sonoco products co (son) q2 2019 earnings call transcript

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Sonoko Products Co. , Ltd. NYSE: SON)
Income CallJul 18,209, 11: 00. m.
ETContents: ready to speak: Ladies and gentlemen, I wish you all a happy holiday and welcome to the 2019 Sonoco earnings conference call in the second quarter.
At this time, all the participants were listening. only mode.
We will ask questions later. and-
Answers and instructions will be given during this time. (
Operator instructions)
This conference call may be recorded as a reminder.
Let me now introduce the moderator of today\'s meeting, Sir.
Roger Schram, Vice President of Investor Relations
You can start, Sir. Roger P. Schrum --
Vice President of Investor Relations and Corporate Affairs Thank you Crystal and everyone good morning, welcome to our investor relations conference call to discuss our 2019 financial performance in the second quarter.
Today with me is Julie Albrecht, vice president and CEO Rob tie and vice president and chief financial officer.
A press release was released before the market opened today covering our financial results and can be found on sonoco\'s investor networking site. com.
In addition, we will refer to our report on second quarter performance, which was also posted on our website this morning.
Before we discuss further, let me remind you that today\'s phone call and presentation contains some forward-looking content
Forward-looking statements based on current expectations, estimates and forecasts.
These statements are not the guarantee of future performance, and there are certain risks and uncertainties.
As a result, there may be significant differences in actual results.
In addition, today\'s presentation includes the use of non-
Management believes that the GAAP financial indicators provide investors with useful information about the company\'s financial position and results of operations.
About the company\'s use of non-
GAAP Financial indicators include definitions, and reconciliation of these indicators with the most closely related GAAP indicators, which can also be found today on the Investor Network site.
Let me give it to Julie now. Julie Albrecht--
Thank you.
I\'m going to start with slide 3 and you can see that earlier this morning we reported second quarter earnings per share on a $0 GAAP basis.
$80, basic income of $0.
$95 per share, within our guidance. 93 to $0.
$99 per share, slightly higher than our base earnings of $0 per share.
The same period last year was 93 years.
Overall, we were challenged in the second quarter as macroeconomic headwinds increased and certain operational disruptions, but as we focused on managing controllable costs, our earnings results were reliable.
Related to $0.
The difference between Base and EPS is $0.
10 due to restructuring activities, 0 yuan.
04 involving non
Operating pension costs.
Simply take a look at our basic income statement on slide 4, starting at the top
Line, you see sales drop nearly $1. 36 billion from the previous year, down nearly $7 million.
I will now review in a moment more details about our main sales drivers on the sales Bridge.
Gross profit was $0. 275 billion compared to the second quarter of last year, just under $1 million, as gross profit as a percentage of sales remained strong. 2%.
The $0. 131 billion fee for SG & A is advantageous-over-
Driven by the reduction in overall business costs, annual sales were $7 million, which exceeded the increase in SG & A in the acquisition.
All this led to $0. 144 billion in operating profit, an increase of $6 million over last year.
Our operating profit for the second quarter as a percentage of sales was 10.
6%, with 50 basis points improvement over the previous year, I will review the key drivers of operating profit for the bridge soon.
Net interest expenditure of $16 million increased by nearly $1 million over last year, mainly due to non-
Interest income from US debt balances and lower offshore cash balances decreased.
The income tax of $33 million is actually the same as last year, thanks to the previous
But the actual tax rate is lower.
Our effective base tax rate for the second quarter was 2019.
Mainly due to the decline in the impact of the GILTI tax, 9% was lower than the previous year\'s quarter.
In terms of net income, our base income of 2019 in the second quarter was $96 million, or $0. 95 per share.
Take a look at the sales Bridge on slide 5 and you\'ll find that sales are down $48 million or $3.
The whole company is 5%.
Consumer packaging fell $24 million, or three.
9%, mainly due to the decline in demand for rigid paper containers, North America and plastics, and also due to some weaknesses in our flexible business.
Rob will provide more color in his comments about the decline in these numbers.
The number of displays and packaging increased by nearly $5 million.
Mainly in our domestic display business, the increase in business activities has driven 2% growth.
I would note that this does exclude the impact of exiting the Atlanta packaging center, which is included in the exchange and other categories.
The number of paper and industrial conversion products fell by nearly $27 million, or 5.
7% due to the weak volume of tubes and cores in all regions of the world, the demand for cardboard and corrugated cardboard in the United States and Canada is low.
Sales of Protection Solutions fell $2 million, or 1.
6% with the continued trend of strong demand for our temperature
In molded foam and consumer fiber packaging, we serve the automotive, consumer electronics and home appliance markets, which are offset by a weak volume.
So turn to the price.
You see, the sales price is higher this year. over-
Driven by rising prices, an increase of $12 million per year to cover higher materials and non-materials
Material costs and other efforts to better realize the value of the products and services we provide to our customers.
Continue the acquisition and you will see the impact at the top
$67 million, driven mainly by the Conitex acquisition in the fourth quarter of last year.
Finally, the exchange was also negative. $37 million was negatively affected by $27 million. Foreign exchange conversion and lower sales of $16 million were exported from Atlanta package center for 18 years in September 20.
Starting from the operating profit bridge of slide 6, our lower sales were offset by a positive business portfolio, negatively impacting the operating profit of $16 million.
This effect is spread across our market segments, often in line with changes in sales volume.
Turning to price costs, driven by consumer packaging, paper and industrial conversion products, our positive price cost for the second quarter was $2 million.
There is a slide in the appendix that shows the recent OCC price, and you can see that the OCC price averaged $42 per ton in the second quarter of this year, compared to an average of $82 per ton in the second quarter of last year.
Although some of our third-quarter customer contracts have been reset at this lower level of the OCC, we have succeeded in
Contract business, and a good mix of contracts priced according to the market paper index such as tan bending chipover-year.
Next, you will see that the impact of the acquisition has increased by $7 million in revenue this quarter, mainly related to our Conitex acquisition in the industrial sector.
