Sonoco Products Company (SON) Q1 2008 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, and welcome to the Sonoco Products Company's First Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. And a brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Roger Schrum, Vice President of Investor Relations for Sonoco Products Company. Thank you. Mr. Schrum, you may now begin.

Thank you Jackie. Good morning everyone and welcome to our 2008 first 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 first quarter were released before the market opened today, and are available on our website at sonoco.com. Let me begin by stating that today's investor call may contain a number of forward-looking statements that are based on current expectations, estimates and projections. These statements are not guarantees of future performance, and are subject to certain risks and uncertainties. Therefore actual results may differ materially. Additional information about factors that could cause different results, and about the use by the company of non-GAAP financial measures is available on Forms 10-K, 10-Q and 8-K, filed with the SEC. With that brief introduction, I'll now turn it over to Charlie Hupfer.

Well thank you Roger. Today Sonoco reported first quarter sales of $1.38 billion, and net income of $13.3 million or $0.13 a share. Actual GAAP results include some unusual adjustments that I'll discuss individually, and then I'll reconcile GAAP to base earnings. Base earnings were $54 million or $0.54 a share, compared with $0.57 last year. At $0.54, we were pleased with the quarter. Our guidance was $0.50 to $0.53, so we were a $0.01 over the high side of the range. The first reconciling item that I'll discuss is restructuring and impairment. During the quarter, we took a pretax write off of $18.9 million. After-tax and minority interests; the net income effect of that $18.9 million was a loss of $9.7 million, or $0.10 a share. About one-half of the pretax, $18.9 million relates to closure costs at our Shanghai paper mill. These costs represent severance costs and an allowance for bad debt. The mill closed in November. We are in a process of selling the assets, as well as the land and building. Given the expected proceeds, the settlement process is not likely to result in an impairment charge for the asset. We had $4.8 million of restructuring and impairment related to the closure of our Brazil metal end plant, with more than half of that amount being a loss due to foreign exchange. The next largest piece was $3.4 million and that relates to our recent decision to close one of our two Spanish tube and core plants. This plant has been on the bubble for some time. We finally concluded as the market wouldn't support two plants, so the decision was made in the quarter. The other major adjustments that I need to talk through, is a write off of $42.7 million subordinated note in preferred stock position. The after-tax impact of this transaction is $31 million or $0.31 a share. The note, which is deeply subordinated, and the preferred stock are the result of our 2003 sale of the high-density film plastic bag business. The notes actually do in 2013. The accounting rules required that we periodically evaluate the net realizable position of the note and the preferred stock position. We did this at year end and concluded that even though the company was highly leveraged in an highly competitive marketplace, that the long-term analysis supported the $42.7 million asset value. More recently, we have reexamined our position based on the latest financial information and given the deeply subordinated position of the note, and we have concluded now that we can no longer support the long-term recoverability of the asset position that we have on our book. So as a result of that the counting analysis required us to write off the entire position. I do want to make it clear that $42.7 million is a non-cash charge. I also want to point out that obviously Sonoco isn't in the financial services business. So any notes that we have on our books is a result of some type of asset transaction. At quarter end, we have about $12 million on our books right now, after this write-off position. We monitor these accounts regularly and we feel that they are fully collectible. In fact only about $4 million could even be arguably at risk and to-date, all of them are performing. So just to give you an idea of where our position is after this write-off. So with all that in mind to arrive at based earnings, if we start with the $0.13, add a $0.10 for restructuring and impairment and then add another $0.31 for the write off, we arrive at $0.54 a share. This $0.54 compared to $0.57 last year, although I will remind you that the $0.57 last year did include $0.04 worth of income related to the settlement of the prior-year benefit costs. So all in all, base earnings were above our guidance and they were in line or maybe even slightly ahead of last year, if you adjust out that $0.04 settlement income. So with these adjustments in mind, our base earnings income statement on a comparable basis and I got a chart in front of me that I'll just run down, it's really got three columns; one just a category, then the 2008 column and then 2007. So this is our income statement on a base earning basis. Starting with sales; sales are $1.38 billion. That's up 8.6% over last year's $955.7 million. EBIT, earnings before interest and tax is $88.3 million. That's down 7.6% from last year's $95.5 million. Net interest is $13.2 million and that compares with last year's $11.5 million. Taxes are $23.8 million and that compares with last year's $28.6 