Sonoco Products Company (SON) Q3 2007 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen and welcome to the Sonoco Products Company Third Quarter 2007 Earnings Conference Call. [Operator Instructions]. As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. Roger Schrum. Thank you. You may begin.

Thank you, Joe. And good morning everyone and welcome to Sonocoís 2007, third quarter earnings investor call. Joining me today are Harris DeLoach Chairman, President and Chief Executive Officer. And Charlie Hupfer, Senior Vice President and Chief Financial Officer. Our financial results for the third quarter of 2007 were released before the market opened today and are available via our website at sonoco.com. Let me begin by stating that todayís 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 about the use by the company of non-GAAP financial measures is available on Form 10-K, 10-Q and 8-K, filed with the SEC. Iíll briefly review the highlights of our third quarter and then Charlie will provide a more detailed analysis, before we open the call for your questions. GAAP earnings for the third quarter of 2007 were $0.63 per diluted share versus $0.60 for the same period in 2006. Results for the third quarter benefited from a significantly lower effective tax rate partially offset by restructuring and asset impairment charges. Base earnings for the third quarter were $0.64 per diluted share compared with $0.61 in the same period last year. Base earnings is a non-GAAP financial measure that excludes certain nonrecurring or infrequent and unusual items. Our third quarter base earnings exceeded the high end of revised guidance that we reported on September 18, due to the lower than expected effective tax rates. Results from operations during the quarter were in line with our revised projections. We announced in today's press release that we expect base earnings in the fourth quarter of 2007 to be in the range of $0.52 to $.55 per diluted share. In addition, ful year 2007 guidance was raised to $2.28 to $2.31 per share to reflect the favorable effect of third quarter tax adjustments. Our fourth quarter guidance assumes an effective tax rate of 34% and fourth quarter will have six fewer days than last year's final quarter. With that introduction, I will now turn it over to Charlie.