As you can see, our total productivity is positive. over-
The annual growth of $11 million was distributed in various fields.
The main factors of this positive impact are procurement and fixed cost productivity.
Finally, changes in exchanges and other exchanges were driven primarily by the positive earnings impact of the Atlanta packaging center exit in last September.
Now go to slide 7 and you will find our market segment summary and you will find that consumer packaging sales are down.
2%, the most obvious reason is the weak demand, which also led to a decrease in operating profit by 1. 1%.
The profit margin of the consumer segment is 10.
4%, slightly higher than in the second quarter of last year.
Sales of display packaging decreased by 5.
9%, due to the withdrawal of the Atlanta packaging center in last September, the strong growth of the remaining business partially offset this impact.
Operating profit rose more than 100% to $5.
9 million, the operating profit margin is negative, mainly due to the increase of the Atlanta packaging center to 4. 4%.
Revenue also benefits from the growth in the number of display and retail safe packaging.
Sales of paper and industrial conversion products increased by 3.
6% is driven by the acquisition of Conitex, in part due to the decline in demand.
Operating profits are relatively flat due to these sales drivers and positive price costs and total productivity.
Operating profits in the industrial sector are stable.
5% in the second quarter of this year.
Finally, sales of protection solutions fell by 1.
6%, but operating profit increased by nearly 5% due to strong productivity results.
The margin for this plate is 10.
9% is about 70 basis points higher than the previous quarter.
Sales fell for the whole company.
Half of 1%, while the base operating profit is 4 higher.
4%, resulting in the company\'s operating profit margin of 10. 6%.
In slide 8, you will find our outlook for the third quarter, and we predict that the base earnings are within $0. 88 to $0. 94 per share.
Our range of guidance throughout the year remains unchanged at $3. 52 to $3. 62 per share.
Our guidance suggests that there is no significant change in basic economic activity, but reflects about $0.
03 higher interest costs related to short positions
Provide long-term debt funds for our recent pension contributions.
When it comes to cash flow in slide 9, you will see that our operating cash flow for the first six months of 2019 was $40 million, compared with $0. 251 billion for the same period in 2018.
The decrease of $0. 211 billion is due to this year. to-
After Date $0. 175 billion-
Tax cash impact on voluntary United StatesS.
The pension we paid in May.
The pension is $0. 19 billion and our cash tax benefits for the second quarter are $15 million.
Halfway through the slide, you can see that our current capital balance for the first six months of the year has increased by $66 million, compared to the previous year, cash usage for current capital has increased by $21 million.
The main driver of this increase is the timing of accounts payable activities.
So, after a net capital expenditure of $0. 101 billion and a dividend of $84 million, we used $0. 145 billion in free cash flow for the first six months of 2019.
Excluding the impact of voluntary pension payments, our 2019-to-
Free cash flow of the date is $30 million.
Due to the specific year, after
The $0. 165 billion tax cash flow impact we voluntarily provideS.
In terms of pension contributions, our outlook for operating cash flow this year is now between $0. 435 billion and $0. 455 billion, and our latest outlook for free cash flow is between $60 million and $80 million.
I would note that this $0. 165 billion annual adjustment of our cash flow guidance reflects our total voluntary pension contributions of $0. 2 billion, partially affected by the expected positive cash tax of $35 million
In slide 10 you will see that our balance sheet and liquidity are still strong.
Our 2019 consolidated cash balance for the second quarter was $96 million, a decrease of $24 million over our year
The cash balance at the end of the period was $0. 12 billion.
This decrease is mainly due to the repatriation of the balance of offshore cash used to repay the shortfall
Regular debt in the United StatesS. and in Canada.
Let\'s take a look at our debt balance.
Our total combined debt is $1.
At the end of the second quarter was $5 billion, up $0. 16 billion year on yearend 2018.
With the new short, the main driving force for the increase in debt balance
Regular bank loans are used to fund recent voluntary loans in the United States. S.
Pension contributions.
I will also stress that in connection with this pension contribution, our pension liabilities and other post-retirement benefits have decreased by $0. 196 billion since this year --end 2018.
This concludes my review of the financial results for the second quarter, so I am handing it over to Rob now. Rob C. Tiede --
Thanks, Julie.
Let me briefly talk about our performance in the second quarter and the first half of 2019.
I will then talk to what we have seen in the second half, including addressing some of the measures we have taken now and in the past to help us achieve our financial and operational goals.
Sonoco achieved very strong results in the first half of 2019.
Despite the apparent slowdown in global macroeconomic activity, which affected the demand in many of our service markets, as well as the impact of some unforeseen fires, floods and other events, in the second quarter, all four of our businesses have been damaged.
Looking back on the second quarter, I am very proud of how our team can cope with these challenges while creating a record base income that is within our guidance.
As most of you know, I\'m a digital enthusiast, so I\'m going to point out that the basic operating profit of $0. 144 billion is all
Our operating margin is 10.
Compared with the same period last year, 6% rose by about 50 basis points, up 110 basis points from the first quarter.
In fact, we did a bit of digging and you have to go back to 2001 to find the company\'s higher basic operating profit margin performance.
Regarding the unexpected events that affected our four businesses this quarter, let me start by saying that thankfully none of our colleagues were injured.
Several incidents occurred in June, including a fire at our Waco flexible packaging company in Texas, which damaged the concave Press.
No customer orders were lost due to about a month of repair pressure as our team did a fantastic job of moving the business to our other flexible operations to ensure uninterrupted service.
Also in June, an overflow dam fault along the Trent River, Ontario, Canada flooded our Trent Valley paper mill and closed its six-day operation.
Our team did a great job again, drying the mill, getting and installing new motor and electrical switches and putting the mill back into production.
Also in our industrial sector, a pipeline and core business in Perth, Australia was completely destroyed due to a fire in the adjacent customer business.
Finally, we will continue to deal with the collapse of the near roof of the Hayward thermal safety protection packaging plant in California, and we have to evacuate most of the plant.
Again, our team did a great job of ensuring structural safety and ensuring that none of our customers were negatively impacted.