million. And then affiliate income/minority interest is a positive $2.8 million which compare with last year's $2.5 million. So summing up those numbers, net income 2008 is $54 million. That's down 6.6% from last year's $57.9 million, and EPS is $0.54 a share compared with last year's $0.57 a share. The effective tax rate was 31.7% this year versus 34% last year. Taxes are slightly more favorable than I expected them in actually the mix. We had a higher proportion of low-tax foreign income in the base earnings results. Let me now move to the bridges. But before I do that, I'll comment on the segment analysis which is found on the back of press release. We were very pleased with performance of our Consumer Packaging segment. Sales were $387.4 million and that's up 16.3% over last year, and operating profit was $36.3 million that's up 22.7% over last year. We reported in this quarter a solid performance in our composite can and in our metal end business. We had modest cost recovery and we had productivity. In this particular segment, our flexible operation was behind last year's first quarter. Last year's first quarter was very strong for them. I need to point out that it was well ahead of the second, third and fourth quarter levels. So that suggests us that the operating problems that we have talked about in the past are largely behind us. In the Tube, Core and Paper segment, the results came in more or less as expected. Sales were $436.2 million, that's up 7.5% percent. Operating profits were $34.6 million, that's down 15.2 %. The profit shortfall was build into our guidance, and it reflected volume shortfalls in the most of the regions in the world, where we do business. Packaging Services' sales were $124.4 million. That's up five-tenths of a percent. Operating profit was $6 million, that's down year-over-year 47.9%. The majority of this shortfall is in our CorrFlex business and it reflects the outcome of the last year's bidding process with the major a customer, in terms of both of lost volumes and reduced price. The all other categories showed sales at $90 million, down 3.4% and operating profits of $11.4 million, down 16.4%. This largely reflects shortfalls at both our Baker Reels and our Protective Packaging business, both of which are affected by declines in the housing markets. Now to the beverages; I'll start with the sales beverages; and this is where we reconcile last year $955.7 million worth of sales, with this year's $1.38 billion. That's a difference of $82.3 million year-over-year. The first element is volume. Volume is a negative $ 35.5 million and I'll go through and discuss a little bit more each of this categories. Price is a positive $34.6 million; acquisitions, a positive $36.3 million and foreign exchange, a positive 46.9 million. So those numbers should add up to $82.3 million year-over-year difference. Let me we start with volume. As I said, it's a negative $35.5 million. This was the weak quarter year-over-year from a volume perspective and it was made little bit worst by the fact that last year was strong and that this year had one to two fewer billing dates, due to the Easter holiday in the first quarter. Our Tube and Core volume in the U.S was down 8.7%. It was down roughly 7% if you adjusted for those two fewer days, but it was still weak especially in the Textile and into the Film segment. Tube and Core volume in Europe was down about 1.5%, with legacy Europe down around 4% and frontier Europe, up about 9%. Frontier Europe, principally with the Turkey, Poland, and Russia, which were all up in the 11% to 12% range, and due to the mix, when its mixed together with a volume was down roughly 1.5% overall. Paper volume was down in Europe, but up roughly about the same amount in the U.S. We ran our U.S Paper mills at about 98.5% utilization in the first quarter. Composite cans volume was strong. It was up about 3% year-over-year and that's led by powdered infant formula volume up 16%, snack volume was up 7%, dough was up 2% only caulk cartridges selling into the housing market were weak. So we had a very good performance in our composite cans grew. Flexible volume on the other hand was down, roughly 11% due to some lost business in Canada. I've already talked when I mentioned segment reporting about lost volume at CorrFlex due to the competitive bid situation and then the all other category, Bakers down largely selling into the housing market. Turning now to price; sales price $34.6 million. About three quarters of the price is in the Tube, Core and Paper segment and it reflects two things; one is the impact of contractual price resets, and the second is last year's price increases in both, paper, tubes and cores. In the U.S both our paper and tube and core business announced price increases in the first quarter of 2008. Paper announced at $40 a ton increase, tubes an 8% increase. That had very little, if any impact on this quarter. Most of the effect on this quarter is the rollover from last year's price increase and contractual resets. Consumer Packaging pricing accounted for roughly the other one quarter of the year-over-year price increase and this reflected pricing in our composite cans business and that is due to both the contractual resets and the general price announcement at the beginning of the year. Acquisition's accounted for $36.3 million of the sales increase. This is a net numbers that reflects the acquisition of Matrix and Caraustar's can assets, minus the closure of the Chinese paper mill and minus the closure of some solicit European can operations. And then, last week foreign exchange, $46.9 million that is simply the effect