today by our board. The guidance that I'm giving you includes overall volume growing in a range on the low side of around 4.1% to about 5.5% on the high side. It also includes significant new volume growth coming at our CorrFlex operation to replace business that's been lost there as a result of a bid. This guidance also includes the cost of reestablishing our 401-K and the wage and salary increases that we had deferred last year. Wages will go up around 2.5%-2.75% effective February 1st for most of our employees.

The guidance also assumes the successful transition of our corrugating medium operations from contract selling to open market sales. But in my opinion, the big difference between the high and low side of the guidance is just going to be what happens with volume.

Now, in the first quarter I expect a modest squeeze coming from the higher OCC costs. Our first quarter contract pricing was set based on OCC at $80 a ton, that was the December OCC level. In fact, OCC rose to $110 a ton in January and then it went up again to $140 a ton in February. That's Yellow Sheet Southeast pricing so we're certainly going to see some squeeze in OCC in the quarter and that's contemplated in the $0.40-$0.45 guidance that we've given.

So our guidance for the quarter as I said, $0.40-$0.45. This takes into account a modest price cost squeeze due to OCC. It also takes into account contractual resets to reflect resin pricing. It takes into account seasonality because the fourth quarter is generally our slowest quarter, especially on the consumer side, and we are assuming approximately a 31% effective tax rate.

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

Question-and-Answer Session

Operator

(Operator's Instructions) Your first question comes from the line of George Staphos with Banc of America/Merrill Lynch.

George Staphos - Banc of America/Merrill Lynch

Thanks. Hi, everyone. Good morning and good luck on the quarter and congratulations on the year. Very quickly, Charlie, can you define what modest means in terms of price cost for the first quarter? It would seem that with OCC being where it is right now and knowing the tons that you buy could have a fairly meaningful effect in the quarter, how are you offsetting that either — I mean, you're limited pricing wise until the second quarter, do you have anything in inventory that you're able to use at the present time so how is that more of a modest hit than a bigger hit?

Harris E. DeLoach Jr.

George, this is Harris. Obviously we've got that part of the business is already set, the contracts, and obviously that is what it is so we will have a modest squeeze there. We announced a price increase on February the 1st on both the board side and the converting side and I would say we're getting good traction with that. We're looking forward looking at OCC and what we think OCC is going to do over the next couple of months and are contemplating future increases and we'll probably be fairly aggressive with that. I would say that we've always had a very strong productivity initiative in this company.

The way I define productivity, in its broad form we had about $120 million last year. So as we look out in the first quarter and we look at our productivity efforts, we look at our recovered paper, we look at the contracts that we have in place, we feel like that we will be able to mitigate that run-up in the quarter and obviously that's reflected in the guidance that we've given and we term that modest. So I'd like to say it's Herculean and we're covering it, but it's modest in our ballpark.

Charles J. Hupfer

It's probably only about $0.02-$0.03 a share.

Harris E. DeLoach Jr.

$0.02-$0.03 a share.

George Staphos - Banc of America/Merrill Lynch

Okay. I appreciate that color. The second question and I'll turn it over, your business and especially on the industrial side are pretty short cycle. Generally your customers don't like to build inventory, nonetheless it's apparent that OCC was going to head higher into the first quarter. Do you think any of the better than expected volume was around pre buy? And then turning the question around, yes you've seen better than expected volume and that's great, but how sustainable do you really think it is given the fact that your businesses are fairly short cycle and where are you seeing the relative strength either across consumer or industrial?

Harris E. DeLoach Jr.

George, you basically asked two or three questions. The first one was about an inventory bill based on OCC and I don't think there's any of that actually on the converted side, for no other reason than the OCC was such a rapid run up I don't believe you would've had any anticipation of that. You could've had some small paper sales as a result of announced paper increases, but that's minimal.

As Charlie said we saw better volumes than obviously we've seen in some time in the fourth quarter. As I look forward into this year and into the January levels, clearly the first quarter is always somewhat our lowest quarter, but having said that, we've seen at least no greater downturn than we would've expected, and perhaps a little upside in January in both consumer and in industrial.

George Staphos - Banc of America/Merrill Lynch

Okay. I'll turn it over, thanks.

Operator

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

Ghansham Panjabi - Robert W. Baird & Co., Inc.

Hey, guys. On the volume increase in matrix, Charlie, I think you said up 26%. Most of your competitors in rigid plastics certainly weren't even close to that number, was there a big customer added in that segment? Can you give us some more color there? Thanks.