These unforeseen events add up to about $0.
02 yuan per share this quarter to cover insurance deductible and other business losses.
Looking closely at our performance in the first half of the year, you will find that sales have not grown much.
5% was mainly due to acquisitions, while basic income increased by 8. 7% to $182.
7 million, or $1. 81 per share.
As a result, the first half of the year benefited from acquisition gains, productivity gains and positive price-cost relationships, which significantly offset the negative effects of lower volume portfolios and foreign exchange.
Our operating profit increased by 8 in the first half of 2019. 2% to $272.
3 million, operating profit margin of 10%, an increase of 60 basis points from last year.
In terms of consumer packaging, the basic operating profit in the first half of the year increased only slightly from last year to $125.
1 million, the basic operating profit margin is basically flat, 10. 5%.
Operating profits in the consumer sector benefit from increased productivity, acquisition gains and positive price-cost relationships, which again offset the negative effects of lower volume portfolios and foreign exchange.
What I want to say is that our consumer business has been disappointing, especially in the second quarter.
The rigid paper containers that started well this year showed some slowdown in the second quarter, especially at the end of the quarter, which may be a combination of demand easing and destocking.
Our elastic conversion business continues to be hard in our primary candy-
Good roast.
We do see weakness in other service markets, and as we mentioned earlier, we will close the slice business of the Elk Forest plant at the end of the second quarter, which will drive operational improvements in the second half of the year.
However, it is true that closing the forming Film Division did decrease slightly in the second quarter, which will lead to a decrease in sales for the rest of the year, but as I said, it will drive operational improvements forward.
The volume of rigid plastics continues to lag, mainly due to poor store performance, partly due to the weather, and then, frankly, partly due to some of our businesses, where, we continue to address the issue of integrating one facility and relocating four thermoforming lines to three operating facilities.
The plastics business in some of our industrial services markets has also slowed.
In the first half of the year, the performance of the paper and industrial conversion products sector that turned to US increased by 8. 2% to $109.
6 million, while the operating profit margin is 11.
1%, an increase of about 30 basis points over last year.
The gains from the Conitex acquisition, the positive price-cost relationship and the increase in productivity once again offset the negative impact of the lower volume mix and foreign exchange.
As Julie mentioned, in the second quarter, both in uncoated recycled cardboard and corrugated cardboard, the volume of tubes, cores and paper worldwide was difficult.
We will continue to run some recycled pulp in the corrugated pulp in hartzville to offset lower orders for the medium.
Also in this quarter, we signed a final agreement to acquire the United States coresaw Holdings for $0. 11 billion.
Coresso\'s sales in 2018 amounted to approximately $75 million, operating 108,000 tons of URB plants and two core conversion facilities in Wisconsin Rapids each year.
Corenos is an attractive portfolio of assets and customers, and 100% of its products are made of recycled paper, which further strengthens our commitment to increase the number of recycled materials, or recycling costs relative to the number of products we put on the market.
We expect the deal to end at the end of the third quarter.
In the first half of the year, there was a strong improvement in our display and packaging sector, with operating profit of $12.
Compared to $1, 3 million.
2 million last year.
You may remember last year we struggled at the Atlanta backpack center and we have been out of the contract since then.
Finally, operating profit in our protection solutions division grew 4% in the first half to $25.
3 million and operating profit margin is 9.
8%, up about 60 basis points.
We continue to experience robust productivity improvements in this area and achieve volume growth at our thermal safety temperatures --
The guaranteed protection business is not just offsetting the weakness of our automotive molding and fiber industries --
Packaging business based on consumer protection.
Finally, let me talk about what we saw in the second half of 2019.
At the end of 2018, we began to worry about the deterioration of the global macroeconomic situation in 2019, which we clearly felt in the second quarter.
That\'s why we \'ve quietly implemented several fixed-cost restructuring operations since the first quarter, with the goal of reducing costs by 15 million to $20 million this year.
Thanks to these and other efforts, we will maintain a 2019 income guidance.
We expect to absorb another $0.
03 higher interest expense per share from regular loans, we may come up with this loan to provide a lot of money for our transition in the United StatesS.
Pension Plan.
As Julie mentioned, voluntary contributions are the only reason why we reduce our business cash flow and our forecast for free cash flow.
Finally, we are satisfied with how we can manage our business in the first half of 2019 in the face of unfavorable factors that are mostly beyond our expectation and control.
In the face of unforeseen events, whether natural or otherwise, our ability to adapt and adjust remains the strength of our organization.
As we move forward for the rest of the year, the rigor and discipline we apply focuses on what we can control, while remaining flexible when needed, and has and will serve us.
However, regardless of the environment, we are still focused on doing what we need to do to drive profitable growth, profit expansion and stable free cash flow.
Now with Crystal, can you review this question? and-
Answer procedure.
Question and Answer: Thank you, operator. (
Operator instructions)
Our first question came from Edlain Rodriguez at UBS.
Your line is open.
Ed Lan Rod Ritz-UBS --
Good Morning, everyone. Rob C. Tiede --
CompanyGood for sonoke products Edlain in the morning.
Ed Lan Rod Ritz-UBS --
Analyst, I have a few questions about the volume.
What are the effects of natural disasters like all on the volume of floods and fires?
I mean it should be more defensive when you look at consumer packaging, but we see weaknesses in all aspects.
I mean, what\'s going on inside? Rob C. Tiede --
Sonoko products company.
So let me start with the number of unforeseen events.
To a large extent, I will tell you that in our flexible business, we are on fire and we are able to move the business, even though it is running a little less efficiently in other operations.
So, I don\'t think we have an important event there in terms of quantity.
When I think of the flood that happened in our operation in the Trent Valley, we have been down for six days, Edlain I will say, from the side up, this is a loss of around 2000 tons due to this activity before we start running again.
When I see the consumer side, let me try to break it down for you.
When I think about our can business, we have a drop
The other day, off and I reflected a bit on this and see where we were last year.
In the first quarter of last year, we experienced a very slow first quarter and a rebound in the second quarter.
