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Executives

Roger Schrum - IR

Barry Saunders - CFO, VP

Harris DeLoach - Chairman and CEO

Jack Sanders - President and COO

Analysts

George Staphos - Merrill Lynch

Philip Ng - Jefferies

Ghansham Panjabi - Robert W. Baird

Phil Gresh - JPMorgan

Chris Manuel - Wells Fargo

Mark Wilde - Deutsche Bank

Alex Ovshey - Goldman Sachs

Sonoco Products Company (SON) Q4 2011 Earnings Call February 9, 2012 8:30 AM ET

Operator

Good day, ladies and gentlemen and welcome to the Q4 2011 Sonoco Earnings Conference Call. My name is Greta, and I’ll be your operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Roger Schrum, Vice President of Investor Relations. Please proceed.

Roger Schrum

Thank you, Greta. Good morning, everyone, and welcome to our Fourth Quarter and Full-Year Results Investor Call. This call is being conducted on February 9, 2012.

Joining me today are Harris DeLoach, Chairman and Chief Executive Officer; Jack Sanders, President and Chief Operating Officer; and Barry Saunders, Vice President and Chief Financial Officer.

The news release reviewing the company’s financial results was released before the market opened today, and is available on the Investor Relations section of our website at sonoco.com. In addition, we will refer to a presentation that is posted on the investor site during this call.

I’ll briefly remind you that today’s call may contain a number of forward-looking statements that are based on current expectations, estimates, and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties. Therefore, actual results may differ materially. Additional information about factors that could cause different results and information about the use by the company of non-GAAP financial measures is available in today’s news release and on the company’s website.

With that introduction, I‘ll now turn it over to Barry.

Barry Saunders

Thank you, Roger. Before getting into the numbers, I will mention that as a result of the Tegrant acquisition, we have reevaluated our segment reporting which is very prescribed by generally accepted accounting principles. And we've concluded that we will change our segments beginning with this fourth quarter. If you have access to the quarterly update slides, you see on chart three that we will have four segments going forward, Consumer Packaging; Paper and Industrial Converted Products; Packaging Services; and Protective Packaging. The most significant change from our previous structure is that given the significant sub-Tegrant we’ve added Protective Packaging as a recordable segment, which includes our Legacy Protective Packaging business and of course Tegrant as well.

Prior to this change, we also had a group of businesses, which was referred to with all-other Sonoco that was not considered a segment. But after pulling out our Legacy Protective Packaging business and putting it into Protective Packaging, we’ve determined that our Wheels business can be aggregated with the other businesses in the new Paper and Industrial Converted Products segment and our injection molded plastics business could become part of the Consumer Packaging segment, which already included our other plastics businesses.

Moving on to slide 4, you can see that this morning we reported earnings under generally accepted accounting principles for the quarter of $0.29 per diluted share and base EPS of $0.46 per share. The difference between GAAP and base is due to pre-tax restructuring expenses of $13 million or $0.10 per share after tax. These related primarily to additional charges of previously announced actions, including several plant closures.

Acquisition related costs of $9.3 million were related to $6.3 million of fees most of which were directly related to the Tegrant acquisition and $3 million associated with the impact of purchase accounting on the inventory step-up. Under U.S. GAAP, inventory at the time of acquisition is written up to fair value with selling costs, so very little is earned by the purchaser on the acquired inventory. Given this is a one-time cost and distorts the operational run rate, as we have previously disclosed, we have excluded this impact from base earning, but the after-tax impact of the fees and inventory write-off was $0.06 per share.

We had a $3 million write-off of a deferred tax asset related to a legal entity in Canada association with the decision to close a plant and transfer some of the business into the U.S. But we also had 4 million in insurance recovery, or $0.03 after tax, related to fixed assets that were destroyed by a fire in 2010, and we’ve excluded this from base earnings. So base ETFs of $0.46 per share is in the middle of the range we communicated with our preliminary earnings release two weeks ago, but short of the guidance we had originally provided for the quarter of $0.59 to $0.63, prior to our preliminary release. The shortfall, as compared to the original guidance was due to a significant falloff in activity in the industrial businesses in the latter part of the quarter, and the higher effective tax rate. The results were also below last year's $0.59.

I will now walk through our base P&L summary found on slide 5, but before I go any further through the numbers, I will mention that the 2011 fourth quarter included six fewer accounting days than that of 2010, simply offsetting the six additional days we had in the first quarter of this year.

