Q3 2019 Earnings Call
Sorry, 2019, Sonoco earnings conference call.
I'm not participate in mind.
No I guess because presentation, there will be a question and answer session.
A question during the session you want me to press Star one telephone.
Please be advised today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference or what are your speaker today, Roger Schrum VP of Investor Relations. Thank you. Please go ahead Sir.
Thank you GE and good morning, everyone welcome to Sunocos Investor Conference call to discuss our third quarter 2019 financial results.
Joining me today, our Rob TD, President and Chief Executive Officer, and Julie Albrecht, Vice President and Chief Financial Officer.
News release reporting our financial results was issued before the market opened today and is available on the Investor Relations website at Sunoco Dot Com and.
In addition, we will reference a presentation on our third quarter results, which was also posted on our website. This morning.
Before we go further let me remind you that today's call and presentation contains a number of forward looking statements 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.
There are a Furthermore, today's presentation includes the use of non-GAAP financial measures, which management believes provide useful information to investors about the companys financial condition and results of operation.
For information about the companies use of non-GAAP financial measures, including definitions as well as reconciliations of those measures to the most closely related GAAP measure is also available in the Investor Relations section of our website.
With that I'll like to turn it over to Julie.
Thank you Roger I'll begin on slide three we see that earlier. This morning, we reported third quarter earnings per share on a GAAP basis of 91 cents.
And base earnings of 97 cents per share.
It's 97 cents a base es is well above the high end of our guidance range of 88 to 94 cents per share as well as above our 86 cents a base as in the third quarter last year.
We're pleased to have delivered solid operational result in a slumping global economic environment and I'll add that our third quarter earnings benefited from the current though acquisition and from a lower than expected effective tax rate.
Related to the six cents difference between base and GAAP EPS.
My sense was due to restructuring activities.
Five cents relates to non operating operating pension costs.
And three cents is from M&A transaction costs.
These non base expenses were partially offset by a seven cents noncash gain driven by a reduction in a site specific environmental reserve.
Now looking briefly at our base income on slide four and starting with the top line you see the sales were $1.354 billion down almost 11 million from the prior year period.
I'll review more details about our Keith sales drivers on the sales bridge and just a moment.
Gross profit was $265 million, approximately 6 million above the prior year quarter as gross profit as a percent of sales was solid at 19.6%.
That's DNA expenses, a $126 million were favorable year over year by 9 million driven by cost reductions across the business, which more than offset the addition of s. DNA from acquisitions.
Oh, that's resulting in operating profit of $139 million, which was $15 million above last year.
Our third quarter operating profit as a percent of sales was 10.3%.
100, 2020 basis point improvement over the prior year period.
And I'll review the key drivers to operating profit on the bridge in a few minutes.
Net interest expense of $14.8 million was nearly flat with last year, primarily due to higher debt balances and reduced interest income lower offshore cash balances, which were both offset by a one time interest income from a favorable tax ruling in Brazil.
Income taxes up almost $28 million were approximately 2 million higher than last year, driven by a combination of higher pre tax profit, but a lower effective tax rate.
Our third quarter 2019, effective tax rate of 22.3% with lower than the prior year quarter, primarily due to favorable interpretations of the guilty tax calculation that we recognized this quarter.
And moving down to net income our third quarter 2019 based earnings were $98 million or 97 cents per share.
In looking at the sales bridge on slide five you see volume was lower by almost $36 million or 2.6% for the company as a whole.
Consumer packaging volume was down $17 million or 2.9%, where some growth in international rigid paper containers was more than offset by lower volume in rigid paper containers, North America as well as in Flexibles and in plastics.
Well, Rob will be providing more color about these volume declines in his comments.
Display and packaging had solid volume growth of almost $3 million or 1.7% driven by increased business activity, primarily in our domestic displays business and in Poland.
Does exclude the impact of exiting the Atlanta Pack Center, which is included in the exchange and other category.
Volume and paper and industrial converted products was down almost $18 million or 3.8% due to weak global tube and core volumes as well as lower worldwide paperboard demand.