When I look at this year, I see a very strong first quarter and a slowdown in second quarter growth.
I don\'t know if we saw some destocking related to this at the end of the second quarter.
When I think of all the consumer side performance in the second quarter, add a little color to it.
We had a very strong April and we had a wonderful June especially in the second half of June and things really slowed down.
So, I don\'t know if this is an expectation for the holidays.
That\'s why I said, I\'m not sure if we \'ve seen destocking in this industry.
Bookings continue to be active when I see our flexible business, we talk about this as a segment that we expect to grow 3% to 4% per year, and as we look forward and move forward, booking support will obviously increase.
Now, we do one thing in a flexible business, we talk about closing the molding film division of our Elk Forest factory, which actually started in the first quarter, then gradually closed at the end of the second quarter, now closed.
Therefore, this has a slight impact on sales volume and sales amount.
Then let me talk about plastic and hopefully this will give you some granularity.
When I think about our plastic business, it\'s clear that if I take the perimeter of the store, we--
The weather did have an impact on the first quarter, and with the interruption of the weather and the outflow of products, our performance was exceptionally strong in April.
I think we saw some sales, especially in the retail market for some berries.
We do see that some of these products are transferred to processed products compared to fresh ones.
And then another thing I mentioned, if you go back to the fourth quarter, we talk about closing a factory, especially the Hollister plant in California, and redistributing the equipment to some of our facilities.
We moved it to three different facilities, four different machines and one extruder.
The opening of these machines is not as good as we expected.
We have solved some of these problems.
At this point, we still have a little bit of a lingering place.
But I will tell you that this has a negative impact on sales because we are not able to provide our customers with the level and direction we want, which is our $7 million North, we just can\'t serve our customers in the short term.
So, if you will affect consumers.
If I answer the question before you ask.
If I think about the annual balance related to the consumer again.
My expectation is that, based on everything we see, for the rest of the year, we will have a total drop of 1% on the consumer side.
Hope to help, Edlain?
Ed Lan Rod Ritz-UBS --
This is indeed the analysis. So, just to --just to get us.
So, back to investor day, you \'ve talked about the lack of 1% volume expectations for the entire portfolio this year.
As it is now, because the first half has fallen, almost like 2. 5%? Rob C. Tiede --
Yes, Sonoco Products.
If I think of the second half of the year, I will tell you that I look at this year\'s balance based on what we know today, which is a coupling between consumers and industry.
So maybe give you some industrial color.
I expect the industry to fall by about 4%.
So, basically, what we see is that in the first half of this year, sales on our consumer side fell by 1%.
In terms of the amount of sales, I expect the sales direction in the second half of this year to become flat compared to the second half of last year.
Ed Lan Rod Ritz-UBS --AnalystOkay.
Thank you very much. Rob C. Tiede --
Welcome to Sonoco Products.
Thank you.
The next question comes from Ghansham Panjabi of Baird.
Your line is open.
Panjabi--Robert W. Baird & Co. --
Good Morning, everyone. Rob C. Tiede --
Good morning, Gansham.
Panjabi--Robert W. Baird & Co. --
Good morning, rob.
I think, Rob, before you open to Q & A, you\'re talking about the comments that you finally prepared and you\'re talking about the prospects.
It is clear that the industrial economy is also very depressed not only in the United States but also in Europe.
Consumers come in at a price lower than you expected, and given the bond issue, your interest expense is higher than you originally thought.
What is positive compensation gives you the confidence to maintain your guidance.
You mentioned cost cuts and maybe you can scale them up for us in terms of size etc. Thank you. Rob C. Tiede --
Sonoko products company.
I think it\'s a few things.
If you remember, in the last 18 months or so, we have talked about something different, in terms of the actions we have taken.
We have talked about taking a comprehensive look at our business and making some tough decisions around some of the businesses we have, whether we are paid for the value we bring.
When I think about what\'s going on, it\'s clear that we put some businesses at risk because we made some tough decisions on some businesses.
Another thing we do is to do it again in the overall business approach.
If you remember, we are very focused on starting with our pipeline and core business in North America, which is an operation to test our papers or assumptions, if you wish, we looked at our business and said, can we do more? If we had fewer roofs, we would have fewer machines.
In the United States, this journey is going on and we spend a lot of money there.
We also made some investments on the way online, what I call the new state --of-the-
The lines of art that have a significant impact on operations make sense.
We have had the same level of activity in Europe and the team there has started to do so, and over the last two weeks I have spent some time with the team members.
I was impressed by the plan they made to take exactly the same action and we have done so in North America.
If you remember, we are here to make a considerable investment in our paper assets, to put money into our best machines, and to have a certain return on those machines
Road 6-I guess two-
Through this activity in his thirties.
We will finish the midpoint next year.
Then we also said that when we invest, when things are right, if it makes sense, we will take some high-cost equipment off the line.
Therefore, we are considering this and we will take appropriate action on this if market conditions permit.
Finally, in terms of costs, I mentioned in my comments that the cost of actually starting work at the beginning of the first quarter was as high as $15 million to $20 million, and that rolling has started
We know what our goal is.
So, we have the confidence to take out these expenses.
Most of them have already taken action.
So we will see this for the rest of the year.
So, what we see is ultimately about improving profit margins, which is based on what we see today and what we believe today is true and gives us confidence.
Ghansham, if we see a crazy swing and volume, then obviously this is off, but we don\'t see it at this time except what we see.
Panjabi--Robert W. Baird & Co. --AnalystSure.
This makes sense.
Then I guess this is just my second question because it has something to do with the fundamentals of American cardboardS.
Especially URB.
I mean, obviously the OCC price is quite low and the industrial market is facing quite a challenge, what do you think about the URB pricing for the rest of the year? Rob C. Tiede --
I think from a quantitative point of view, we have fallen, and I think the orientation for the second quarter is 4%.
There is clearly some weakness in the market.
But from our point of view, I think we will take some appropriate action according to the needs of the market.