In terms of the base P&L compared to last year, sales were 1.129 billion, which was essentially flat with last year, before the impact of the six fewer days and lower volumes was offset by higher selling prices and the impact of the Tegrant acquisition.

Gross profit was $184.7 million, down $15 million, which you’ll see in the EBIT bridge was due to numerous things including the impact of the six fewer accounting days, lower volume in the industrial businesses, even after factoring out the six fewer days, and essentially no manufacturing productivity to offset inflation. Price cost was the most positive story but even it was not as favorable as expected given the drop off in OCC prices during the fourth quarter.

This resulted in a gross profit margin of 16.4%. S&A was $100.6 million, lower year-over-year by $6 million due to fewer days in the quarter and lower management incentives partially offset by the addition of Tegrant’s estimated cost. But this did not offset the lower gross profit thus base EBIT was $84.1 million, down $8.9 million and EBIT percent to sales was 7.4% versus 8.2% for the same quarter last year. The lower EBIT accounted for $0.05 of the lower year-over-year earnings per share but more than half of that shortfall at the EBIT level was due to the fewer days.

To round out the income statement, net interest expense of $12.8 million was $3.2 million higher due to the debt issued to finance the Tegrant acquisition and impacted results by $0.02 per share. Income tax expense was $27.8 million based on an effective tax rate on base earnings of 39% which is much higher than last year’s rate of 31.6% and our full-year rate of 32.5%. Given the significance of the increase in the effective tax rate, I want to spend just a minute talking about taxes. On slide six, you see our base effective tax rates have been running in the 31% to 32% range in the first two quarters. It dropped to 29.1% in the third quarter which is often lower due to the release of reserves upon exploration of statute of limitations. In the fourth quarter, it jumped to 39%, bringing our full-year rate to 32.5%. The increase to 39% was driven by four discrete items in the quarter. We always have tax items but it’s unusual when they are all one direction on this quarter, they were all negative.

Two of the items are related to accelerated items for determining taxes payable that impact the manufacturing deduction for qualified manufacturers and are somewhat counterintuitive. The manufacturing deduction is based on taxable income from a tax return perspective and not by booked tax expense. Therefore, if you have any accelerated tax deductions, your taxable income goes down so your manufacturing deduction is worth less.

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

A similar impact occurred when much greater than expected accelerated depreciation adjustments were recognized or we were able to get more than expected capital jobs closed and put in service which allowed us to take the 100% accelerated depreciation and notably reduce taxes payable. But again, did not have the same impact on book expense.

Over time, assuming the manufacturing deduction is available, cash and book tax will be the same but cash taxes will be much lower in the early years because of the accelerated deduction for pension and depreciation.

We also had some impact just from the true up of the mix of both domestic and international and state issues and some other items in the quarter that increased expense.

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

So, looking at the change in sales more closely on the sales bridge on slide seven, you see the 2010 sales were $1.127 billion. Volume and mix was negative on the top line by $21.8 million. Selling prices were higher which increased sales by $37.1 million. Acquisitions added $61.7 million in sales and exchange in other lowered sales by $74.5 million, bringing 2011 sales to 1.130 billion. As previously mentioned, the fourth quarter 2011 did include six less accounting days than the same quarter last year, offsetting six more days we have in the first quarter. So to eliminate the confusion on volume trends, we’ve included the full impact of the fewer days and all other on the sales and EBIT bridges.

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

More specifically, on slide eight, you see the volume trends for North America and Europe. Tubes and core average daily volume was running at 1,384 tons per day in North America, and this includes U.S., Canada and Mexico, in the fourth quarter of 2010. Although volume fell off to 1,297 tons per day in the fourth quarter of 2011, representing a 6.4% decrease. In terms of serve market segments, paper mill packaging was flat, film and tape and specialty segments were each down 11% and textile was down 12%. Of the total decrease, less than 1% with any share changed, the balance was all due to the demand by customers in those serve segments.

Tube and core volume was also down 7% from the prior year in Europe, with the Legacy business in the West down 8% while the frontier region was down by 3%.

But just to kind of round up the volume discussion, tubes and core volume in Asia, which obviously is a much smaller operation for us, was down 16%. But that was due almost entirely to a flood that affected our plant in Thailand. The tube and core volume in South America was up 3%.