of the weak dollar. This is just a translation number. The EPS impact is added, it is probably only about $0.01 per share. Now turning to the EBIT Bridge and here's where we reconciling last year's $95.5 million of the EBIT to this year's $88.3 million. That's negative difference of $7.2 million and the component sales are our volume, volume mix and that's a negative $16.8 million. Price, net of material costs, freight and energy is a positive $2.1 million, productivity; a positive $8.7 million and then all other a negative $1.2 million. So those should add up to a negative $7.2 million. Let me start with volume and mix. Again, I said it was negative $16.8 million. This represents the property impact on the volume year-over-year shortfall that I mentioned with sales. So it's the property impact of the sales shortfall of $35 million. It also represent the mix difference, for example to keep our U.S. paper mills full, we produce some lower margin tissue and tow board and some lower margin chipboards that we exported to Europe. Freight cost is as I said, a positive $2.1 million. You know that this is in addition to the material costs we have included our best estimate of energy in freight costs. And we've done this because recent pricing activity is designed to cover the significant run up we've seen recently in energy and in freight. So given the run up of all these costs, we were more than pleased to have a positive freight costs even if small one of just $2.1 million. In our paper mills, white paper costs were up roughly $22 or 20% year-over-year. Film costs were up in the 3.5% range, resin was up depending upon the type 20% to 40% and EBIT [ph] was up 8%. So we took some significant cost increases during the quarter. Productivity was at $8.7 million, which was generally good in all of our segments. And in the other category, a negative $1.2 million that's the catch all category that includes wages, fringes, acquisition income, fixed cost savings. This is where we did have last year's $5.5 million of benefit recovery. So that looks like a negative year-over-year in this variance comparison. But I will point out that buried in these numbers, wages were up roughly $7.5 million. So we had a more or less offset of roughly the same amount with a fixed cost reduction year-over-year. This is also the category where you see the impact of our control over discretionary spending. So in fact, S&A spending, as we monitor it internally, was 9.3% of sales versus 10% sales last year, which tells you a whole lot about how we could clamp down on discretionary spending in the first quarter. Now, let me turn to cash flow. Cash flow was good during the quarter. Operating cash flow was $64 million which, was $6 million better than last year's $58 million. The change in net working capital was $7.3 million better than last year, which reflects continued progress in our working capital program. Capital expenditures were $34.1 million, which was slightly less than last year's $36.9 million and dividends in the quarter were $25.9 million, which was a little bit greater than last year's $24 million. All in all, we were very pleased with the cash flow generation in the first quarter, and especially pleased with continued performance of our working capital management program. As result of that, our balance sheet remains strong. Debt was reduced by $10 million from year end. Debt-to-total capital as we calculated was 35.2%. And I made the point yesterday that you have to go back to 1991, 1992 to find the lower number. So to say that our balance sheet is strong is almost in understatement. Our forecast for the second quarter is $0.58 to $0.61 and for the year, we've left it unchanged at $2.44 to $2.47. This reforecast was redone in late March, so it reflects our best thinking at the time, which is no significant change in the level of business activity. But it does assume that we'll see an ordinary second quarter uplift in our tube and core volume. The effective tax rate that's built into the last three quarters is approximately 31.5%, which is about the same that we had in this year's first quarter. A report on new products; new product as we define them, that is a product that has been introduced over the past two years were $27.9 million in first quarter versus $20.2 million in last year's first quarter. A new generation Snack n' Seal and the Ultrapeel retort end, were among biggest year-over-year contributors. And then lastly, let me comment about Fox River. During the quarter, the company subsidiary U.S Paper Mill recorded a $15 million income related to insurance recovery for the Fox River environmental claim. This represents cash that we received and settlements that were agreed to, with some selected insurance carriers. The Board of US Paper Mills greed to increase its settlement offer for the remediation of the river, by $15 million, and that brings our total offer to $35 million. So the income and the expense income of $15 million, an expensive $15 million offset during the quarter and that's why you don't see any effect on the bottom line. The company has other insurance carriers that it's currently negotiating with, to see if we can reach a settlement with them. And then as I said last year, that the last point that I do want to make is on the dividend increase. On Wednesday, the Board voted to increase the quarterly dividend from $0.26 to $0.27 per share. This takes the annual dividend to $1.08 per share, which is a pay out in the low 40% range, which is where we generally tend to keep it. So with those comments in mind, I think it's now time to turn it over to the group for questions.