There are some price challenges that are spreading in this area, the answer is yes, but we also keep the price.
So, it\'s a mixed bag for us.
When I think about future input costs, I don\'t see how much change OCC will have in the rest of the year.
So, I guess in the last few months we \'ve been a little stuck or bottoming out and rebounding, I hope.
Panjabi--Robert W. Baird & Co. --AnalystGot it.
Thank you so much, Rob. Rob C. Tiede --
You bet Sonoco Products.
Thank you.
Our next question is from Adam Josephson of KeyBanc.
Your line is open. Adam Joseph. -
Capanke capital market CO. , Ltd. --
Good morning, Roger and Julie.
I can see a very solid quarter in this case. Rob C. Tiede --
Thanks to Sonoco Products. Adam Joseph. -
Capanke capital market CO. , Ltd. --
Analyst, you think in answering Edlain\'s question, you talked about the rhythm of some consumer business
It is wise that April is the strongest in some parts of the business.
The last weeks of June were the weakest.
Can you talk about this in terms of industry? If there is a similar trend in your industry, that is, April is the best and June is the worst until July? Rob C. Tiede --
Yes, I will tell you that Adam is not as obvious in terms of industry as we have seen in consumers.
I will tell you that we see the weakness at the end of the first quarter, which basically continues on April, 5 and June.
If there is a fluctuation, it is not, I call it the needle movement fluctuation in a month.
So, we saw the drop, and then it was a bit hanging there, because it was related to the paper side, so in the US, it was down 4%. Adam Joseph. -
Capanke capital market CO. , Ltd. --
Analyze That\'s why, correct me if I hear you wrong, you expect the industrial line to drop 4% in the second half, similar to your experience in the first half, right? Rob C. Tiede --
Sonoco\'s products are correct.
Yes, on the basis of mixing with our conversion operations. Adam Joseph. -
Capanke capital market CO. , Ltd. --
Any difference between the analysts\' medium and the tube and the core, etc. , drops at a roughly equal rate, are you thinking? Rob C. Tiede --
Sonoco Products Company yes, I will tell you that, as you know, we are really not a factor in medium space given one of our machines.
If you remember, we used to talk about it--
We are shipping to pulp mills in China.
So Adam, I don\'t know the exact split, but I do think our medium volume dropped by more than 4%, but it was offset by some pulp activity, maybe on the medium side, it will increase by 2%, 3% or 4%, but it is another small component for us. Adam Joseph. -
Capanke capital market CO. , Ltd. --
I want to ask a question about this, Rob.
Especially in the past few months, paper rolls seem to have fallen off the cliff with no coating.
I know this is your biggest market in tube and core. What do you --
What do you think of what\'s going on there? Rob C. Tiede --
Well, I\'ll tell you what we saw--
What we see is a decline in all segments.
So, if I think about it from an American perspectiveS.
Our tube and core space dropped by about 4%.
In addition to a slight increase in our film business or film core business, this is every segment.
But when I think about our specialty, when I think about our textiles, when I think about our paper, if I think about our business.
Obviously, we all-
We all know what\'s going on with paper.
So, we see.
We have seen some factories shut down because it is related to fine writing paper and news paper.
This is not a surprise.
Obviously the tubes and cores we made for the cardboard industry, we saw the drop again and there was nothing shocking to surprise.
I\'m glad the movie side is up slightly, but again, it\'s not a trend for a quarter.
So we just need to monitor closely.
But what\'s interesting is that if I turn around in this system right now, our URB is about 2 million tons a year and a half. -
There is a little more than half here.
What we see is that, despite the volume drop of our tubes and cores, paper is actually rising for us in Europe.
And then, if I look at the side of the other parts of the world that is changing, obviously in Asia, but interestingly, it\'s a story of a country.
When I think about what we see in Asia, China, and Taiwan, it will certainly be very disappointing.
I think I attribute this to the dialogue between our President and the prime minister, the Chinese president and some of the tariffs in the ongoing dialogue there.
If I go to South America, it\'s interesting that we see a little balance in Brazil, which seems to be the only country in the world that looks positive and has been balanced for the last few quarters.
Then, the balance in South America, including Mexico, is very similar to what we see in North America. Adam Joseph. -
Capanke capital market CO. , Ltd. --
Thank you.
In specific areas, have you heard from customers concerns about your existing plastic packaging, other thermoforming packaging, or the desire to buy more compound cans, replacing plastic with plastic in Europe? Rob C. Tiede --
Obviously, we--
Obviously we have a lot of activities in Europe and are interested in all the paper, we will meet the recycling requirements in Germany if you like, this laid the foundation for the development trend in other parts of Europe.
If I think of the only place I can say for sure, we do see a shift ---
This is a paper ball with constructive frozen meals.
I think we talked about this in the third quarter (ph)last year.
I would like to tell you that our conversations with our customers today are more collaborative and really try to understand the whole concept of sustainability and recycling.
Make sure we truly understand what is possible and what is impossible.
And then another conversation we\'re having is, again, I\'m saying in terms of collaboration, if there\'s something recyclable in your plastic, we can make sure it\'s recyclable, how do I trade
What is trade-off?
What did I give up on shelf life?
Would I be willing to give up some of these attributes if you would?
So, I found these very constructive conversations leading to meaningful projects between us and our customer base. Adam Joseph. -
Capanke capital market CO. , Ltd. --
Rob, thank you very much. Rob C. Tiede --
You bet Sonoco Products.
Thank you.
The next question comes from Gabe Hajde of Wells Fargo Securities.
Your line is open. Rob C. Tiede --
CompanyGood, Gabe products. Gabe Hajde --
Wells Fargo Securities--
Good morning. Good morning.
I have a question about de-stocking, or I want the rhythm track of the volume environment of the composite tank.
I\'m curious, if you can rob, maybe think back, other times in the past, you \'ve seen the customer\'s go-to-stock effort, and I know part of it is a bit guessing.
Could this be due to the expectation that the cost of OCC will be reduced through the system or something like that?