Harris E. DeLoach Jr.

Ghansham, we have added some more customers in that area. I don't know that it was one big one or two big ones, but we've certainly grown that business nicely over the last couple of quarters and I think it's a cumulation of all that and we did have some pretty high volumes tied to the energy drink and to the hand sanitizers that Charlie talked about. But I think it's just a cumulative effect of how we've been growing that business.

Ghansham Panjabi - Robert W. Baird & Co., Inc.

Okay. And then one them that seems to be emerging is some of the big branded food beverage and consumer staple customers seem to be more aggressive in defending share against private label, has that benefited you on the branded side as it relates to your consumer business? And also, has that helped improve some of the backlog impacting services too?

Harris E. DeLoach Jr.

We certainly, to the extent that we're seeing the defense to branded products, we will benefit from that. We are benefiting, but we will continue to benefit for it. We also have some private label business which is obviously growing as well, and we are seeing some pickup in the services side as I think we're certainly seeing more promotions in the fourth quarter and we've seen more promotions early in this year.

Ghansham Panjabi - Robert W. Baird & Co., Inc.

Okay. Thanks a lot, Harris.

Operator

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

Chip Dillon - Credit Suisse

Yes, good afternoon. Charlie, I had a question for you. Maybe I'm missing something, but it looks like you might have shifted like $10 million in revenue from the consumer segment to services after the third quarter. Did we get that right? Was there a restatement there in revenues?

Charles J. Hupfer

There might have been a modest shift and I don't have a number for that, but we do have a business. It's our Trident business which does advertising —

Harris E. DeLoach Jr.

Right, brand management.

Charles J. Hupfer

— and we did physically move that into a different manager that had the effect of dropping that into the packaging services.

Chip Dillon - Credit Suisse

Okay. That might be it.

Harris E. DeLoach Jr.

It's an amazing catch.

Charles J. Hupfer

That is a great catch.

Chip Dillon - Credit Suisse

We try to do our homework. Let me ask you this, it's interesting how a lot of people that are subject to buying corrugated OCC out there are very nervous or at least guiding down their first quarter, and is it just fair to say that your ability to move that pricing is much more real time if you will because you're not making boxes. In other words, what you got in January stuck in January?

Harris E. DeLoach Jr.

I think, Chip, the strength of our ability goes back to our integrated system where we obviously have our collection facilities which gives us a significant leg up because we're selling to the outside world and covering some 40% or so of that run up. That plus the way we manage the business with contracts, with pass throughs, and just the way we fairly aggressively move pricing, if you look back historically you look back over the last three years, five years, eight years, 10 years, we historically have had positive price costs and as a result of all of those things the model is working thew ay it should.

Chip Dillon - Credit Suisse

Gotcha. And the last question, in light of maybe what's happened in Europe and maybe that's not going to be a big deal and just in general, is there any risk or are you concerned that maybe some of the strength you saw in December, and I know this was asked differently, might have been sort of a buy ahead? And it looks like you are taking it rather conservatively. You're not really bolstering the guidance that much beyond the pension, but could we actually see it go the way other way a little bit in the first quarter ora re your backlogs making you feel like no that wasn't just an acceleration by December?

Harris E. DeLoach Jr.

Well obviously that was a question that I think George Staphos asked earlier and the answer is we see no indication or saw no indication of a buy in. Now, our order cycle is a pretty short cycle. We don't carry a lot of inventories. Our customers don't carry a lot of inventories, and what we see talking to our customers is their business has improved and continues to improve and we are seeing that in our business and we don't see any indication of an inventory bill frankly anywhere around the world.

Chip Dillon - Credit Suisse

Gotcha. And then the last thing is it kind of rung very clearly and I know you touched on this a little bit in December, but with your balance sheet again being the strongest position it's been in decades, do you still see, as I think you suggested back in December that there's still some good solid assets or businesses out there that you could see buying this year as people look at what might happen to their personal tax situations, et cetera?

Harris E. DeLoach Jr.

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

Chip Dillon - Credit Suisse

Thank you very much.

Operator

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

Ariel - JPMorgan Chase & Company

It's actually Ariel sitting in for Claudia. I had a question on the consumer business. Your margins have improved, I think they were up almost 300 basis points year over year. I just was wondering if you see any type of a margins squeeze there from resin prices going up?

Harris E. DeLoach Jr.