Thanks, thank you, Roger. As we just mentioned today we reported third quarter sales, sales over $1.298 billion and EPS of $0.63 a share, base EPS $0.64 a share. Of course GAAP earnings include restructuring and other unusual items, and the base earnings adjustment that we'll make will take those items out, and I'll go through that. This particular quarter we have a number of elements that I'll try to carefully discuss. First I'll discuss the reconciling items between GAAP earnings and base earnings especially the impairment charge and the tax credits, specifically what it takes to get us from $0.63 of GAAP EPS to $0.64 base EPS, and what those different elements mean. Then having clarified the make up of base earnings, I'll discuss the impact of a lower effective tax rate on a comparison, for the quarter, and to our earlier guidance, to last quarter and to our earlier guidance. And then lastly, I'll discuss operations in terms of the usual sales in EBIT bridges, I'll talk about cash flow, the balance sheet and then some other items. So let me start with the adjustments from GAAP earnings to base earnings. The first adjustment, which is an add back is for restructuring. We took a $2.3 million pretax charge, thatís $1.6 million after tax or $0.02 a share rounded. This represents miscellaneous costs associated with our prior year plan. Next we have an add-back for environmental expenses of $1.1 million pre-tax, thatís 600,000 after-tax or a rounded $0.01 a share. This charge relates to Sonoco's share of higher than budgeted costs to clean up the hotspot on the Fox River; thatís the hotspot thatís outside of our DePere plant. Mega point here, we would not ordinarily include such a minimal amount $1.1 million from base. But this is a true-up to the original $12.5 million charge that we took in the fourth quarter of 2005. what it resulted from was just more dredging than was originally expected when we got into it. The next item, and the big item is an impairment charge totaling $15.1 million pre-tax, thatís $9.9 million after-tax or $0.10 s share. The majority of this, a little bit less than $12 million relates to an impairment charge taken at our Brazilian metaling plant. And that represent a write-down of resold improvements and certain other assets at that plant which we've now decided to close. Recognition this quarter, represents a third quarter decision to relocate the equipment back to the US given continued losses at that plant. Those losses are largely due to foreign exchange and the expiration of a fuel supply contract in 2008 that we were put on notice would not be renewed. Going forward, this gets most of those costs out of the way. Now going forward, we will have some dismantling and severance costs that will probably be around $2 million and it will be incurred in the fourth quarter. The next item of impairment is approximately $3.5 million of the $15 million charge and that relates to the impairment of the installation costs and certain special purpose equipment at our Wausau plastic bottle plant. Given the continued losses there and are likelihood of redeployment over time of some or all of the blow-molding equipment, we have taken an impairment charge to cover the write-off of those installation costs. So if you he add all those add-backs up, they add up to $0.13 a share. In addition to that, GAAP net income includes $0.12 per share related to the release of tax reserves which we are subtracting to arrive at base earnings. The $0.12, actually $11.8 million of tax credit relates to the relief of tax reserves which we took into income when the statute expired on the 2003 year on our federal return and on certain of our state returns. Now the reserves related to the items that were either large individual amounts, that secondly, were unusual in nature and that third, went back to 2003 and are not expected to reoccur. And so thatís why we felt like it was important to pull them out of base earnings. So therefore, the total subtraction is $0.12 and the net that we'll add back is $0.01, $0.13 minus the $0.12 of tax reserves. In 2006, we took a $1.1 million restructuring charge, thatís $600,000 after tax or $0.01, which we add back to last year's actual EPS of $0.60 to arrive at base EPS of $0.61. So then, the comparison that we are making is $0.64 versus $0.61. The income statement on a base earnings basis, and I'll read out some of these numbers to you. Sales unchanged at $1.298 billion; thatís up 10.5% from last year's $931.5 million. EBIT is $91.5 million; EBIT is down 1.4% from last year's $92.8 million. Profits before tax, $77.4 million, is down 5.6% to last year's $82.1 million. And then net income, obviously because of taxes is $64.8 million up 5.1% over the last yearís $61.7 million. Taxes in these base numbers were $16.2 million, thatís a dollar amount, versus last yearís $23.5 million. That works out to be an effective tax rate of 20.9%, compared with last yearís 28.7%. During the third quarter we had approximately $10 million of favorable discrete tax adjustment that reduced the tax rate down to this 20.9%. Now, I think itís important to know that at the time that we released our guidance, when we took the guidance down to $0.52 to $0.55, we knew up and we build in $5 million of this per-tax adjustment into our guidance. So out of the $0.10 per share we build in $0.05 per share. What this means is, is that we have an additional $5 million or $0.05 per share that was favorable and that had not been factored into the guidance. So, if you subtract that $0.05 from the $0.64 that we announced, you get $0.59. And that supports Harris' quote. And that quote was that we exceeded our guidance due to the tax rate and that results from operations were in line with our revised projection. Now our normalized effective tax rate is 33.8%. So, about half the difference to the 20.9% is due to the statute expiring on the year 2003. Now this is in addition to what we pulled out of base earnings and it relates to ordinary items that were charged to tax expense, in base earnings when the reserve was set up in the first place, back in 2003. So thatís about half of that difference between say 34% and 21%. The remainder is just ordinary adjustments that are always heavier in the third quarter. For example this is the quarter when we true-up the 2006 tax provision, to the tax return that was filed in September this year. Turning to the segments, and I am going to report the segments on a base earnings basis. I believe you will find that on the last page of the press release. But the consumer packaging segments did report sales of $369.5 million, up 12.4% over last year. Consumer packaging reported EBIT of $23.7 million, thatís down 15.4% compared with last year. So I will discuss volume and I will discuss price costs, and all others, when I get into those year over year bridges, but generally, as it relates to consumer packaging there are a couple of points I want to make here at the segment level. The first is, their results include the settlement of a law suit related to a very specific product claim that was resolved in this third quarter. Absent that claim we would have been down 6% year over year as opposed to the 15% year over year. This settlement was factored into our guidance and so it does not stand out as a difference compared to the guidance. But like most other situations, there is a confidentiality agreement here, so I am not going to go into more detail, but I will say there will be no recurring amount in future quarters or years related to this. In addition, on the consumer packaging segment we did experience very modest declines in composite can volumes and no real financial turnaround in flexibles division compared with the second quarter. Now the two scores in paper. Sales are $433.7 million, that is up 11.9%; EBIT is $43.4 million, up 1.5%. This reflects a weak tube volume in the US offset by strength in our paper operations and in our tube, core and paper operations in other regions. It also reflects the jump in OCC, both pricing and cost year over year. Packaging services, sales are $132.4 million, up 8.5% over last year; EBIT, $10.9 million, up 15.9% over last year. Thatís mostly a result of volume and productivity. And then all others, $94.2 