Or, is there any other factor besides managing your balance sheet? Or can you give us some insight? Rob C. Tiede --
Yes, Sonoco Products.
I\'m going to tell you a bunch of anecdotes.
But if I think about it, let\'s say, we already have some to stock;
We used to eat in snacks and chips, especially in the canned business, because it was either a promotion ---
Promotional products are entering or coming to an end and they want to flush out the product.
We see the same thing on the flexible side from time to time.
I think part of the reason is that our customers do see an increase in inventory, but usually, it depends on specific events in the market and/or their firm belief that some of the input costs will change significantly.
But I will tell you that when I look at the forecast from our customers and then we do the same with the supplier, there is 45% to 50% accuracy at best.
Therefore, some destocking events that occur from time to time will not last for a long time.
I clearly think that when we entered the end of the fourth quarter, there was obviously a de-inventory activity going on.
I think the other incident, I don\'t know, is definitely the whole issue surrounding Brexit.
And the impact on Britain\'s exit from the EU, whether there is operation-
For some reason, in the first quarter, it seems to me afterwards that this is definitely the case.
So there\'s more to do.
I don\'t know I\'m answering your question, Gabe, but that\'s what we \'ve seen in the past. Gabe Hajde --
Wells Fargo Securities--
This is very helpful, analyst.
And then in terms of flexibility, I\'m curious ---
If you can comment on the performance of the industry as a whole, if this is a degree of share transfer, or the sustainability issue starts to spread out, on the outside-
Time, or some isolated problem you guys have? Rob C. Tiede --
Sonoko products company.
I\'ll tell you this is a great question because last week I happened to have a conversation with the CEO of Ping An Insurance about some other issues and I talked about this ---
Specific question, what are you talking about?
Overall, the industry continues to grow at 3%.
So I don\'t think that\'s the sustainability-related issue that we\'re seeing, or the issue of people creating new structures and flexibility based on some of the trade I\'m talking about --
Offers acceptable to customers.
So, you can create a uniform structure of the material.
These are the ongoing conversations.
For example, during the shelf life of 18 months, you will start from 9-
Given that distribution channels are in place, a one-month shelf life is enough.
I think customers have better data today, which allows them to start looking at this kind of thing in a different way. Gabe Hajde --
Wells Fargo Securities--
Very good. Thank you. Rob C. Tiede --
You bet Sonoco Products.
Thank you.
Our next question comes from George staforth of Bank of America Merrill Lynch.
Your line is open. Rob C. Tiede --
Good morning, George. George Stafford-
Bank of America Merrill Lynch--
Rob, how are you?
Thank you for answering my question.
Relying on sustainable development discussions, it is clear that we have done quite a bit of work on this topic over time.
What do you see from consumers, from your research, are they concerned about recyclability, or the actual recovery rate, because according to our analysis, according to the indicators you see, you will get different answers.
So, what do you think is important to consumers, so what kind of packaging will your customers choose in the end? Rob C. Tiede --
Yes, you know, George, it sounds like I\'m a politician to divert attention, but that doesn\'t mean that.
I think part of it is that we have to try to educate consumers.
I think the consumer wants to do the right thing, I think the consumer needs to connect these points, and you and I have the opportunity to talk about the problem of food waste throughout the line from time to let them understand.
I think we need help connecting these points, so we will have a summit on September, 17 and 18.
I have hardly invited all of you to join us because it will be many people from different industries, talking about how we are and what we can do collectively.
Frankly, this is the driving force of the conversation, and you and I have talked about how to get everyone together.
So, we have consumer goods companies.
We have it ourselves.
We have government, education and academia.
So, I think it will be a good platform for us to have a conversation around this issue.
As I said, I really believe that consumers really want to do the right thing, but they need to understand what the right thing is.
They don\'t want it. -
If unexpected consequences have a more harmful effect on the environment, they do not want to recycle.
I think that\'s what we\'re trying to do with these people.
In the end, I think, once the consumer understands it all, it will make the most sense for them, but it is our responsibility to help connect these points. George Stafford-
Bank of America Merrill Lynch--AnalystOkay.
Rob, as always, I appreciate the discussion on this.
You mentioned the rapid growth related to flexible packaging, and I think Ping An Insurance is up 3%.
From my memory, they tend to evaluate growth in name. e.
Including pricing.
This is their real quantity expectation for the industry, because it is certainly not really seen in many end markets.
So, this is more nominal, or the real volume expectation of Ping An Insurance.
If you can comment on this? Rob C. Tiede --
Yes, you know, it\'s nominal, George.
Measured in dollars.
I don\'t think I \'ve ever seen anything based on impressions, pounds or tons.
As you know, in a flexible space, you will reduce the size of something or the head of the bag.
Unfortunately, it\'s measured in dollars, and 3% of growth is actually driven in dollars, so it could be a combination of quantity and price. George Stafford-
Bank of America Merrill Lynch--AnalystOkay.
The last two, I turned it over.
So far you see the profit, the amount of the loss of unfavorable profits, has been running about 30% this year.
This is what we should expect for the rest of the year, and it is your usual goal to target unfavorable profits.
I forgot. Who asked me? -
It\'s probably Adam.
I think, given all the volume and operational challenges, your operations have done a very good job this year, though, but in the second half of the year it was a very big downside, is there any way to improve?
Then my last question, I will turn it over.
All of these discussions about weak quantity, of course transport and rail box transportation, indicate a downturn in demand prospects, if not a weakening.
It\'s good to see some improvements in display and packaging, and realize that the products there are easy.
But is there any glimmer of hope that we should get anything positive from the benefits you see in the second half and 2020.
Thank you guys.
Good luck this quarter. Rob C. Tiede --
Thank you, George.
Seemingly high volume loss of unfavorable margin.
So I will tell you that I don\'t expect the future to be so big.
Regarding the weakness in quantity, I think we may have seen the same problem.
CSX announced yesterday that I think their CEO talked about the economic confusion he saw.
We clearly saw that we also looked at the trucking index and looked at the situation where the number of loads and the number of tractors was basically reduced by half last year compared to this year.