Obviously we've seen resin prices escalate in the last couple of weeks, but most of our plastic businesses, they are under longer-term contracts that had pass throughs and while we may lag or get ahead in the quarter, generally they reset over time.

I would say that if you look at the whole consumer segment and you look at that margin increase, we've had a lot of startups in that business that it's all been dragging let's say for the last 18 months or so. Those operations are up and running close to expectations now and so that has clearly improved the overall margins of that sector.

Ariel - JPMorgan Chase & Company

And just to followup on that, can you be a little bit more specific on what consumer businesses have ramped up?

Harris E. DeLoach Jr.

Well, we had several start-up plastics businesses and you start up a business, obviously it doesn't hit full speed at day one and so they are pretty much hitting up to close to full speed and we've had a small operation in Asia that was a startup and it's performing much better. So obviously the sector is up and we're seeing improved margins, but I don't see anything that's going to squeeze those margins in the short term.

Ariel - JPMorgan Chase & Company

Okay, thank you.

Operator

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

Christopher D. Manuel - KeyBanc Capital Markets

Good afternoon, gentlemen. A couple of quick questions for you. First, more of a bookkeeping one for Charlie I think. In equity affiliates, that seemed to jump up quite a bit, was there anything unusual in there or can you give us a little more color just on that specific component?

Charles J. Hupfer

There really wasn't anything unusual. There was an equity component — Conitex is the company that we have a joint venture with whenever we joint ventured our tube business a decade ago and their business was much improved. Showa Products is our Japanese affiliate and their business was much improved and then RTS which is the partitions joint venture that we have, I think that they all just showed improvement year over year and I think that reflects the same sort of trend that we saw in the industrial side of our business so it really wasn't anything special there, but it was a nice pickup.

Christopher D. Manuel - KeyBanc Capital Markets

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

Charles J. Hupfer

Probably on the high side, but nevertheless not far off. I mean, there's always some year-end adjustments, but by and large it would be on the high side, but a reasonable run rate.

Christopher D. Manuel - KeyBanc Capital Markets

That's helpful. And then the next component that I wanted to maybe get into a little bit was I missed some of the volume numbers that I think you gave out. You talked about matrix being up 25%-26%. Could you run through a few of the other key components, composite can, tube, core, et cetera, as to how those did in the quarter, where specifically some of that upside came from?

Charles J. Hupfer

Sure. And the matrix volume was up and that just reflects some of the changes that we've talked about. Composite can volume was up probably in the 2% range and what we saw there was the food can, and that's principally the coffee can conversions were a big part of that as well as there was still some year-over-year growth in powdered infant formula, that conversion. So we were up significantly in those two major conversions that have taken place recently, and they were offset by snacks which have been down year over year and caulk cartridges. The paper caulk cartridge that sell into the housing industry have clearly been down year over year, so we had a net out about 2% positive with all the positive really coming from coffee can conversion, VIF conversion — but then there were some other categories. Motor oil was up, nuts were up, all in all it was a good volume quarter for the domestic composite can business. In Asia our volume was up, rigid plastics volume was up, so we had good volume increases generally in the whole consumer segment.

Christopher D. Manuel - KeyBanc Capital Markets

And on the tube and core side?

Charles J. Hupfer

On the tube and core side, Europe was up around 7.3%. In the US it was flat, but that was a mixed bag because some of our volume like textile volume was up 21%, film volume was up six, but paper mill core volume was down year over year which I think just reflects what's going on in the paper industry. Our Asian tube and core volume was up significantly. It was up about 30%. We were up 14% in Latin America. All of our regions except Venezuela were strong. Paper was up both in the US and in Canada. Paper recycling was up so as opposed to the first quarter. This is a nice turnaround where I'm talking about volumes up. Volumes were up as I may have said in the packaging services overall $11 million and some of that pass through volume was down so our CorrFlex volume was down $16 million so generally good volume increases.

Christopher D. Manuel - KeyBanc Capital Markets

Okay, that's helpful. And then kind of as we translate that into 2010 I think you kind of, if memory serves, laid out the volume assumptions that you originally had of I want to say it was 6% or so in the consumer side and three in the industrial side with half of that being the corrugated stuff. Could you maybe update us and give us what the new end to those ranges would represent with your extra volume in there embedded into your guidance, please?