million, up a tenth of a percent and EBIT $13.4 million, up 7.1%. Now, let me turn to the bridges. And here, I will start with sales and here we are reconciling the $98.3 million year over year increase in sales. And it is made up of these four categories. Volume is a negative $2.6 million. Price is a positive $19.2 million. Acquisitions, a positive $53 million. And foreign exchange, a positive $28.6 million. So those numbers should add up to the year over year difference of $98.3 million. Let me start with volume. Volume, as I said was a negative $2.6 million. We had negative volume in tube, core and paper. And thatís largely due to a 5% to 6% volume shortfall in the US and Canada. Here we have experienced a slight share loss especially in some low-end textile segments. But the majority of this decline is due to paper mill closures over the last 18 months, and we obviously sell paper mill cores into the paper industry, and then also just a general slowdown with our customers. Volume was up in Europe, 4.5%. About 1.2% of that was in our legacy operations; that would be Germany, France, the U.K. And 18% in our frontier operations; for example Poland was up 17%, Turkey was up 14%. So the blended rate between our legacy and our frontier operations is 4.5% year over year. Paper volume was up 4% thatís mostly outside sales of tissue and towel board. And then on the consumer side flexible volume was down, down roughly 4%, thatís due to a general slowdown plus some business that was lost due to competitive bids. And also sticking with consumer, composite can volume was down around 1%. We did see increase in powdered infant formula year over year and in plastic caulks, but there were declines in snacks, juice concentrate and powdered beverage. Packaging services volume was strong in both our pack centers and in our core-flex side of our business. Now turning to price. Price, as I said was up $19.2 million. Most of the pricing is on the tube, core and paper side and most of that is in the US, where if you remember, last march we initiated a $50 a ton paper increase and an 8% tube increase. We are seeing the benefit of that in this third quarter. A little less than one half of the net increase comes from recovered paper where that is simply passing on higher OCC costs. In the consumer packaging and the packaging services side of our business pricing is slightly negative where we've granted some selective price concessions due to bids. Now to acquisitions. Total of $53 million in sales incremental this quarter, that of course is Demolli, our Italian tube company, Clear Pack and bulk of that would be Matrix that we acquired late in the second quarter. And then foreign exchange, $28.6 million obviously thatís a weak dollar versus almost all the other currencies that we do business in. This is all translation. But when you go to translation, all the way to the bottom line I'll point out here that there is only a modest net income effect. Now let me turn to the EBIT bridge, and hereís where we are reconciling the negative Ä1.3 million year-over-year change. Volume and mix, we'll throw mix into this category, so volume mix is a negative $3.4 million. Price cost, throwing cost into the category now, is a negative $5.9 million. Productivity is a positive $11.2 million. And then the all other category is negative $3.2 million. So those four numbers should add up to a negative $1.3 million year over year. Starting with volume, volume's a negative $3.4 million. Obviously this represents the profit impact of the volume shortfalls that I discussed what I was talking about sales. The biggest driver was the volume shortfall in the U.S. and thatís offset in part by higher volumes in paper U.S. paper Europe. Although in both cases, the added volume was coming from lower margin boards. So there was a little bit of a mix decline. Plus we saw the impact of volume shortfalls in flexibles. In terms of price costs, itís a negative $5.9 million, although we saw pricing up $19.2 million, when I was talking about sales, costs were up, $25.1 million, so that leaves us with a negative price cost of $5.9 million. The big driver here is the OCC cost, overall furnished cost in our domestic paper operations were up $ 32 or roughly 32% year over year. In Europe, we've seen similar more increases. OCC moved up over the last two quarters from Ä100 per metric ton to about a Ä140 per metric ton. On the consumer side of our business we have seen some very modest increases in liner and tin. Productivity, the third category is a positive $11.2 million. Generally, good productivity across all of our operations. This number is in line with our previous quarters. And then all other. Thatís a negative $3.2 million. This is our catch all category, this includes wages, energy, freight. It also includes the profitability from the acquisitions. And in this quarter, it includes the settlement of that product claim that I talked about earlier. Let me turn now to cash flow. Cash flow from operations for the third quarter was a $131 million. That compares with a $166 million last year. Thatís a difference of $35.2 million. The entire difference can be explained by a change in net working capital. Last year, we freed up $38 million of networking capital. This year, our working capital consumed $3 million. So thatís a year over year difference of $41 million in terms of net working capital. So that more than explains the year over year difference in cash flow from operations. Let me stress here, like I did in the second quarter, that our 2007 working capital program is on track. Our accounts receivable days are 1.2 days better than they were last year in September. Our inventory days are one day better than they were last year. Our account payable days are 0.8 of a day better than last year. So the issue isnít that our working capital program isn't on track, it's that we are not improving at the same rate as we did last year. And last year of course was the first year of the working capital program. Capital expenditures are $49.4 million. That is up from last yearís $28.4 million. Our most recent reforecast shows operating cash has been revised now to be between $375 million and $ 400 million. Capital spending though is running at a higher rate than expected. It's running at an annual rate of around $165 million. We have seen increased spending, due to a couple of things. One is the Columbus, Ohio, plastic bottle plant, the two Flexo presses that were introduced earlier in the year, a new Matrix facility that we are working on, and also some protective packaging line. So we do expect and have revised our operating cash to be up, versus our previous projections. We also see capital spending up as a result some of these major projects. Our balance sheet remains strong. Debt to total capital, as we calculated is 41.2%, thatís down from 41.7%, at the end of the second quarter. During the quarter we bought back 1.5 million shares for $ 51 million. And our total debt really is unchanged from the beginning of the year. The reforecast for the full year is $2.28 to $2.31. This is really unchanged from our September 18th guidance. Except for adding the incremental third quarter tax benefit to the full year, we really havenít made any change. So the effect here is to lead the fourth quarter the same, and thatís at $0.52 to $0.55 rate. I will point out, actually Roger did earlier, that last year's fourth quarter had six extra days in it and it was $0.56 a share. And then my last comment, we always comment on new products, so I will do that here. We had new products in the quarter that totaled $26.9 million. Thatís compared with $29 million last year, $29.1 million. So a little bit behind last year. Most of the new products are on the consumer side, $19.6 million. $7.3 million is on industrial side of our business, so thatís a total of $26.9 million. The biggest increase is coming from the flexible division and it is the second generation of Snack 'n Seal product. And then I will point out too that the Sonopop display had been grandfathered off after two years and that principally reflects the decline year over year. So, those are my standard comments. I'll leave it at that. And I guess now, Roger, turn it over to questions.