Jackie, we'll go ahead and take questions now. Question And Answer

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions]. Our first question is coming from Ghansham Panjabi of Wachovia Securities.

Hi guys, good morning

Hello, Ghansham. How are you?

Good. Thanks. Adjusting for the number of days in each quarter, 1Q '08 versus last year, Harris I was just wondering if you could comment on what you are seeing sequentially in terms of just the macro environment? Have you seen any sort of deterioration incrementally to where you were late last year and certainly when you gave guidance in the middle of January? Just favor on the economy would be helpful. Thanks.

Thanks you, Ghansham. Charlie obviously mentioned that we are down on the tubing... I'm going to take them separately... tubes and core. If you looked at the tubes and core sector, I think Charlie said we are down some 6% over first quarter of last year. But we were down about that in the second quarter, in the third quarter and the fourth quarter. And so we have not seen any further deterioration in that business, I'm pleased to say. It hasn't improved, but it certainly hasn't deteriorated. The composite can business, on the consumer side, obviously, we've seen improvement year-over-year, and Charlie talked about sectors in the composite can market. And I think that reflects what we have seen traditionally in other recessions, particularly consumer-led recessions where the consumers tends to stay home and eat more and consume more of our products, and certainly we've seen that. I think an indication of that, Charlie, I don't think mentioned it, but actually concentrate was up in this quarter by some 2.6%. And I don't think since I have been CEO have we seen concentrate up quarter-over-quarter. So it says to us at least that the consumer is obviously watching. He's spending dollars [ph], he's now buying... he or she are now buying concentrate rather than ready mix to conserve money. So we are cautiously optimistic, Ghansham.

Okay. And so some of the weakness that you saw late last year in consumer, was that likely inventory draw down at the customer level do you think?

I would think it was. We certainly saw a pick up in the January time point. In talking to our customers, particularly our food customers, their business is up on the food related side. So I think we are certainly seeing that.

Great. Thank so much. Very helpful.

Thank you, Ghansham.

Thank you. Our next question is coming from George Staphos of Banc of America Securities.

Thanks everyone. Good morning.

Good morning George.

Hi George.

Just a question maybe on high density films to begin. What are the... perhaps you can't really comment on this call, but should we totally write this off? Is there a chance perhaps that you are able to get some of these funds that are due you right now. And other than the write-off, there is no other potential outcome from this write. It's not as if you might wind up with this business back again.

We will not end up with this business back again, so let me clarify that very, very clearly. George, I hate to say that our best judgment is, as Charlie said, that this note is likely unrecoverable. And from an accounting standpoint, we were compelled to take this write down. Is it a possibility that it could be recoverable or something can be recovered from it? There is always a remote possibility of that.

Okay. What... if I can ask, what changed in three months where it became so likely to recover versus not likely to recovery? What happened to that company, if I could ask?

Not very much frankly. We did the analysis of that at the end of the year for the fourth quarter. We were sort of on the bubble at that time. We expanded the disclosure in the 10-K, and then as we saw more recent results and a little softer volume, it just sort of took it over to the other side.

Got it.

This is a pretty deeply subordinated note, and not due until 2013 and the preferred stock position. So it just became the right thing to do from an accounting and perhaps a little bit of a conservative perspective.

All right. We will talk in five years. In terms of the guidance, let's say you don't see the normal seasonal uptick in tube, core and paper, what would that do to your guidance overall and have you seen sequentially a normal uptick obviously from a reduced base thus far in Q2?

George, as you well know, we tend to see the second quarter better than the first, the third quarter better than the second, and generally, the fourth quarter a little down. But we normally see that seasonality. If we did not see it, obviously, it would have a negative effect on our guidance. I will say that in April we have seen thus far the uptick that we normally would expect.