Charles J. Hupfer

Sure, I can come close to that. In the guidance we would've assumed that the industrial side of our business is probably up let's just say 5.5%. And now of course some of that's already in the bag because we obviously had a good fourth quarter and we're assuming that we're growing from those levels. Volumes in the consumer side, and I'm speaking generally now, would've been up about 1.5%, but I did talk about, just a moment ago, about the loss of some business due to a bid. If we took that into consideration volumes there would've been up about 3% and if you put it all together the blended average would be somewhere between 4%-4.5% and then that goes up on the high side of the guidance more like 5.5%.

Christopher D. Manuel - KeyBanc Capital Markets

Okay. So 4%-5.5% for consumer for your — that's what's in your 2010 guidance assumptions?

Charles J. Hupfer

Well, blended is about 4%. Industrial would be higher, more like 5.5%, and consumer more like three. Of course we're talking about year over year comparisons so the consumer side of our business wasn't down as much as the industrial side.

Christopher D. Manuel - KeyBanc Capital Markets

Okay that's helpful, thank you.

Operator

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

Al Kabili - Macquarie Capital Advisors

Hi. Good afternoon, guys. Question I guess on how the corrugated medium sales to external customers outside of GP is ramping up?

Harris E. DeLoach Jr.

Al, I would say it's positive. We have a ramp down with GP over three quarters, but the outside sales are going, I would say above expectations.

Al Kabili - Macquarie Capital Advisors

Okay. So are you sold out at this point of the 25% in the first quarter that you'd be selling externally?

Harris E. DeLoach Jr.

We're sold out through February.

Al Kabili - Macquarie Capital Advisors

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

Harris E. DeLoach Jr.

It occurred in the late third quarter, fourth quarter.

Al Kabili - Macquarie Capital Advisors

Okay. And then how should we think about the sales impact, rough order of magnitude how much of a headwind this presents as we look to 2010 and what's your outlook for CorrFlex? Are you seeing any signs of more promotional activity on the display business?

Charles J. Hupfer

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

Al Kabili - Macquarie Capital Advisors

Okay. And then how about the outlook, how is bidding activity shaping up? Are you seeing more opportunity in terms of bids or about the same?

Harris E. DeLoach Jr.

Oh we've not only seen it we picked up some nice new bids, particularly from our corporate customers without naming which ones and we fully expect to cover that $40 million, Al.

Al Kabili - Macquarie Capital Advisors

Okay, great. And then final questions I guess is on the tube and core business that the better seasonal trends which were surprising, any sense as to whether some of that might be share gains at all or do you see your share relatively stable at the moment?

Harris E. DeLoach Jr.

If I had to guess I would say the shares are relatively normal. That could've been a small amount of share gain. I think the gratifying thing to me is I think we've certainly seen a market pick up and as Charlie mentioned, wherever we look around the globe we're seeing it whether it's Asia or whether it's in frontier Europe, Western Europe, South America, or North America. We're seeing improvements in those market segments which is obviously not only helpful for Sunoco, but for everyone in general.

Al Kabili - Macquarie Capital Advisors

Okay, good. And then lastly on use of free cash flow, given the strength and your leverage, I know that priorities acquisitions, but have you considered more on the share repurchase front at all and I guess given you just got out of a board meeting, any hints on what you might do with the dividend this year? Thanks.

Harris E. DeLoach Jr.

Well, we have moved a dividend which I think was announced this morning or last evening so going forward we've always said that historically we look at the dividend in April and we will do that. There's always a bias. We have 26 or 27 years of increasing dividends. There's no guarantee of what we will do, but we will clearly look at it and do what's appropriate for our shareholders.

The cash, I mean you hit the nail on the head. Our first priority is going to be to grow the business and I said earlier to someone I'm going to be very disappointed if we don't take advantage of our cash position, our leverage position, and make some nice acquisitions this year. But we're not going to be foolish about it. We will stick to our criteria of being accretive in the first year and returning our cost of capital within a 3-4 year period of time. And we've always said at the end of the year if we haven't made acquisitions we would look at a share buyback. We have done that historically in the past and I wouldn't rule it out, but it's clearly not our first priority.

Al Kabili - Macquarie Capital Advisors

Okay great, thank you.

Operator

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

Christopher Shunk - Deutsche Bank

Good afternoon, guys. Hey, Charlie, I was wondering if you could give us a few more details on the pension plan? I think you mentioned that it was 86% funded now, but could you give us some specific numbers on with the fair market value and the projected benefit obligation?