And finally sales volume and protective solutions was down by $4 million or 2.8% with the continued trend of weak volume in automotive and consumer packaging, but very strong demand for temperature assured packaging.
Moving over to price you see that selling prices were modestly lower year over year by $2 million driven by lower raw material costs, partially offset by our work to better realized the value of the products and services, we provide to our customers.
Moving on to acquisition you see an impact on the topline $74 million, which was primarily driven by the kinda techs acquisition in the fourth quarter of last year.
Well as the addition of current those operations in early August .
And finally exchange and other with negative by $47 million driven by a $28 million negative impact from foreign exchange translation and $26 million of lower sales from the Atlanta Pack Center exit at the end of last year's third quarter.
Moving to the operating profit bridge on slide six and starting with volume mix are lower sales volume concentrated and our industrial and consumer segments with the primary driver to the 8 million dollar negative impact on operating profit, we did see a benefit from positive mix of business.
In both our displays and protective solutions segment.
Shifting over to price cost, we had $5 million of unfavorable price cost in the third quarter, driven mostly by our by our industrial converted product segment.
As usual, there's a slide in the appendix. It shows recent Oh cc price trends and their you'll see that southeast Oh see prices averaged $35 per ton in the third quarter of this year compared to an 88 dollar per ton average and last year's third quarter.
Although some of our fourth quarter customer contracts have reset at this level for a C.C.. We continued to be successful in implementing price increases on noncontract business, along with having a good mix of contracts with pricing that is based on market paper indices, such as 10 vending chip, which is actually flat.
Year over year.
Next you see that the impact of acquisitions added $9 million to earnings this quarter, which is primarily related to kinda tech, but also to our Correnso acquisition.
Continuing to total productivity you see that our total productivity was positive year over year by $13 million and was spread across the segment.
The main contributors to this positive impact, we're procurement and fixed cost productivity.
And finally, the change in the exchange and other category was favorable by $6 million driven by various items, including the positive earnings impact from last septembers exit of the Atlanta Pack Center.
A onetime positive tax ruling in Brazil, as well as lower depreciation expense.
Now moving to slide seven you'll find our segment analysis, where you see that our consumer packaging sales were down 3.1% due mostly to softer demand, but also our decision to exit a forming films operation and flexible.
Operating profits were higher by 1.3% and operating margin was 9.8% up 45 basis points relative to the third quarter of last year.
[noise] display and packaging sales were down 12.2% due primarily to the Atlanta Pack Center exit last September .
Operating profit increased well over 100% to $8.9 million and operating margin improved by 390 basis points to 6.1%.
This earnings increase is due to exiting the unprofitable Atlanta pack center contract, coupled with favorable volume and price cost.
Paper and industrial converted product sales were up 6.9% driven by the kinda text and correnso acquisitions, and somewhat reduced by lower demand and price.
Operating profit is up 10.2% driven by the benefit of these acquisition as well as total productivity.
Our industrial segments operating profit was a solid 12% for the third quarter of this year.
Protective solutions sales were down 2.9%, but operating profit surged by 34% due to strong total productivity results as well as a favorable mix of business.
This segment's margins of 10.6% improved by 290 basis points from the prior year quarter.
For the total company sales were down almost 1% well operating profit improved by 12.1%, resulting in a company wide operating margin of 10.3%. This is a 120 basis point improvement over last year's third quarter.
Moving to slide eight you find our outlook for the fourth quarter, where we are forecasting base earnings to be in the range of 72 to 76 cents per share.
With our year to date actual base as yet and this updated fourth quarter guidance, we're updating our full year base earnings guidance to be $3.50 to $3.54 per share.
Specific to our updated fourth quarter earnings guidance as compared to our 84 cents a base E. P. S. In the fourth quarter of last year. We had two notable positive items in last year's fourth quarter earnings.
The first item was an unusually low tax rate of 17.8 per cent compared with our assumed tax rate in this year's fourth quarter of 26%.