Okay. But if... so if it didn't materialize, would that be $0.02, $0.10. I am just getting... trying to get around...

George, I don't know that I can clarify that.

Okay.

I don't know that I could clarify that.

All right, fair enough. The last question and then I'll turn over. Can you give us a bit more detail in terms of flexible packaging and what seems to be at least some stability to sequential improvement in the operations? Can you also give us some color in terms of why I thought that volume was down 11%, which seems to be high even with a relatively higher number than I would have expected even with the tough comparison? Thanks.

George, as Charlie said, the first quarter of last quarter in flexibles was the best quarter we had last year and then we had the issues that we talked about a lot in the second quarter and the third quarter and fourth quarter. We saw improvement in the third quarter, we saw improvement in the fourth quarter and we saw even better improvement this quarter. We have seen some volume issues in some of our larger candy and confection customers that are high single digits where we have the same business that we had year-over-year. And so our conclusion that that market is a little softer than we would have been anticipated. But from an operating perspective and that's sort of where I judge it, we continue to see the improvement that I talked about last year and anticipated seeing.

We gave up a piece of business at the end of 2006 which would have still been in the first quarter of 2007 numbers in Canada which would make a big part of that year-over-year.

That's correct, Charlie.

Have your customers seen some sequential uptick in their business more recently? I mean we've actually been seeing that from the standard data. I don't know if you've seen it from your customers in flexibles?

Well, once again, George, it's sort of a mixed bag. We have had some that are certainly up and some that are down. But we have two or three major pieces of candy that are down.

Okay. Thanks Harris.

Thank you, George.

Thank you. Our next question is coming from Claudia Hueston of JPMorgan Chase & Company. Claudia Shank Hueston - JPMorgan Chase & Company: Thanks very much, good morning.

Good morning Claudia. Claudia Shank Hueston - JPMorgan Chase & Company: Just a couple of questions on cost. One is just on OCC. Prices have pulled back in the export market over the last month or so. Can you just comment on your outlook there for both maybe the second quarter and then just the 2008 period as a whole?

OCC is at $125 per ton right now, I think our forecast holds it at basically that level for the balance of the year. Clearly, as you mentioned, the export has declined a little bit, and a lot of that is due to a shortage of containers and has driven that down. Claudia, I have said that I think given the economic conditions here in this country, I believe there will be more downward pressure on OCC over the balance of the year than there will be upward pressure. But... Claudia Shank Hueston - JPMorgan Chase & Company: But in terms of your guidance, you are looking...

It is not tempered [ph]. We have not put that into our guidance. Claudia Shank Hueston - JPMorgan Chase & Company: Okay, perfect. And then just on the energy side, energy reduction has been a priority at Sonoco over the past couple of years and you have done a pretty good job reducing our natural gas exposure. But can you just comment now in terms of where you are now in terms of total natural gas usage and if there is more room to go in terms of energy efficiency? And then just if you have any hedges in place, if you could just comment on that as well?

Well, you certainly know because you asked me the question in the past. We have seen our energy cost per ton of paper that we produce go around nicely over the last four or five is we have invested fairly significantly in our mills and more energy efficient motors and other things. So obviously, that's been a real benefit to us. We have our hedging program on natural gas, not to beat... to really beat the market, but to make some certainty for our costs as well as our customers. And at any given time, as we are this year, we are fully hedged, we are hedged about 75% for the balance of 2008. Charlie, help me. I guess we are probably 60% hedged into '09.

More like about 50%. Generally, it would be about 75% for the next... over the next year. We built... that built in half year increment 50% and then roughly a third. There has been a big change in our natural gas balance sheet position almost a $10 million asset that was created between the December quarter and the first quarter, although obviously the offset of that is still on the balance sheet. But the hedging program seems to be providing some nice benefit for us right now. Claudia Shank Hueston - JPMorgan Chase & Company: Okay. And then just in terms of your guidance for the year, you didn't really on the cash flow side of things. Do you still expect operating cash to be about $420 million and then CapEx of $130 million or so?

I would say that's a fair estimate at this point Claudia. Claudia Shank Hueston - JPMorgan Chase & Company: Okay, that's great. Thank you guys so much.

Thank you very much.