Joes, we'll go ahead and take questions. Question and Answer

Thank you. Ladies and gentlemen we are going to conduct question-and-answer session. [Operator Instructions]. Our first question is from Ghansham Panjabi with Wachovia Securities. Please go ahead with your questions

Good morning, guys. This is actually Phil calling in for Ghansham. A quick question on the pricing front. I mean you guys in the past have had a positive price cost spread for as long as I remember. But with OCC prices up, do you guys have any price increases on tap for the rest of í07 or early í08?

Phil, this is Harris. I fully expect the year to be a positive price, going forward, the quarter was down, we expect the year to be positive price cost. Actually, as you know, a good bit of our business is under contract, and we actually raise prices under those contracts on the first of October.

Okay.

And we have been in the other business weíve been raising prices on many of our paper-based products throughout the last month or so.

Okay.

Weíre actively doing that. We have not made an announcement but weíll sort of play that by ear over the coming 30, 45 days or so.

Okay. But are you seeing a more difficult environment in terms of pricing power just because your time's [ph] obviously slowing down, in more prospects?

I donít think weíll see any more difficulties than weíve normally seen in the cycle.

Okay, thank you so much.

Youíre welcome.

Thank you, the next question is from George Staphos with Banc of America Securities. Please state your question. George Staphos ñ Banc of America Securities: Hi everyone, good morning.

Hello, George. George Staphos ñ Banc of America Securities: I just want to follow up on the pricing question. So, if you are negative on price cost in the third quarter, which you were, notwithstanding the positives youíve seen in prior years and quarters and the market itself is no more difficult to raise pricing in the past quarters, why would you not come out with a general price increase, why would you need to look out the next 30 to 40 days?