Paper in North America had higher trade sales which almost offset the notably lower inter-company sales, thus their total volume was down about 2% year-over-year.

Recycling volume was up 7% due to the increase in trade sales. Paper Europe total tons were down by 13% due to a similar decline in both inter-company and in our trade activity.

On the bright side, volume in reels was up 24% due to strong demand for steel reels for the utility industry. Volume and packaging services was down as the loss of a pack center contract packaging customer was partially offset by more activity in our core flex business. And in protective packaging, volume in our legacy protected packaging business was down 4% due to exiting one plant in China. As a slight weakness in some of the U.S.-based businesses was offset by a much better quarter this year in Mexico.

So, now back on the sales bridge on slide seven, you can see that prices were higher year-over-year by $37 million with favorable variances in all segments. But since most of the price increases were related to higher input cost, it’s really easier to discuss these when we review the price cost on the EBIT bridge in just a moment.

Acquisitions accounted for $62 million of the increase in sales, with essentially all attributable to the Tegrant acquisition, partially offset by the impact of disposition of our small injection molded plastics business in South America.

All other was negative by $74.5 million, roughly $67 million due to the six fewer days in the fourth quarter, with the balance associated with the translation of sales in foreign currency associated with the overall slight strengthening of the dollar compared to the same period a year earlier.

So, moving on to the EBIT bridge on slide nine, as a starting point, 2010 base EBIT was right at $93 million. Volume and mix was negative and lowered EBIT by $9.1 million. Selling price increases, net of increases for material, energy and freight was positive by $6.6 million. Manufacturing productivity added $1.2 million. The all other category was negative by $12 million and pension expense was lower year-over-year by $4.6 million, all of which resulted in this year’s base EBIT of $84.1 million.

I will again point out that the impact of the six fewer days is included down in all other on the bridge, so the impact of the volume short fall here is just the comparison on a same day basis. Most of the 9.1 million EBIT impact from lower volume is driven by the industrial businesses as I previously described. Higher selling prices more than offset higher material, energy and freight cost with most of the favorable variance in the industrial businesses associated with the timing of OCC movement.

Flipping to slide 10, for just a few seconds, looking just at the yellow sheet pricing for OCC in the Southeast, you see that many contracts in tubes and cores and trade paper sales in North America reset in September 2011 based on $175 per ton OCC price. And then OCC actually moved lower through the quarter averaging $127 per ton creating a favorable price cost spread compared to last year in 2010 when prices reset at 130 then moved to 155 on average in the fourth quarter.

Although price cost was favorable it was really not nearly as favorable as expected for three key reasons. The first being that with the slowdown in volume, we used higher price paper in inventory for a longer period of time. Pricing in regions outside the Southeast were also not as favorable as what we saw in the Southeast. And lastly, some grades of recovered paper did not move as well as the change in OCC.

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

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

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

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

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

With the debt related to Tegrant acquisition, as expected, our debt-to-total capital increased to 47.4% at the end of the year.

To spend just another minute talking about pensions, on slide 13, you see that the direction and the magnitude of the change in both the liability and projected expense for the 2012 are in line with what we described in December. As you might recall, we split the US qualified plan into an active and inactive plan at end of 2010, but for simplicity, I’ll just speak to the blended information.

At the end of 2010, our funded status for the domestic qualified plans was 83%. But immediately following the 85 million contribution in early 2011, it would have increased to about 92%. But due to the actuarial losses, we’re down to 80% funded status at year end. In terms of the discount rates, rates are down for the two plans on average 75 basis points. And you can also see that the other part of the actuarial loss is coming from investment returns where we had actual returns of only 4.5% in 2011 versus a weighted assumed rate of return of 7.8% on average between the two plans.

But to complete the update on pension, I’ll just point out the pension expense is expected to increase by 14 million in 2012 due primarily to the amortization part of the additional actuarial loss that I just described, which creates $0.10 per share headwind we we’ll be facing. And we are expecting pension contributions to be right at 76 million including a 30 million payment made to our domestic qualified plans in early January.

In terms of cash flow, on slide 14, you see that we had cash from operations of 113 million for the quarter, bringing our full-year cash from operations to 245 million which was about 15 million below what we had projected for the year simply due to the lower earnings in the fourth quarter.