Thank you. Our next question is coming from Dan Khoshaba of KSA Capital Advisors.

Good morning guys.

Good morning Dan.

How are you guys doing today?

Doing well. Hope how you are.

We are doing well. Good quarter.

Thanks.

I wanted to ask, Charlie, what is your FX assumption for the year, dollar, euro? If you have that. If not, I can give a... find a guess?

Basically just flat, just where we were. So we didn't build in any change as a result of that.

And is that lower than where it is now? In other words, is that...

It would be.

It's more of a conservative number?

Lower being that the dollar would have been stronger.

Of course.

Against the prior year's quarter, the second, third and fourth quarter.

All right.

So you have some of that just naturally built in. So we're not doing any real forecasting here.

That's good. No problem.

It has very little bottom line impact on our overall earnings.

Yes, okay. And then another question. As I look at the various components of EBIT, volume took a pretty big hit, but it looked like volumes may stabilize, maybe they get a little worse. But obviously, the catalysts that are causing weaker volumes look relatively stable. But pricing was only up a little bit. Would we expect pricing component to actually improve in the second quarter? I know that you've raised the selling price about 8% in tubes for instance. How would the various components, volume, price, productivity maybe change a little bit over the next couple of quarters?

Actually, I would have argued that pricing was up a good bit and so are [ph] costs. And so we did have, and again, we threw the energy and freight into that category which was an incremental $2 million for both pieces.

Okay.

So I think as we look into the second, third and fourth quarters, we actually holdings things. And Harris's comment about the OCC assumption, we probably have a slight negative in price cost built into the reforecasted numbers.

Yes, but I would expect I guess, and I don't know the answer to this, but I would think that price cost should be at least modestly better in the second quarter, but does that sound right?

It probably should be, Dan.

Yes.

Yes. Okay, well great, thanks guy. I appreciate it.

Thank you very much.

Thank you. Our next question is coming from Chris Manuel of KeyBanc Capital Markets.

Good after... or good morning gentleman.

Hello Chris, how are you?

Not too bad. Thank you. I would like to follow up on Dan's question. From the time you put together your original... it looks like your full year forecast essentially stays the same. But from the time that you've put your assumptions together, clearly, there have been some changes. The economy certainly is a little weaker now than it looked back in December. Could you help us foot what some of the pluses and minuses were within your forecast? Clearly, one of the ones I think you just mentioned was that price cuts may be a little negative is what you are baking in the back half of the year. Can you help us a little on what your volume assumptions may have changed?

Dan, I would say that as we look... I mean, Chris, I am sorry, as we look at it, we look at tube and core volume and price pressures in tube and core probably being a little more severe than they were when we put the original forecast together back in December. The composite can side, the consumer side is probably a little more positive than it was when we put it together. So it's obviously a mix.

Okay. All right, that's fair. But I just want to get a sense of at this point, you are embedding in your assumptions continued softness in tube and core, but not to the extent of what we saw in the first quarter since we are going to start to lap...

Well as I said, basically, the last three quarters have been basically flat. And so we are saying that our current running conditions will probably continue for the balance of this year. If it improves, obviously, we have got upside. If it deteriorates, there is downside. And we have certainly seen better consumer spending for our products in our consumer side of our business than we anticipated when we put the budget last year, particularly in composite cans. And we are assuming that that's going to continue and we will see the seasonal effect of both of these three sectors.

Okay. That's helpful. When you think about the acquisition environment, you've got other pretty large or fairly large tube and core competitors out there that are struggling. Do you feel that the acquisition environment is getting more favorable or less favorable? And with your balance sheet, I think as you pointed out, it's at one of the strongest points it's been in the last multiple... many years. Would you be more likely to be looking in the consumer side as you have been in the last couple of years or would you be more likely to consider opportunistic opportunities in the industrial business as well?

Chris, all of the above. We are always looking... we weren't looking in Europe four years ago, particularly when the opportunities present themselves with Alstrom and ultimately with Demolli. But those were opportunities that presented themselves, and obviously they were consolidation opportunities that we in fact took advantage of. At any given time, we are looking on both sides of the business and it's been my experience that generally when you have economic downturns like we are in today, that opportunities present themselves. And that's the reason we keep the balance sheet that we have, so we can take advantage of those opportunities. And should those opportunities present themselves and we will be proactively looking for those opportunities. But should they present themselves, we will certainly take advantage of them to the extent that we can if they meet our criteria, and that obviously being accretiveness and return on capital.