This drives a negative eight cents year over year impact on earnings per share.
The second item is a four cents net benefit from the receipt of flood related business interruption insurance proceeds in last year's Q4.
Adjusted for these two unique items last year's fourth quarter base EPS would have been 72 cents, which is inline with our updated guidance for this year's fourth quarter.
Turning to cash flow on slide nine you see that our operating cash flow for the first nine months of 2019 was $239 million compared with 452 million in the same period of 2018.
This 213 million dollar decrease was driven by the year to date 175 million dollar after tax cash impact of the voluntary U.S. pinching pension contributions that we've made this year.
These pension contributions have totaled $200 million and we've had related year to date cash tax benefit of approximately $25 million.
We do expect an additional $10 million of cash tax benefit in the fourth quarter.
Mid way down this slide you see that our working capital balances increased during the first nine months of this year by $41 million, which was a 19 million dollar increase in cash usage by working capital versus the prior year period.
The primary driver to this increase was timing of accounts payable activity.
I'll also highlight on this slide that our net capex spending of $144 million. So far this year was 32 million higher than last year.
The two main drivers to this year over year change, our $11 million of higher gross capex spend as well as $21 million of lower asset sale proceeds.
As a reminder, last year's asset sale proceeds included $17 million related to the Atlanta Pack Center exit.
So after our net capital spending and after paying dividends of $127 million, our free cash flow in the first nine months of this year with a use of $32 million.
Excluding the impact to the voluntary pension contribution our 2019 year to date free cash flow would've been a positive $143 million.
At the bottom up this slide you see that we're leaving our cash flow guidance unchanged from what we provided in July we continue to expect operating cash flow to be in the range of $435 million to $455 million and free cash flow to be between 60 and $70 million.
Dollars.
As a reminder, both our operating cash flow and our free cash flow. This year are impacted by the estimated 165 million dollar full year after tax cash flow impact from our voluntary U.S. pension contribution.
On slide 10, you see that our balance sheet and our liquidity position remains strong.
Our third quarter 2019, consolidated cash balance of $116 million reflects a slight 5 million dollar decrease from our yearend cash balance of 120 million.
Next looking at our debt balances our consolidated debt was approximately $1.6 billion at the end of the third quarter, an increase of $170 million from the end of 2018.
The main driver to this higher debt balance with a new short term bank term loan used to fund this year's voluntary pension contributions.
I'll also highlight that related to this year's pension contributions our liability for pension and other post retirement benefits decreased by $177 million since the end of 2018.
This concludes my review of our third quarter financial results, so with that I'll turn it over to Rob.
Thanks Julie.
Let me speak briefly about our performance in the third quarter as well as the first three quarters of 2019, and then I will address what we see as we enter the last quarter 29 team, including updating the progress we're making on cost reduction actions to help meet or financial and operational targets.
Our strong mix of consumer and industrial related businesses did an excellent job navigating slumping global macroeconomic conditions in this quarter.
Focusing our business on the areas, which we can control we continue to drive margin expansion as each of our four business segments reported genes in operating profit.
As compared to last year.
With these strong results, which included the mid August acquisition of friends or holdings, which Directionally contributed two cents per share along with the benefit of a lower effective tax rate in the quarter year over year, which also contributed directionally two cents per share we exceeded the high end of our guidance.
So I looked at the third quarter I'd point out that base operating profit increased 12.1% $139 million, despite slightly lower sales.
Operating margin improved 120 basis points year over year, reaching 10.3% well based off the Dol improved 9.5% to 199 million with off at dawn margin improving to 14.7%.
The highest.
Margin performance since 2001.
I am proud of our teams third quarter performance, especially considering how challenging but current operating environment truly is.
You've all read the growing amount of troubling economic data.
Which I believe has been and is pointing to a clear slowed down and global business activity I'll highlight a few factors, which I believe are relevant to our businesses.
First domestic ice and manufacturing PMI data for September showed the steepest month of contraction in the manufacturing sector since June 2009.
Truckload capacity, which was tight throughout much of 2080 is down dramatically.