This compares to 375 million in 2010 but pension and post retirement plan contributions were 141 million in 2011 versus 29 million in 2010 which accounts for much of the year-over-year difference in cash from operations.

For the year, capital spending net of asset sales was 162 million which has trended up as a result of growth projects in the consumer businesses most notably in our plastics. Investments to lower cost in our paper mills, including some initial spending for the biomass boiler project in Hartsville and IT related spending for systems upgrades. We paid out 115 million in dividends and acquired net shares of $28 million. And finally, we spent 566 million on acquisitions in the year, most of which was related to Tegrant.

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

And lastly, turning to our forward-looking guidance for 2012, we are now projecting that base earnings per share will be between $2.32 to $2.42 per share for the full year. At the midpoint of $2.37, this is $0.15 lower than the preliminary outlook we provided in early December due to a lower run-rate in our industrial businesses particularly in Europe, and due to a higher effective tax rate.

We have used a 32% effective tax rate for 2012 for the earlier projection and we are now expecting our blended rate to be 33.6% based on the projected mix of business.

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

That concludes my overview of the quarter and our updated outlook, and we will now open it up for questions. Q&A

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from George Staphos of Merrill Lynch. Please, proceed.

George Staphos - Merrill Lynch

Maybe a bigger picture question to start. Obviously, volume didn’t transpire as you’d expect that you were not alone in that regard in the fourth quarter and maybe periods during 2011 and that was a big factor in terms of your productivity being perhaps not where you’d want it to be. Having said that, do you think that 2011 was also impacted by just the fact and here I mean related to productivity the fact that there were so much going on at Sonoco with the Tegrant acquisition with some of the capital initiatives. And I guess to some degree given that the company itself has grown in its scale and diversity do you think that at all is having any impact in terms of management stability, the folks reporting to you, their ability to get productivity out of the business, is there too much going on at Sonoco do you think or was that the case perhaps in 2011?

Harris DeLoach

George, clearly volume impacted 2011 which you acknowledge and I would say that the acquisition activity last year probably took some focus off of productivity more so than we realized at that time it was not only Tegrant but there was a lot of all the acquisition activity in the year that actually didn’t come to fruition. So yeah I would clearly say there was some disruption to color some of that lack of productivity.

I don’t think Sonoco is any more complex today than it was in 2010 and 2009 and 2008 and 2007 so I think we have certainly the management team to handle the productivity and drive the productivity back at our historical levels and that’s what I would expect in 2012. Jack, do you want to comment?

Jack Sanders

The only thing I would add is that I think it’s also true that 2011 was a year of unusual inflation, especially during the first half of the year, it’s extremely strong. And that creeps in to our productivity calculations in ways that we can actually see and calculate, but that definitely was a factor. As well as if you’ll recall the winter of 2011 was quite severe versus this nice weather that we’re having now, and it had an impact on our operations throughout the North and Northeast in the first quarter.

George Staphos - Merrill Lynch

Okay, I appreciate the details. There are two quick questions and I’ll turn it over. You mentioned in your press release and commentary that you don’t anticipate further reductions in industrial volumes from the fourth quarter level. If I paraphrase that correctly, could you provide us some details? And you mentioned energy inflation within the consumer segment, could you remind us why there would be unusual energy impact in consumer in the quarter if I captured that correctly given packaging and converting business don’t generally consume a lot of energy. Thanks, guys.

Jack Sanders

Specifically, George, I guess, to run rate situation not being lower than fourth quarter, I would tell you that the US run rates today are better than December, and actually, have probably rebounded a little bit more, maybe a little bit stronger than we actually anticipated, so we feel good that our projection forward now is pretty stable, at least for the foreseeable future.

Europe, certainly, also saw improvement from December, but it’s probably not as strong as we would like. Again, we’ve kind of factored in all of that into our guide is going forward. Our mill utilization is certainly better during the first part of this year. So everything seems to indicate that what we’ve factored into our re-forecast for now seems to be realistic for what we expect. As far as energy on the consumer side, I would tell you that freight is a part of it but also there is energy consumed in blow molding which is a little bit different than our portfolio has been in the past as well as in flexibles.

Operator

And your next question comes from the line of Philip Ng with Jefferies. Please proceed.

Philip Ng - Jefferies

Just from a very high level standpoint, the macro data coming out of the US, you’re probably suggesting to have improved a little bit on the margin but it seems like in relation to your tube and core business, things have softened so I’m just trying to get a sense of what’s the disconnect. Are you seeing more leakage in your business into other forms of packaging?