Charles J. Hupfer

The total plan, we're talking about the US defined benefit plan which we have really curtailed last year at this time 10 years out. So the plan will be in decline, but the total portfolio at December 31st was $782 million and that compares with $605 million last year. We were 86% funded this year, 69% funded last year, and we have a pretty balanced portfolio and overall came in at 22% for the year, 3% in the fourth quarter.

Christopher Shunk - Deutsche Bank

Okay. And then what will the actual expense be in 2010?

Charles J. Hupfer

Well, what we were saying is that the actual expense is about $55 million this year and I had projected that it would go down about $21 million or $23 million as a result of the changes that I talked about. That's the $100 million. That earns us at a rate of 8.5%. The 22% that we earned versus an 8.5% assumption will earn us something else and then the discount rate changes as well. So those three factors alone amount to about $0.13 of year-over-year improvement in EPS terms in the pension plan. I'm looking for some notes that I made that I sort of reconciled that on the back of an envelope to see if I could — here they are. I think I've got them right here.

Yes. I think what we would expect to see is a combination of the asset performance at 22% and the $100 million contribution should provide us with a $15 million pretax savings year over year from the return component. And then because we assume in our calculation that we'll earn 8.5%, we actually earn 22% and that creates a difference as well because it's amortized and I've just assumed that that's over 11 years which I think is about right and so that would give us another $7 million of year-over-year improvement. So when you put it all together it's about $22 million of year-over-year improvement on a pretax basis times the tax rate we've been using, 39% so after tax 61. So that's $0.13 a share.

Christopher Shunk - Deutsche Bank

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

Charles J. Hupfer

Well, we didn't have to make a contribution. We had assumed that we would have to make contributions beginning in 2010, '11, '12, and '13 and on out, but in September when the IRS changed the rules and gave us much more flexibility on the discount rate it put us in a position where we did not have to make a contribution in 2010 and so we really prefunded for obviously different reasons, but that $100 million serves as a credit so it's entirely up to our discretion whether we would fund in 2010 probably on into '11 and '12.

Christopher Shunk - Deutsche Bank

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

Harris E. DeLoach Jr.

Well, the strategic considerations are critical to it and that is one of the gates that's got to be strategic to our businesses now. Having said that, Sunoco doesn't need another platform. I think our business model that we had today is what we need, will support our growth clearly over the next four or five years, but the bent would be we've said we want to grow our consumer businesses so the bent would be on the consumer side of the business. Having said that, as we see opportunities to further consolidate the tubing core market around the world we'll certainly take advantage of that.

As to size, gee I'd like to make one or two large acquisitions and not have to make small ones, but in our space so many of these companies are small in the $50-$75 million range. I suspect that we'll see some $50-$100 million acquisitions. As far as geographies, you shouldn't be surprised to see something in Europe, you shouldn't be surprised to see something in South America, and you shouldn't be surprised to see something in North America. So I guess what I'm saying is we've got at any time discussions going on around the world and that's certainly the case as I sit here today.

Christopher Shunk - Deutsche Bank

Okay. Thanks for your help, guys.

Operator

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

Dan Khoshaba - KSA Capital Advisors

Hello Harris, Charlie. It's good to see that my old friend Chip Dillon can still find them (laughter) .

Harris E. DeLoach Jr.

He can, Dan.

Dan Khoshaba - KSA Capital Advisors

We worked together for many years, it was a good time. Anyway, Charlie, you had said I believe last quarter that there would be some provisions that would result in a little bit of a stepdown on some of the film or flexible packaging products. If we take that and remove it let's say from your flexible division, the contractual declines in pricing, what is your expectation for price? Have you guys been impacted at all by this move towards private label? I know that you're a big supplier to P&G and a lot of the big mobile brand names, what's taking place there?

Harris E. DeLoach Jr.

Dan, clearly as you look at the marketplace and you read, and I think anytime you go through a recession such as we've been through or are going through, you see the consumers taking advantage of the private label and you're seeing the retail food chains pushing their private label. I think today about 16%-17% of the US market is in private label. For instance, I think Kroeger has about 35% of their total sales so clearly it's a growing place for the business. About 12% of Sonoco's consumer sales are to private label companies. That grew in 2008 about 9% year over year. I suspect it probably grew greater than that last year although I don't have the numbers. But we have a plan to benefit from that growth on the private label side and clearly we're seeing that.