Okay, and then my final question is I know we've talked about this in the past, but I just want to kind of regauge your interest is as you guys have been aggressive at different times with the share repurchase. And even in spite of a stock that's doing pretty well today, it's still relatively... or on a relative basis rather cheap. What would your appetite be should you not find an acquisition through the balance of the year to become more aggressive on the share repurchase?

Chris, first of all, I'll agree with you that it is cheap. Secondly, if we still continue to throw off an awful lot of cash, and to the extent that we got to the balance of the... towards the end of the year and had not found an acquisition that we wanted to do that met our criteria, a stock repurchase. Certainly, we have a history of buying back at least our dilution from stock options and other equity, that would be something we would have to give some strong consideration to.

Okay, perfect. That's all I had.

Thank you, Chris.

Thank you. Our next question is coming from David Leibowitz of Vernon Securities Incorporated.

Thank you, good morning.

Good morning David.

Briefly, I have a lot confusion with restructuring charges only in the sense that it seems a quarter doesn't go by that there aren't additional restructuring charges. Do we have a time limit on this where we will no longer be restructuring and we are down to the core business that need not be restructured or is there a program in place that has a time out that we get to half time in 2009 and we get to complete the project by 2011, or what have you?

David, I think that's a good question. Clearly, this quarter was more than we would have expected, and it was driven primarily by two things: One, as Charlie mentioned, the paper mill in Shanghai in China that actually we have been looking at for some period of time. And a bit frankly, the land value of that mill got more valuable than it was as paper mill. And we have been negotiating with the government to sell them the land back. And I think we are in the final throes of that. The mill was actually shut down in November, and I'll let Charlie deal with the accounting issues. But in my separate issues, we have to take the severance now and we can't take the other hostage to that mill until we actually either receive the cash or sign the contract. So that was as much the timing issue as anything and that was about half of the... I think half of the charge. The other was in Resende in Brazil where we had, as Charlie said, some catch up. But the nature of our business with 334 plants around the world, that has a fair chance that we are going to always have some one-offs, particularly with [indiscernible] of these plants that are set up to supply a particular customer. And when the customer actually shuts down or does something, then we obviously... that plant is going to be affected. But I think we have no... we have certainly no large restructuring plan. I don't anticipate anything this year or going into next year.

Okay. And in terms of impairments, since we do this on a quarterly basis, as we sit here today, are we towing the line or we do have other areas of concern that, whether it's three months, six months, nine months down the road, we might have to again take another charge in a different part of the business?

It is recently... I mean, we obviously, as you said, we look at this on a quarterly basis, and I don't think there is anything today that is on the bubble, or anything that I would anticipate seeing next quarter, the next quarter or no [ph]. But we do look at this on a quarterly basis as we are required to do by accounting standards.

Thanks right. Actually, I think the answer is if there were, we'd have to book it. So we are really sort of clean up to this point in time. But obviously, it's a fluid marketplace and things like the Spanish plant that I talked about, that's been looked at for some period of time. It wasn't deemed be to be impaired and then the decision was finally taken that there just wasn't enough volume there. So as Harris said, there is going to be those kind of events, but clearly there is no triggering event that's out there right now that has not been accounted for.

No, I'm not suggesting there are.

No.

No.

What I'm saying simply is how close to the line are we in other parts of the business where you say we might have an oops moment if X, Y, or Z were to transpire? And is there any way to quantify where you have a high degree of confidence versus where you are saying, we have another three months of whatever at this particular facility, or in this particular business, or whatever it might be are we are going to be back with some more impairment charges?

There is not anything that I am aware of that is of any size that would fall into that category David. The one thing that we do, because the impairment is something we would look at anytime there is a triggering of that. And then... and more specifically, we do look at the impairment of goodwill absent triggering events on an annual basis. And we tend to do that in the third quarter and we've talked and we disclosed that we got goodwill on the book, some of that is in our flexibles operation that has to be supported by their continued improvement in growth. So absent that is sort of just one of those things that's out there. I can't think of anything.