Barry Saunders

How about you repeat that question, I’m sorry. We didn’t get the whole thing. It broke up on us.

Philip Ng - Jefferies

Yes, sure. Just with the latest macro data coming out of the U.S. which suggests that things have actually been picking up a little bit, but your tube and core business has obviously softened. So I just want to get a sense of what’s the disconnect there and have you been seeing any leakage in your business into other forms of packaging?

Jack Sanders

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

Philip Ng - Jefferies

Okay. And then I noticed you guys have announced some price increases particularly in your Paperboard business in Europe. Is that more of a reflection that demand is coming back a little bit or just simply a cost for this year?

Jack Sanders

It’s a reflection of cost.

Philip Ng - Jefferies

And are you getting more abnormal pushback I guess, just the macros has been challenging out there?

Jack Sanders

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

Philip Ng - Jefferies

Okay, and just lastly on your Consumer Packaging business, order patterns were a bit choppy last year and part of that I would imagine, bonds were depressed by food inflation. Have you seen promotional activity take up a bid for your customers and just thoughts on the demand profile from your customers on the Consumer business?

Jack Sanders

No, it’s really too early for us in any type of promotional type of activities, but I will tell you that coming out of the box, we are pleased with consumer. I think that the projections that we’ve got in our reforecast are solid. And I feel good about that as well as our Protective Packaging business, both of those we feel good about.

Operator

And your next question comes from the line of Ghansham Panjabi with Robert W. Baird. Please proceed.

Ghansham Panjabi - Robert W. Baird

Hey, just curious on how Tegrant performed inter-quarter on a volume basis, perhaps relative to your internal plan?

Harris DeLoach

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

Ghansham Panjabi - Robert W. Baird

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

Harris DeLoach

You are talking about Tegrant?

Ghansham Panjabi - Robert W. Baird

Yeah, exactly.

Harris DeLoach

I’m not sure I have a good feel for that. You Jack, about visibility into customers. I think it’s too early for us to really know that count to be perfectly honest.

Ghansham Panjabi - Robert W. Baird

Okay, okay.

Jack Sanders

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

Ghansham Panjabi - Robert W. Baird

Okay and then the consumer business, your comments on volume being roughly flat in that business. How is the ownership news flow on Pringles affected volumes in that category?

Harris DeLoach

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

Ghansham Panjabi - Robert W. Baird

Okay, and just one final clarification question, on '12 quarterly variances, on accounting days, is there anything that we should keep in mind as we kind of think through the quarterly progression?

Harris DeLoach

I don’t think there’s anything on a day basis. I think there’s one day add in one quarter or the other.

Ghansham Panjabi - Robert W. Baird

Okay.

Harris DeLoach

But I would remind what Jack said, bear one or the other. There’s a certain amount of seasonality in that business where the first quarter’s always the lightest quarter of the year. And that we would expect that obviously in 2012 as well.

Operator

And your next question comes from the line of Phil Gresh with JPMorgan. Please proceed.

Phil Gresh - JPMorgan

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

Harris DeLoach

Well, I think the biggest opportunity, obviously, Phil, is macro and we have baked in to our guidance basically the run rate that we anticipated coming out of December on the industrial side of the business. And I think that’s the real wildcard and we were reasonably cautious and I think with good reason with Europe and we still don’t anticipate a strong rebound in Europe at least in the first half of the year.

But we’ve got a lot of things going, and obviously execution is critical to them. We’ve got a lot of consumer products coming on. We’ve got the completion of the new blow-molded plan in Columbus, Ohio coming on and we’ve got the new products coming on as well.

So I think the real key is going to be getting back at historical levels of productivity. And I can tell you that Jack and his team are very well appropriately focused on that and I have high confidence that that will in fact happen.

The other thing I think is I don’t know what we’re going to see on raw material costs and inflation that Jack referenced but we will see something. But given our historical market position, historically the way we manage the business, I would expect us to manage price costs in a positive fashion as we always do. So when I come back to it, it probably is the macro that probably gives us the most upside and perhaps downside, as we go forward in the year.

Phil Gresh - JPMorgan

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

Jack Sanders

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

Phil Gresh - JPMorgan

Okay. And then I guess the final question is as you think about capital allocation priorities, as you’re working through the integration of Tegrant, how are you thinking about the uses of cash this year?