George, I think what we have, what I said and what weíve done is we have been sort of, with inside the businesses targeting price increases and going out with those rather than making a general announcement. It clearlyÖ the paper industry that we compete in, the capacity utilization is lower than we would like. And, but weíve seen increases of OCC, weíve also seen increases of other commodities such as adhesives and starch and weíre going out pretty aggressively and are recovering those. I would not be surprised to see us announce something between now and year end or shortly after the first of the year. Now I really donít want to get into a lot more than that at this point. George Staphos ñ Banc of America Securities: Okay.

But you know, we will continue to aggressively raise prices. Weíre doing that as we speak. George Staphos ñ Banc of America Securities: And the recent tinplate price hikes, my guess is that will also be something you need to consider as you look out to 2008 for pricing and have you had any discussions initially with your customers there?

George, most of that business is obviously is, as you know on the consumer side of the business. We have seen the tinplate increases that have been announced. We are talking to customers, and most of those have passed through to our contracts that we have in place. That generally change January the 1st on the consumer side although some of them, I think March 1st and one or two of them are June 1st. George Staphos ñ Banc of America Securities: Okay.

But we are having discussions and I do anticipate pushing those through. George Staphos ñ Banc of America Securities: Okay. Switching gears, in flexible packaging the pace of improvement would appear to beÖ given our research, given your comments coming at a slower pace, perhaps a much slower pace than I think youíd hoped for in the second quarter. If thatís correct, great; if not please correct me. But if itís correct, why is that the case?

Fair question. I think Iíve answered in response to one of your questions that I expected to see a turnaround in the fourth quarter in that business, at the last conference call. And we have in fact seen nice, and I use that word loosely, nice operating improvement in the third quarter in the flexible business as compared to the first and second quarters, particularly the second quarter where we were having some customer issues. So, the operating plan, the operating performance of that business is on track with what we anticipated and Iíd expect to see that continue through the balance of the year and into next year. As Charlie said, we saw volumes down in that business in this quarter, year over year, reflecting two things. One, just frankly a softness in the market and that obviously affected the financial performance. In addition, as Charlie said, we had some bids in the latter part of last year and the early this year where we actually lowered some pricing and that affected the financial performance. And what I wanted to get in, under control first was the operating performance, which I think we have. And I expect the financial performance will follow behind that, George. George Staphos ñ Banc of America Securities: Okay. I know it's perhaps hard to say, but you would expect maybe '08 to be comparable to '06 for flexible in terms of EBIT or is it too early to call that and we're too optimistic to expect that.

It is probably too early to call that. I do expect certainly a nice improvement over '07. We are early into our budgeting process right now and to be quite honest, I havenít seen the projections for '08, George. George Staphos ñ Banc of America Securities: Okay thanks I will turn over, Iíll be back.

Okay .

The next question is from Chris Manuel with Keybanc Capital Markets.. Please go ahead with your question.

Good morning, gentlemen.

Good morning Chris

Couple of questions for you. First, if we could talk about the volume trajectory, as you went through the quarter. I think in terms of your pre-announcement, you talked about how volumes were soft through theÖ at that point through July into August. Did you begin to see any pick up at all from those levels in September or in AugustÖ I am sorryÖ in September and thus far into October or can you give us a little more color there?

Iíll be happy to, Chris. I would say thatÖ let me break it out by business segment, if I may. If I looked at the industrial side of the business, it was pretty much the status quo in September, and I would have to say status quo in October, with what we saw inÖ if I took in what we had into July and August. On the consumer side, we saw composite cans improve in September, we saw the services business improve in September and we are seeing those trends continue into October. So thatís sort of what we are seeing.

And that was built into our guidance.

It was.

The September 18th guidance.

Okay. So still somewhat sluggish, but improving, would that be a fair way to characterize it or should we anticipate what sales we roll through the fourth quarter built into your guidance is overall flattish or how can we rectify that.

Chris, I would say that sluggish, not declining, but not improving other than those two areas that I said, and Charlie talked, they were in our guidance, I would say sluggish status quo and thatís pretty much that is built into our guidance.