New order surveys are declining sharply over the last several months and business confidence indexes are slumping.
This data was clearly reflected in our customers order patterns in the third quarter.
Overall, our volume mix was down 2.6% in the quarter compared to being down 3.5% in Q2, our customers are tightening inventories and closely watching new orders with expectations for slower demand.
Now looking more closely at our first three quarters performance you will see sales increased slightly.
Due primarily to the acquisition of context in 2018 and Correnso in August .
Lower volume mix and the 93 million dollar negative impact from a strong dollar offset much of those gains.
Base earnings were up a solid 10% of $281 million or $2.78 per share results in the first nine months of your benefit from earnings from acquisitions.
Productivity improvements cost controls and a slightly positive price cost relationship, which more than offset lower volume mix and the negative impact of foreign exchange.
Our operating profit for the first nine months of 2019 was up 9.5% of $411 million, an operating margin was a solid 10.1% an increase of nearly 80 basis points from last year.
And consumer packaging base operating profit in the first nine months of 29 was up slightly from last year at a $182 million and base operating margin was also up slightly up 10.2%.
The consumer segments operating profit benefited from productivity improvements earnings from acquisitions.
Positive price cost relationship, which offset the impact of lower volume mix and the negative impact of foreign exchange.
As I mentioned volume in our consumer businesses continued to struggle third quarter.
Richard paper container sales volumes in the quarter declined in North America, which was partially offset by higher revenues in Europe , Latin America, and other international operations, our flexible packaging business experienced a shortfall of volume in the third quarter, despite solid growth in some of our.
Markets as Julie mentioned, we had previously closed the forming films operation in or Elk Grove facility at the end of the second quarter, which drove operational improvement, but negatively impacted sales.
Rigid plastics volume lagged in the third quarter, driven by slowing industrial served markets, which matches the PMI manufacturing data that I mentioned earlier.
Primitive the store performance also lag as we continue to deal with operating issues involving the relocation of Thermoforming lines into three of our facilities earlier this year.
We're in the process of upgrading equipment and tooling at several of our perimeter. This for thermoforming facilities to improve quality, which should allow us to better meet customer orders more effectively and 2020 and beyond.
Finally volume in our prepared and frozen foods segment lag as some new business awards have been pushed out to the end of year, which we'll see in 2020.
In addition, we were recently been awarded new frozen food trade business, which will further out to sales in the second half of next year.
Switching to our paper and industrial converted product segment operating profit for the first nine months to the your were up 8.9% to $169 million, while operating margin was 11.4% up about 30 basis points from last year.
Earnings from the context, and Correnso acquisitions productivity improvements and a positive price cost relationship.
More than offset lower volume mix and the negative impact of foreign exchange.
As you can see in the profit bridge on a combined basis context, and Correnso added approximately $9 million an operating profit during the quarter.
Industrial volumes continued to struggle in the third quarter down, 3.8%, which was in line with or expectations. We continued to see weakness in demand for global tubes, and cores as well as paper both in uncoated recycle board and Corrugating medium.
We are continuing to run some recycled pulp and our corrugating medium operations in hartsville to offset lower orders for medium.
Our display and packaging segment in the first nine months of 2019 reflects the strong turnaround from operating profit at $21.3 million compared to 4.9 million last year, you'll recall, we struggled with the Atlanta Pocs energy in the first nine months of last year in of since exited that contract.
However volumes have been steadily growing in the segment up 5.2%.
And finally, our protective solutions segment had a very good first nine months of 29 with operating profit up 13% to 39.3 million an operating margin of 10%.
Up about 130 basis points, we continue to experience strong productivity improvements in the segment and the volume growth in our services temperature assured protective business is more than offset by weaker volume in our automotive molding and fiber based consumer protective packaging business.
Let me conclude by addressing what we're seeing as we entered the last quarter of this decade.
First we are projecting a more pronounced yearend slow down in customer orders in several of our served markets due to continuing deteriorating global macroeconomic conditions.