Harris DeLoach

Most of our cash really hasn’t changed that much, Phil. We’ll generate good cash flow. We’ve got a higher CapEx in 2012 driven somewhat by the Hartsville Master Plan project of the biomass bawler that we talked about the New York in December as well as some systems cost of our Oracle implementation.

And then we’ve got the dividend that is very important to our shareholders. It will be there. And the cash flow, we will use our free cash flow probably this year to pay down some debt that we acquired with the Tegrant acquisition and position ourselves to move forward on that probably in 2013.

Operator

And your next question comes from the line of Chris Manuel with Wells Fargo. Please proceed.

Chris Manuel - Wells Fargo

I just wanted follow up, I think the direction George was going earlier with respect to what volumes are going to look like in 2012 versus 2011 and partly versus maybe where expectations were, I think what you indicated was you would reforecast based on where things were in December and I’m just trying to understand what that necessarily implies for full year as I think through some of the segments.

If memory serves you had originally expected that your consumer business overall would be roughly flat. So if you could give us a sense of where that would be now embedded into your numbers versus your expectation previously and I think tube and core might have been kind of flattish for global as well. So could you help us, maybe update us on where you are on your current numbers for those post December?

Harris DeLoach

First of all, no, we did not base them on the December run rate. The consumer basically, yes, we see that that is going to be flat year-over-year. I think that what we did was revised based upon what we saw in the December, I think that tube and core North America, we’re saying it will be down about 3% year-over-year, and Europe down about 6% now year-over-year which was not what we originally rolled out, but based upon what we saw in the fourth quarter, and our best estimates looking forward, that’s where we see volumes.

Chris Manuel - Wells Fargo

Okay that’s actually very helpful. And if I could dig into a few of those components, I mean, certainly all the data that we look at from Europe and from other regions is clearly more negative now than where it was recently, I would say. How much of the reduction do you think is maybe permanent? How much is maybe temporary with respect to some destocking going on, given tougher credit conditions for your customers over in Europe? At what point do you take a step back and maybe reassess for potential restructuring for sizing your business?

Harris DeLoach

Chris, I guess my crystal ball is not quite as accurate as you'd probably like but obviously some destocking went on in November, December and early January but I think it was just pure demand in that European business that drove that down. And I would say to you that Jack and his team have already looked at contingency plans in Europe and we’ll probably pull a couple of triggers and prepare to pull a couple of more if it’s a permanent change, but frankly I think it’s more temporary than it is permanent.

Operator

And your next question comes from the line of Chip Dillon with Vertical. Please proceed.

Chip Dillon - Vertical

First question is sort of just as we look at 2012. I was noticing that if you take a bird’s eye view, the 45 to 50 would basically represent I believe the lowest first quarter probably since going back to 2006, so six years ago. And yet when I look at the last three quarters, so let’s say you hit them, let’s call 47 since the midpoint. So if you do, the midpoint of the year to call it 237, that would be an incremental $1.90 in the back nine months, which is a number you’ve never done before.

So we’re kind of going from a quarter that would be kind of a six-year low point to an all-time sort of best in that last nine months. And I guess maybe you haven’t specifically looked at it from that high of a level, maybe you have, but it would seem that you’re being fairly optimistic in terms of how much a lot of the business snaps back, and I just want to know if you could give us a little viewpoint on how you see that unfolding as we go through the back nine months of the year?

Harris DeLoach

I’ll be happy to and actually we have looked at it from that level as well. I want to start off reminding everybody for the second time that there is a certain amount of seasonality in our business and the first quarter is traditionally the lowest business. And to a various point, in this year we’ve got a fairly significant headwind on pension and tax compared to other years. But as I look out for the balance of the year and we’re quite comfortable at least at this point with our guidance for the full year, we’ve got a fair amount of consumer growth that is baked in, that is already in the pipeline that will come on in the balance of the, probably the second half of the year.

One of the pieces of it is the completion of the blow molded operation in Columbus, Ohio which I previously have mentioned to serve health and beauty customers. We’ve also got in the pipeline, about $150 million or so of new products that I expect to come on at various stages in the year. We also, in response to someone’s question, I guess it was George’s, about the productivity getting back to historical levels which I've a couple of plans in place to do that and I also think in the year, we were chasing margins with higher raw material costs through the year, through 2011, and I expect that not to be the case this year, and then we obviously are controlling cost pretty tightly in the company so, we’re quite comfortable with the guidance that we’ve given.