Okay, perfect. And then, the second question I wanted to ask was, you specifically called our in your press release some point-of-purchase displays where you had lost some business. And last quarter, I think we asked you about how you were coming back with winning back some other business. Can you give us an update on how you are progressing there? Do you anticipate that '08 can be similar to, I guess, refill the business that you potentially lost?

Chris, I assume you are talking about our announcement last quarter, when we talked about the POP business because I donít think there was anything in this quarter.

Okay .

That was, we were talking about in the second quarter, the mega bid.

Right .

Actually, I think that situation is probably improved a little bit to what we talked about at the end of the second quarter conference call. I really have to respond to that infrastructure sort of the same way I responded to George, about flexibles. I havenít seen the roll up yet of '08. So it'd be a bit premature to talk about, but I certainly reviewed the plans 60 days ago and they anticipate business coming in. The performance in the quarter was good year over year, and I expect continued good performance out of that business.

Okay. And then the last question, actually it goes back to the volumes issue for a moment. And could we talk a little bit aboutÖ you gave me a trajectory of the whole company and by a few of the product segments. Could we look at it geographically. I think you had indicated most of the weakness was here in North America. The European piece and the other pieces of the world, have they been generally pretty steady this whole time and was the fall-off principally North America and then now starting to pick back a little in North America, is that fair?

I think what I said, it is North America, it is the principal one. And I think what I said is while weíre seeing a pick-up in composite cans and the services business, CorrFlex, in particular in the quarter, I would still say the status quo of what weíve seen is what I expect for the balance of the year. Europe, I think Charlie said, tubes and cores and paper in Europe are up about 4% - 4.5%. So weíre seeing a pretty good economy in Europe. Asia is up. South America is up, with the exception of Brazil which is clearly effects of a pretty strong currency. So, I would say, if I'm looking for a place to place the slowness, it's in North America.

Okay perfect, thank you very much.

You are welcome, Chris.

The next question is from David Liebowitz with Burnham Securities. Please state your question.

Good morning, a couple of under related items. First question, in terms of the new products for the second half of the year, weíve already had the third quarter, are fourth quarter shipments of new products as robust as you had originally budgeted?

David, I think they're certainly in the ballpark with what we had planned for the year. And the fourth quarter will be similar to the third quarter, I would guess.

And, much of it coming from the second generation of the Snack 'n Seal product, which really was coming on in the third quarter. And so, I would expect that the overall, if you just focus on new products, it would be a stronger quarter.

Great. And how much of that product is holiday re-weighted, so you do not have that product continuing into the first quarter? Guess Iím looking, is there a slippage factor here, which may boost the first quarter at the expense of the fourth quarter.

I donít think that any of the new products will be holiday related, so I think it would be a continuation in the first quarter, David.

Excellent. The second question is, in terms of top-line growth, is there any reason to believe, given the vicissitudes of the economy right now that next year will see definitely an uptick based on programs we have put in place, what products we have developed and now it's simply a mater of shipping to a contract that will be signed as soon as the customer has a timeframe to delivery?

David, I would expect with the projects that we have in place for this year and the new investments weíve made, that I would expect to see certainly an improved top-line next year or year-over-year.

And the last question, Charlie, has been doing yeoman service working overtime for each of these quarterly conference calls, because of all the one time events. Do we have any timeframe in mind where Charlie can get back to being just the overworked CFO, rather than all of the extra weight that he has to put in for one time charges?

Charlie, is so overworked I am going to ask him to answer that.

David, I think clearly we had the two big restructurings in '01 and in '03 and a smaller restructuring last year. I think the big restructuring, as I said previously, are behind us. We will continue to have from time to time, things thatís just a phenomena of operating 325 plants, many of them are dedicated to customers around the world. As the customer change we move that equipment from one place to another. So I think it's all in the nature of our business but the big ones are behind us.

In other words, then youíre going to have to be burning the midnight oil for each quarter upcoming for the foreseeable future?

I expect David, Charlie would be burning the midnight oil whether we had those or not.

Okay, thatís fine deal with me, if his wife doesnít mind.

I donít know that.

She'll take the compliment.

Thank you so much.