We expect our customers will take a very conservative approach to managing their businesses and will be stock inventories at yearend.
Fourth quarter typically experiences a seasonal slowdown and we've seen this pattern of tight inventory controls by your customers for the past four quarters.
In addition, as Julie mentioned, we faced several difficult comparisons in the fourth quarter, including a much higher effective tax rate compared to last year, which is about an eight cents per share swing.
And we benefited from about six cents per share in business interruption insurance proceeds in the fourth quarter of last year, which will not repeat and as you heard Julie say four cents is that really applied to the third quarter of last year.
Overall, we believe we are taking a balanced view of the fourth quarter and are further focusing on controlling believers that we can.
I mentioned last quarter that we've been quietly implementing several fixed cost restructuring actions and that's set in place.
Which were targeted to lower cost between $15 million to $20 million. This year now I expect those efforts that between 20 and 25 million by the end of year.
Despite difficult market conditions, we remain focused on doing what we need to do to drive profitable growth margin expansion and solid free cash flow I believe the rigor and discipline, we apply to focusing on what we can control while being flexible when needed has and will serve us well as we move into the next decade now.
With that operator would you. Please review the question and answer procedures.
As a reminder to ask a question you want me to press Star one on your telephone to withdraw your question press the pound key please standby we've compiled the came in a roster.
Our first question is from Ghansham Punjabi from Baird. Your line is now open.
Hey, guys. Good morning, good morning.
I guess, a you know Rob first off just.
Just picking up on your on the last comments you made you know the press release about a more pronounce your on float slowdown.
Customer orders in certain markets get can you just expand on that which specific segments do you anticipate that and it seems like inventory levels across the supply chain across multiple companies that we've covered point towards them being pretty lean and so I'm just curious as to whether you're seeing further sort of destocking as we cycle into the year end.
Yeah, I would tell you gone from the way the way we've looked at it is sort of the behavior. We've seen what we have seen as every quarter starts off pretty strong and then we start to see a tail off towards the ended the quarter.
And when I take a look at what we experienced last year in December where we saw significant.
Change in behavior, and I take a look at what our seasonal reductions typically are across the board, especially in December .
Yeah, we as we looked at all of that.
We have no reason to believe at this point that we will see something different.
Now to the point that you have date is a we also believe that some of our customers have been managing their inventory down and if in fact.
It is as low as in some cases are people do think it is then it would not surprises to see a bit of a surge in orders as we come to the end of the year I, just don't know that would necessarily be able to ship those we maybe able to produce and drive absorption through those but at this point.
That's what that's what we see and that's what we know and that's what we built into our guidance.
Got it and then switching to the consumer packaging segment I know you called out some nuances as it relates the volume of performance for Threeq, you, but just sort of stepping back I mean, the segment has been quite weak spot volume standpoint for three years now you have a very broad and diverse port product portfolio, you have committed capital to it what sort of back.
Additions and new verticals that are theory growing faster I guess kind of stepping back what do you think has gone wrong from your vantage point, Rob that has driven this level of.
Quarterly Choppiness the segment and then what do you what are the initiatives you're trying to change that going forward. Thanks, so much.
Sure. Thanks, Josh.
As I look across the portfolio I am pleased with what's happening in regards to our rigid paper business we have seen.
If you recall, we saw significant volume declines, especially in Europe as it related to the tobacco industry. We have now turned the corner and we're starting to see some volume growth clearly.
We do believe that some of that volume growth is being attributed to the whole issue around plastic specifically in Europe , and we're seeing some benefit associated with that we also were seeing some of our customers.
Grow into white space in markets that they haven't previously.
And able to participate in if I take a look at Oh are our plastics business I think that a one of the things that we've clearly seen is a slow down in terms of our customers rolling out some new products that are that we have one.
We thought quite frankly, we thought that early in the first quarter, we'd be ramping up some business in our plastics business and as its as it turns out we're now ramping it up in the fourth quarter. So we really won't see the benefit of that run rate until the first quarter.
And if I take a look at the.