So, when I look at it, I--obviously we --
I\'m worried about what we saw.
I don\'t think there will be a big change in business.
If I look at the volume growth we see in the D & P business, we do win some new business after we have our staff really focused on this.
I do think that people are trying to bring their products to market through different venues, old bricks and mortars, and that\'s where the show is.
Then another area I\'ll tell you is interesting, it does relate to our fresh and natural approach, and our thermal security business has a strong quarter in terms of temperature --assured side.
It is powerful in both ways;
One is in the fresh and natural food space, which is an extension of some of the product lines we have.
We see significant growth in products that have not been pasteurized.
And then, the other thing we do see is that it\'s doing really well in terms of biological products and Pharma.
So, it has some clips, but if I pick up a brush I actually still have to wait and see what\'s going on, because I can\'t relate retail data for all segments to the data we see.
Clearly, we also looked at the trucking index, and looked at the comparison between the number of loads and the number of tractors last year and this year, which has basically been reduced by half.
So when I saw this, I was concerned about what we saw.
I don\'t think there will be a big change in business.
If I look at the volume growth we do see in the D & P business.
After we got our staff really focused on this, we did win some new business.
I think people are trying to push their products to old bricks and mortars through different venues, and that\'s where the show is, and then I\'ll tell you another interesting area, it does relate to our fresh and natural approach, and our thermal security business has a strong quarterly temperature in the following areas: on the guaranteed side, it is strong in both ways, one is in the fresh and natural food space, which is an extension of some of the product lines we have, and we see a significant increase in products there without pasteurization.
And then, the other thing we do see is that it\'s doing really well in terms of biological products and Pharma.
So it has some clips.
But if I brush a brush extensively, actually I still need to wait, look at the attitude and see what\'s going on, because this is what I can\'t relate the retail data released to our current situation, in all segments. George Stafford-
Bank of America Merrill Lynch--
The analysis is correct. Thank you, Rob. Rob C. Tiede --
You bet Sonoco Products.
Thank you.
The next question comes from Steve Chercover from Davison.
Your line is open.
Steve lid. -D. A.
Davidson Company--
Good Morning, everyone. Rob C. Tiede --
Thanks to Sonoco Products.
Good morning, Steve.
Steve lid. -D. A.
Davidson Company--
The first analysis is in correenso.
I mean, you expressed the desire to achieve this in 85% of the overall recycled content. Rob C. Tiede --
Yes, Sonoco Products.
Steve lid. -D. A.
Davidson Company--
Analyst, what is the current level? Rob C. Tiede --
Sonoco Products Company according to the weight of all the products we put on the market, the cost of recycling or recycling in the system is slightly higher than 75%.
Steve lid. -D. A.
Davidson Company--
Thank you.
Secondly, I don\'t want you to try to predict the price of the OCC.
But at a higher level, would you be concerned that if the price continues at the current level, the entire collection system crashes and $42 per ton doesn\'t seem worth the collection. Rob C. Tiede --
First of all, I don\'t think you can charge it for $42 per ton.
Picking it up, handling it, trucking it and delivering it and all this stuff has a lot of cost.
So, we have a system for collecting 2. 8 million tons.
We spend about 1. 3 million, 1.
We have 4 million tons ourselves.
The rest of our deal is because of the merse we have. The model --
We are engaged in this business because we want to provide reliable fiber supply for our systems, our factory systems.
Then I will tell you another thing that we are seeing and obviously we are taking action but I will tell most recyclers that if not all is already doing so
The pendulum swings.
If you go back in the past, the recycling chamber charges the municipalities for the garbage, and then the pendulum is set to where we purchased the method, and the pendulum is now back where we received the material.
I think if you have a municipality that would say, well, we don\'t want to do that.
After educating all of our consumers about recycling is an important aspect of keeping the Earth pure, how will you have a clear conscience, say we will start carrying all of these things again.
I don\'t think there will be any results.
In the end, you and I as consumers will pay for it.
So I think we will find a way to make this system work if necessary.
Steve lid. -D. A.
Davidson Company--
Thank you.
Thank you.
Our next question comes from Salvator Tiano, a vertical study.
Your line is open. God\'s savior-
Vertical Research Partner Limited-AnalystYes, hi.
So, first of all--Rob C. Tiede --
How about Sonoma products? God\'s savior-
Vertical Research Partner Limited-
Good analysis. How are you? Rob C. Tiede --
The company\'s products are very good. God\'s savior-
Vertical Research Partner Limited-AnalystGreat.
So, the first question about M &.
In the past few years, you have made two or three acquisitions, slightly improving the location around the store, which seems to be a problem for the past two quarters, actually a problem with consumer packaging.
So, in terms of quantity and operational profitability, let us know, how did the company you acquired perform, and how did it perform at the time of the acquisition? Rob C. Tiede --
Sonoko products company.
At a high level, I will tell you that it is mixed.
We had great success in some areas around the store.
But, if you remember, I said earlier that when we shut down the facility, walked around and didn\'t perform the task as we should, we faced some challenges.
Unfortunately, we have experienced the growing season this year and these plans have been negatively affected, but this is a temporary situation.
If I break it down into acquisitions that we\'ll talk about publicly, be very happy with the performance of the Highlands and continue to perform with our partial performance on the west coast.
But we still have some work to do. It\'s a long process.
Term play is still very, very committed to this market because the trend that led us to make these acquisitions continues to be strengthened, as I said earlier about our thermal security business, we are creating additional opportunities for using other packages and we have to bring our products to market.
Thank you.
Our next question is from Mark Wilder at the Bank of Montreal.
Your line is open. Rob C. Tiede --
Good morning, Mark. Mark Wilde --
Bank of Montreal--
Good morning, rob.
Rob, first of all, I was wondering if we could talk about your views on the $18 million increase in productivity in the first half of the year? Rob C. Tiede --
Well, I feel good about it. Mark Wilde --
Bank of Montreal--
Analysts are just trying to think about the background of what you are trying to produce every year.