[Operator Instructions]. The next question is from George Staphos with Banc of America Securities, please state your question. George Staphos ñ Banc of America Securities: Thanks guys. I just wanted to come back to, it seemed like Chris was hinting on itÖ and may be itís overdoing it or over-reading it, but just to make sure. You said in your press release something to effect that either volumes were slow or down, most notably in North America. That wording could suggest that while North America was the biggest component that other markets might have slowed. For the record, you havenít seen any other big market slow for you right now within 3-Q or early into 4-Q, it's just North America.

That is correct, George. George Staphos ñ Banc of America Securities: Now on productivity, I am guessing it's too early to call, you havenít seen the roll up, but can you give usÖ maybe not, and if so, could you give us some direction terms of what productivity might look like next year, what areas you are looking into improve upon?

George, it is probably too early, and I suspect that some of my general managers may be on this phone call, but my expectation for productivity is not changed. It is, we are trying to drive 3.5% cost reduction year-over-year. And we made some investments so this year which we would anticipate, driving that productivity into the first half and into next year and they're putting their budges together. But I think those are the kind of expectations we have at this point in time. George Staphos ñ Banc of America Securities: Okay, fair enough. On capital spending, as we look out to next year and also consider some of the dislocations or less than anticipated performance that you had in some areas where you have been investing like flexibles or plastic bottles, are you using an even more critical analysis of capital budgets or capital requests are coming to you, to Charlie but tougher than you expected, CapEx is going up, a couple of your growth areas have not been performing well. Should we expect reduced CapEx or reduced projects for next year?

I would think the answer to that is yes, we spent, as Charlie said, a little more than we were anticipating this time last year because some opportunities actually presented themselves with Matrix and some others. So, I would think, George, until we digest those CapEx, we'll be down, I would think, we will probably be in the $130 million $125 million, $130 million range going out into the next year. George Staphos ñ Banc of America Securities: All right thanks, two last ones, and I'll turn it over. One, so whatís happened at Wausau that itís likely you are removing that business, especially that you've only recently gotten into that facility, if you could refresh my memory there. And then just a reforecast on cash from operations, where is the pick up coming? Thanks, guys.

George, fair question. I think we opened Wausau three or four years ago, I donít remember the exact time. We had three blow-molders at the time. And two of the blow-molders, the acquisition of Matrix and their plant configuration, the major customers for these blow-molders are actually very close to the Matrix plant. And so we made the decision that we could consolidate that plant into the Matrix operations, get into the call side of the operation, and obviously enhance earnings. That leaves one blow-molder up there that we will work out of and do something with as we shut that plan down. So that was basically the driver of it. Charlie, you want to give someÖ

Yes. And as it relates to cash flow, cash flow operations, our estimate is now between $375 million and $400 million but there is really not any significant year-over-year change. When we were looking at the year-to-date number, it's $257 million, almost $260 million and our fourth quarter generally is our high generation quarter. And so I think itís just a combination of where we are right now, projected into the fourth quarter, where a little bit more improvement in net working capital that we would expect to see. So there is nothing magic in there. Certainly nothing that stands out relative to the fourth quarter or the whole year from where we are right now. George Staphos ñ Banc of America Securities: Okay. Thanks, guys, good luck in the quarter.

Thank you, George.

Your next question is from Chris Manuel with Keybanc Capital Markets. Please state your question.

Just a couple of quick follow-ups. First, actually for you, Charlie, what, with some adjustments in taxes and things of that nature, in tax rates and such that have gone on globally now, what would you anticipate going forward? Aside from, I think you said, 34% in the fourth quarter, what would you anticipate being a normalized rate beyond that?

Yes, thatís an interesting question. And the normalized rate that we have right now is 33.8% and thatís where 34% came from. But if you go back and look at our effective tax rates over the last couple of years, it has been less than that. So, I would hope that it would certainly come in less than that. But when you make the calculation, it comes in as 33.8%. Where we have seen adjustments is just things, as I described, that are in this quarter like freeing up of some reserves, as we true-up tax accruals. So perhaps a little bit on the conservative side, when we make, when we set up these reserves and I hope they come in less than 33.8%. But the number calculates out to 33.8%, less than 34%. And so, I'm really not answering your question. The answer is, that is the number. If you went to the tax department, thatís what they'd tell you it is. I'm hoping it comes in less than that and frankly over the last couple of years, with these adjustments, it has.