Chip Dillon - Vertical

And just one follow-up, as you look at the…

Harris DeLoach

Before you go there Jack has a comment, I think…

Jack Sanders

Well, I’d also say obviously Tegrant is in the mix now and the contribution we expect from Tegrant is a part of that increase.

Chip Dillon - Vertical

And we look at the blow molded business which obviously had a big jump last year. How do you think about the growth rate there? So that stays sort of significantly above the company average, more than say, couple of years? Do you sort of see a run rate where that can happen, and then I guess to reverse gears, do you think in the industrial business, I don’t know, maybe you can update this for us, but I know a number of your tubes and cores, I think do find their way into the Paper business where they wind the paper on the reels, on the cores, and with lower demand in some of the printing grades, is that’s something that you feel might continue to push that volume down on the tube and cores side gradually over time?

Jack Sanders

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

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

Operator

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

Mark Wilde - Deutsche Bank

So I wondered, if you or Jack could just give a little more color on this weakness in industrial packaging, maybe draw some comparisons or some contrast between North America and Europe?

And also, just as an observation, it seems like some of the public and private companies that I deal with in industrial packaging saw this a little bit earlier in the year than you guys did, like starting to crop up sometime mid to late summer. Maybe you could speak to that?

Jack Sanders

Well, Mark, I think the story of the fourth quarter was December. Certainly, we saw the traditional slowdown in August in Europe and then had the normal return to volumes that we see. To give you a little bit of color in the picture, we had 143 down days in our mill system in the U.S. in 2011, 143 more in 2011 versus 2010. 124 of those were in the fourth quarter and the bulk of that pushed into December.

In Europe, we had 100 more down days in the fourth quarter than we did in the fourth quarter of 2010, and prior to that it was basically flat on a year-over-year down day basis. So for us it just occurred, that’s the way it occurred to us. And again I go back, it has to do with the end markets we serve. To date, we just didn’t see the drops in those markets until the fourth quarter, and then in the fourth quarter it was well into December before we saw those significant falloffs.

Mark Wilde - Deutsche Bank

Okay. And just on the cost idea, is it possible, Jack, to get a little of your perspective on this balance that we’re seeing in both Europe and North America and the OCC prices, and thoughts about how that will affect you in the first and second quarter?

Jack Sanders

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

Mark Wilde - Deutsche Bank

Okay. And then finally, Barry, can you tell us what you’re assuming in terms of FX in 2012?

Barry Saunders

I think CapEx is $185 million in 2012

Mark Wilde - Deutsche Bank

Sorry. Wrong Ex there. I’m interested at the kind of your foreign exchange assumptions.

Barry Saunders

I’m sorry. I thought you said CapEx.

Mark Wilde - Deutsche Bank

No OpEx?

Barry Saunders

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

Operator

And your next question comes from the line of Alex Ovshey with Goldman Sachs. Please proceed.

Alex Ovshey - Goldman Sachs

A couple of questions. Can you just remind us the company’s top line exposure to Europe and just the breakout of that exposure by each of the segments?

Harris DeLoach

We’ve got about 17% of our total sales, maybe a little bit less than that now with Tegrant in the mix and Europe in total, and most of that is in the paper and industrial converted businesses.

Alex Ovshey - Goldman Sachs

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

Jack Sanders

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

Alex Ovshey - Goldman Sachs

Maybe one last question just to talk about what you see as the biggest upside and downside risk to OCC price of this year?

Harris DeLoach

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

Operator

At this time, there are no more questions.

Roger Schrum

Thank you very much, Greta. As a reminder, Sonoco’s annual shareholder’s meeting will be held on Wednesday, April 18, starting at 11:00 a.m. Eastern Time at the Center Theater which is located at 212 North 5th Street here in Hartsville, South Carolina. For those of you that are unable to attend the meeting in person, it will be webcast on our Investor Relations website.

In addition, our first quarter 2012 earnings conference call will be conducted 11:00 am on Thursday, April 19, and our earnings release will be issued before the market opens that day.

Again, let me thank you all for joining us today and we appreciate your interest in the company and as always, if you have any further questions, please don’t hesitate to contact us. Thank you very much.

Operator

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

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