Are you on track for the whole year where you want to go? Rob C. Tiede --
Sonoco Products Company we are a little behind because it has something to do with the plan we made at the beginning of the year.
But some of the activities we are doing about the cost expenditures I mentioned.
These are beyond the original plan.
I think it will help us get to where we need to be by the end of the rest of the year. Mark Wilde --
Bank of Montreal--AnalystOkay.
Is it possible to give us a general idea of what you are talking about in terms of $15 million to $20 million, what are the increments? Rob C. Tiede --
Sonoco Products is a bunch of things throughout the organization.
Some of them are in SG & A, probably a large part in SG & A space,--
This is an area of our attention.
As you know, one of the things we have when we buy A business is the introduction of SG &-
What we have discussed is whether we have the opportunity to simplify, standardize and automate activities.
Therefore, we can bring excellent activities from different regions around the world to more places.
We already have pockets.
We are trying to expand this scope.
So we deploy our people to more value. added activity.
So, it\'s really behind the driver, Mark. Mark Wilde --
Bank of Montreal--AnalystOkay.
Then I want to talk about the portfolio, Rob, you talked to us on investor day and other times about what you\'re interested in, in terms of acquisitions.
I would like to know if it is possible for you to talk to us, what do you see in terms of acquisitions now?
What is the valuation?
At the same time, you also talked aboutCore business.
I would like to know if we can have some idea about the development of this process? Rob C. Tiede --
Sonoko products company.
I will tell you that we are as active as ever, looking at things, we will be involved in something different over time, you know, we will talk about it, when we are ready to talk about it, but still very active.
To be honest, I think we may have talked about this before, and I think December will bring some reality to people\'s expectations.
But this is not the case.
Multiple environments still look pretty bubble, and it\'s an opportunity, and it\'s also a setback if you want.
So, first of all, it has to be strategic because it has something to do with having a look at it.
Whether it helps us drive scale, customer, capability, or geographic reach is critical to our layout.
These are our concerns. So, --
We will continue to do so. On the --
I think you and I have talked about it in the past, and if we simply talk about our strategic focus, that is simplification, it focuses on the flexibility of the three platforms, paper and hard plastic.
There are some issues that we need to address so that we can evaluate strategic alternatives.
These are the things that we are doing and when we can, we talk about where we are in the process. Mark Wilde --
Bank of Montreal--AnalystOkay.
Then give me the last one.
I was wondering if you could talk a little bit about coenso.
I guess I\'m just particularly curious about the regulatory issues there?
Because in North America, the pipe and core markets have been quite consolidated.
So, I\'m curious, how are you satisfied with your ability to get more market? Rob C. Tiede --
Sonoco Products Company yes I mean the market is very expensive and as you know we are one of a few bigger companies. But there --
If you look at it, I mean, there are really not many barriers to entry if you want to make tubes and cores.
If I think about koenso, it goes back to our thinking about our paper assets.
We want to invest the best. in-class assets.
We are very satisfied with the assets displayed by koenso factory.
It allows us to observe our footprints through different light.
So I think from this point of view, we think that from our network, it makes a lot of sense for us, and we look forward to completing this deal in the next 60 days or so. Mark Wilde --
Bank of Montreal--AnalystOkay.
Rob, it sounds lucky in the second half. Rob C. Tiede --
Thanks to Sonoco Products.
Thank you.
We do have one.
Rise from Gabe Hajde of Wells Fargo Securities.
Your line is open. Gabe Hajde --
Wells Fargo Securities--
Julie, the analyst will try to make this short speech.
I look back at 10-
The pension has an annual funding history and an average of about $55 million.
Will there be expectations in the future, and I will come up with $10 million to $15 million, realizing that pensions are often very unstable creatures. Julie Albrecht--
Sonoco Products Company Yes, well, in terms of pension volatility.
This is really at the heart of our board\'s recent decision to cancel the pension plan.
So that includes our $0. 19 billion contribution in May, and then we have about $10 million in additional contributions that we will make in the second half of this year.
So beyond that, at this point, our plan is getting very, very close to 100% of the money, which is the largest part of our pension liabilities in the United States, as you can imagine.
So, really on the journey
On the basis of moving forward, we have very limited requirements for pensions. forward.
We put the money in again, May, and we have a little left.
We have shifted most of these investments, pension investments, to fixed income, so that most of the money can be secured.
So I expect that next year, as we close some of the derailment activities next year, there may be around $100 million in cash flow in the pension plan.
In addition to this, the impact of pensions on our cash flow is very limited. Gabe Hajde --
Wells Fargo Securities--
Thank you.
Thank you.
I did not ask any further questions from our telephone line.
I would now like to move the meeting back to Roger Schram for a final statement. Roger P. Schrum --
Vice President, Investor Relations and Corporate Affairs.
Again, as Rob mentioned, if you have any interest in attending our food waste and sustainability conference in September, please let us know and we will be happy to host you.
I would also like to congratulate Rob, who was a grandfather at the conference call.
He is already a grandfather.
He became another. -
There\'s another grandson.
Congratulate you, Rob. Rob C. Tiede --
Thanks to Sonoco Products. Roger P. Schrum --
The vice president of investor relations and corporate affairs once again thank you for joining us today.
Please feel free to call me if you have any other questions. Thanks.
Thank you all for attending today\'s meeting.
This did end the project.
You can all disconnect.
Everyone has a good day.
Participant: Roger P. Schrum --
Vice President of Investor Relations and Corporate Affairs-
Rob C. , Sonoco Products. Tiede --
Delai rodeitz-Sonoko Products Co. , Ltd. -UBS --
Panjabi analysis--Robert W. Baird & Co. --
Analyst Joseph Johnson-
Capanke capital market CO. , Ltd. --
Hagid analysis-
Wells Fargo Securities--
Analysis by George Stafford-
Bank of America Merrill Lynch--
Analyst Steve lid-D. A.
Davidson Company--
Analyst Tian Ye--
Vertical Research Partner Limited-
Analysis of Mark Wilder-
Bank of Montreal--
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