Dan Khoshaba - KSA Capital Advisors

That was my second question and so as you think about — you answered it without me asking. But I guess when you look at acquisitions and capital expenditures within the film flexible packaging industry, are there specific areas where you'd like to see a little bit of a better balance whether it's private label or confectionary? How do you think of the end market opportunities as opposed to just the overall segment of flexible packaging?

Harris E. DeLoach Jr.

Well, clearly we segment that. There's cookies and confection side, we're doing some pouch making, we're doing some pouches. We'll continue to see that grow. And I'm not prejudiced whether it's branded or whether it's private label. I'll take either one that makes sense and gives us the returns.

Dan Khoshaba - KSA Capital Advisors

Okay great, then last question just real quick. There was a February resin price increase and I don't know if it stuck. I know that resin costs went up a little bit in December-January. There was some talk that resin suppliers might not be in as favorable a spot as they were at the end of the year only because exports have trailed off a little bit and demand is still relatively soft overall for resin. What's your view on polyethylene price both in terms of the February announced increase and going forward?

Harris E. DeLoach Jr.

Dan, we think that in the short term you're going to see some resin price increases. We think that probably by mid-March or April you probably should see some tailing data on it. There's been a lot of capacity taken out of the resin side with downtime and as that comes back I think the supply side will probably drive that down. That's our read, for what it's worth.

Dan Khoshaba - KSA Capital Advisors

Good enough. Good quarter, guys.

Operator

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

George Staphos - Banc of America/Merrill Lynch

Thanks. Hi, guys. A couple of quick ones hopefully to finish up. Charles, you mentioned what your capital spending was going to be this, now could you remind us? And how do you see that trending between larger business?

Charles J. Hupfer

Well, I could give you our estimate in total. For the year 2009 we were at $104 million and we've assumed that we'd be more like $125-$130 million in 2010. Last year 2008 was 123 so sort of an ordinary run rate might be in the $125 million so that's what we're expecting to go back to, $125-$130 million. That answers the numbers part of the question.

Harris E. DeLoach Jr.

George, obviously we went through this in the budget session. I don't have it in my mind, but clearly we've got a lot of growth projects in the pipeline, particularly on the consumer side of the business and I would have to guess that the majority of this spending, the growth capital is clearly on the consumer side of the business. The maintaining is whatever the maintaining is.

George Staphos - Banc of America/Merrill Lynch

Is it fairly evenly split between geographies? So are you growing the domestic consumer as quickly as you're growing the international consumer or do you think —

Harris E. DeLoach Jr.

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

George Staphos - Banc of America/Merrill Lynch

Okay, I appreciate that.

Harris E. DeLoach Jr.

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

George Staphos - Banc of America/Merrill Lynch

I understand. I guess the last question then, are there anything's that Rob Tiede's doing differently now that he's back in pack services that might help the performance on a go-forward basis? And as we think about consumer excluding pack services and CorrFlex, are there any larger contracts that we have to be aware of whether in composite cans or flexibles that could come up either in '10 or '11? Thanks very much, good luck in the quarter.

Harris E. DeLoach Jr.

George, Rob went into that business in June, the 1st of July. Rob is obviously very experienced. He's been in that business and we have seen improvement in the third quarter and the fourth quarter compared to year over year under Rob's leadership. So clearly Rob is making an impact and I expect that to in fact continue. I'm not aware of any big contacts that come up this year. We have contracts that come up all the time. We may have a Pringles contract that is in the process of renegotiations as we speak that terminates sometime in the summer for North America, but off the top of my head that's about it, George.

George Staphos - Banc of America/Merrill Lynch

All right. Thanks very much, guys.

Harris E. DeLoach Jr.

Thank you very much.

Operator

And there are no further questions in the queue.

Roger Schrum

Thank you, Chanel. As a reminder, Sonoco's annual shareholder meeting will be held on Wednesday April 21st starting at 11am Eastern Time at the Center Theater which is located at 212 North 5th Street in Hartsville, South Carolina. For those of you unable to attend in person it will be webcast on the investor relations website of Sonoco.com. In addition, our first quarter 2010 earnings conference call will be conducted at 11:00 am on April 22nd. Our earnings release will be issued before the market opens that day. We'll be sending out electronic invitations regarding the specifics on the annual meeting webcast and the first quarter earnings conference call.

Let me again thank everyone for joining us today. We appreciate your interest in the company and as always, if you have further questions please don't hesitate to contact us. Thank you again.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disinfect. Have a great day.

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