And I was just thinking, with Germany has got a tax rate thatís moving down, I think the 1st of the year or some time soon, and with more of your income coming from frontier or some of these other places that presumably have a lower tax rate than, we in the US now seem to have the highest tax rate in the world, so that may be moving down. But, okay, thatís fair.

But some of that stuff's already filled, or certainly is filled into these numbers now, it's the mix changes, but the profitability thatís coming out of Europe has had the tendency to modestly reduce the overall effective tax rate, especially when it's coming in countries like Germany and France for us. But what, our sales are what, 15% out of Europe, so the mix effect gets that to be a fairly modest number on the overall effective rate.

And then a question for you Harris is, I saw you had increased, the Board had increased the authorization for share purchase. Is that something that with cash remaining good here the rest of the year, you would consider stepping up?

Chris, we've traditionally kept $5 million share authorization in our pocket for I donít know, about years and years. So we're simply bucking it back up to that. We bought back up $5.5 million of shares of stock in the last, this beginning of last year. Cash flow, if we canít find other opportunities, we certainly would consider additional stock buyback.

Okay, thank you, gentlemen.

The next question is from Alan Zwicker [phonetic] with First Manhattan. Please state your question.

Good day. Going back to second quarter you mentioned some problems, production problems by virtue of which maybe you had to move some people around. Could you just give us an update about whether you have seen the end of that and notwithstanding what business conditions are, thatís just a problem that we could put in the past.

I think you could put that in the past. As I responded I think to George Staphos' question, operationally in flexibles and thatís the business you are referring to.

Yes .

We have seen nice improvement in the quarter operationally. And so I think, as you said, you can put that in the past.

And then secondarily, just from a volume standpoint of view, when you talk about the Americas, excuse me, not the Americas, America being weak, would it be fair to assume that if you have a customer say that in America and also say in other parts of the world, that it's possible that in other parts of the world they may be doing more business and it's just sort of US based weakness based on maybe the retailers in the US, just kind of differentiate since you do so much business with the same clients in different territories.

I think its US based and probably Canadian based.

So them theoretically, if you were doing business with a consumer packaging company also in Europe or in Asia business there hasnít been as affective as it is in the US, is that a fair statement?

Yes, I think thatís a fair statement. It's probably not necessarily such a good comparison but clearly the US economy, at least in our business is generally [ph] what the weakness is right now.

Okay. And lastly, just in terms of the tubes and paper, again, I know you mentioned about the US, but in terms of the textile business, are you continuing to see some of those same customers that may not be giving you business in the US, are you picking up some of that business, say in China or in other parts of the world?

Our business in China continues to grow particularly in the textile area but also in Turkey in some of the Eastern block countries as well. Our textile volume, generally you are not picking it up with the same customers over there. You are picking it up with someone different

Okay thank you.

Thank you.

Thank you. The next question is from Mark Masters [ph] with JP Morgan. Please state your question.

'Afternoon, guys.

'Afternoon, Mark.

I wonder if you could just talk a little bit about the current acquisition environment and if you are seeing any potential opportunities there. Thanks.

We always have, look out at acquisitions, I think I saw something the other day that we made 35 to 36 acquisitions over the last five years. So at any given time we have always got the nail out, if you will, as being cast. And I guess what you are talking about we are seeing more opportunities perhaps because the private equity folks are not engaged. And the answer to that is the private equity guys are probably not as engaged as you were six months ago. And so we are not seeing those issues. But I think it's probably inappropriate for me to talk a lot more about acquisitions other than to say we always are looking and you shouldnít be surprised to see us do something.

Okay, great; thanks, guys.

Gentlemen, at this time I have no further questions, thank you. I would like to turn it back to you for closing comments

Let me again thank all of you for joining us today. I do want to remind to please reserve the day of Friday December 7th to attend our annual investor conference at the Grand Hyatt Hotel located at Park Avenue in Grand Central in New York. We will begin with a breakfast that day at 7:30 am and presentations will start at about 7:50 am. You will receive an invitation with details next week. And if you have any questions please donít hesitate to contact myself or my group. And you can contact us at 843-383-7794. Again we appreciate you interest in the company and look forward to talking with you in New York on December 7th. Thank you again.

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