Okay. And my last question and this is a follow up to something I asked earlier, but this has slightly different phrasing on it. The game plan in the five year plan is to move the consumer side of the business up to 60% from the current 55%. In light of current market conditions, is there any reason to want to change that guidance?

David, I wouldn't change it, but I have also said I think in this... on these conference calls and certainly in some presentations, that is not a hard and fast rule. And our intent when we laid our that guidance in 2002 was to move to 60:40 consumer by the end of '07. And we saw the opportunities in Europe in the tube and core business and we obviously took advantage of those. We sold off the high density film business in 2003 that George and I talked about earlier. Absent those, we would have made it...we would have made the 60:40. As I look out, that's certainly the intent of where we are going to go. But I guess to Chris's question, if we saw an opportunity... to Chris Manuel's question, if we saw an opportunity to further consolidate some tube and core opportunities around the world that were attractive from a shareholder value standpoint, we would not let the 60% consumer stand in the way of making the right acquisitions.

Very fine. And if we just add to that then. In terms of your R&D efforts as we sit here today, how much of your new product development is being directed by a customers coming to you saying we have in need XY or Z and how much of it that your are creating your product then going out to sell it?

Well, this... that's hard to define. But I would say that probably 90% of what we are doing is being worked on with a customer in '09. And I would have to say of the total amount, probably 75% of it is working with a customer in end market application such as the serial box that we introduced yesterday at our annual meeting at the new product and some on the shelf [ph] would target as we speak.

Thank you very much.

Thank you, David.

[Operator Instructions] Our next question is coming from George Staphos of Banc of America Securities.

Thanks. Hey guys. I'll try to make it quick.

No, George, you have plenty of time.

For lengthening [ph] the call. You know on the acquisition question which been asked many times quite well, maybe one last quick one. Would it be fair to assume that given the current economic environment that you are getting increasing industrial types of opportunities showing up at your desk or not necessarily and it's really evenly split between consumer and industrial opportunities?

George, I think we are getting the same amount of opportunities on both the industrial and the consumer that we were getting a year ago.

Okay.

Percentage wise.

Fair enough. Second question very quickly, given your end business, you have a pretty I think interesting view into both peelable ends and traditional easy open end. Are you seeing any kind of move one way or another from your customers and what they are hearing in the market these days?

George, I have no... I don't think so.

Okay. I will follow up with you offline on that.

Okay, that would be fine.

A third question, the decremental margin on the lost volume was, I mean round numbers, 40% to 50%. Obviously, you've got some very profitable businesses, but could you give us a bit more color in terms of where you really did see the reduction in profitability in the quarter?

Well I think you have to look at the integrated margins of this business.

Got it.

And I will say that's where it is, George. You are looking at maybe a two... but it's back in terms of the type of adhesives and then on that.

Understood. Okay.

To follow up on that just a minute, if we obviously were reporting trade sales and then we eliminate intercompany transaction. So whenever we have a decline in volume from our... on our tube and core businesses, then that results in a decline in the intercompany sales from our paper group to that group and some reduced profitability there that the sale gets eliminated, so you don't see it, but the production of the lower margin board falls through. And so some part of it is just simply the mix of outside sales and some of it is the lack of or the slowdown on some of those intercompany sales that get eliminated in consolidation but still have a profit impact.

Got it. Two last ones. Packaging services, should we expect that given the bidding effect from last year and then the macro environment to be tough logging the rest of this year. One would expect perhaps... I don't know if you would agree with this that given the environment, your customers will be less likely to do in store display or maybe they would use the opportunity to try to brandish your products, and then would you expect get out of the Chinese mill when you ultimately do sell and if you have that number? Thanks.

George, I think clearly the balance of the year, there will be tough comparisons in the services business, because of the... the business, the loss business as well as the pricing. We have picked up, a good portion of new business in the first quarter of the year and we have some that we are working on and we expect will come on. But I think that will be difficult comparisons for the balance of the year. The Chinese mill is... well that's a moving target. I would say the mid single-digit number of millions.

Got it. Okay guys, good luck for other quarter and rest of the year.

Thank you George.

Thank you. There are no further questions at this time. I would like to hand the floor back over to management for any closing comments.

Thank you Jackie. Let me again thank all of you for joining us today. We certainly appreciate your interest in the company and look forward to talking with you in the near future. Thank you.

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