Additional volume that I referenced in my comments that we won we should see some additional benefit in the rigid plastic side.
As we move into.
The second half of next year, if I look at our Flexibles business.
And again I want to step back one of the things that we have done is if you recall.
We talked a lot about looking at our businesses Holistically, we said that we want to we want to make sure that we're achieving.
The value that we bring.
And in some cases, we've made some choices with respect to moving out of some business that was not necessarily as a as fruitful as we would expect it to be so it's a combination of those things as we move forward what are we doing differently.
Specifically you know we talked about the perimeter the store, we did see year over year sales growth with respect to that.
The the challenge that we had is I think that a you know.
Frankly, we we had a challenge when we shuttered a facility and the.
Fourth quarter of last year, we got some air cover because of weather in the first quarter of this year, but we were unable to catch up with the inventory levels required and as a result of that that cost us some.
Some revenue dollars than it was not inconsequential and so.
As I mentioned, we're investing in some additional equipment some additional tooling.
All of which takes some time to get put in place I think that as they look at our businesses. Overall I think the teams are aligned we have made some people changes, which we have referenced in the past and I think a those.
Things are starting to take hold and clearly if I take a look at some of the performance we had in the third quarter well volume was down we did see some a nice improvement in some of the the businesses in the portfolio.
Okay perfect. Thanks, so much.
Yeah.
Thank you.
Next question is from George Staphos from Bank of America. Your line is now open.
Thanks, Hi, everyone. Good good morning, Thanks for details.
And I wanted my my first two questions maybe I'll have a follow on after that but just piggyback on on what garnishment teed up so Rob if you talk about the fourth quarter and what is you know I guess what is embedded in your volume outlook.
Across the segments extent that you can.
Talk about that relative to what you're seeing early in the fourth quarter. Recognizing you know we've talked about this in prior quarters. There has been a thought to where the quarter starts out okay. And then your customers every one customer that seems like Poland. The horn later in the year can you give us a little bit of where are you now relative what's embedded in guidance.
Sure you know what I would tell you that.
Obviously very early as we head into the fourth quarter, but on them.
I'm bullish about fourth or specifically October October typically tends to be our best month in this sets the tone for the quarter. So at this point I have no reason to believe that we're not going to have a relatively good fourth or.
October what I don't have line of sight is December and so.
Just a taking a look at what we saw last December .
Where we saw the consumer customers really turn off the top.
I don't know, whether it's going to be exactly the same because as John mentioned in his question, we do see customers managing their inventory a little tighter and so as they said we may have a nice surprise, but don't know that and so without knowing that we didn't build that into.
Our guidance in terms of orders late in the year that allow us to produce and.
Drive some absorption and have that ready to be shipped in the first quarter.
So that that's that's really where we are I would tell you the industrial business is tracking no differently than what we expected it to.
And the consumer business.
We're looking at it from the standpoint of probably some of the experience that we had a late last year.
And weve factored that into our okay.
So Rob would it be sure say, okay. Industrial is doing its typical lets say minus three consumer is up low single, but you're you're guiding for for flat to down in the fourth quarter would that be a fair synopsis.
Yeah, that'd be a fair synopsis I would tell you that that's what we're guiding is download somewhere between one and 2%.
Okay. Thank you for that appreciate the granularity then in terms of what you're seeing in terms of.
Your customers in consumer delaying launches.
Why are they telling you there are delaying their launches are they doing it because it's the same old same old in terms of uncertainty, which hurts confidence, which means you don't spend money on marketing or capital and it can you just get into this not you necessarily but everyone gets into this for tax.
Or is there something else going on where they're concerned perhaps about launching a new plastic products in a world that is starting to get a little bit less comfortable with plastics.
Recognizing.
There's lots of size on that debate, what's going on in terms of why did the launches are going less quickly then you would have expected.
I would tell you George it's a couple of things.
It's less about the construct.
And part of it is just having the resources available to run through and get the trials done I'm not on our side I mean, we're ready to go.
Of invested in the equipment.
And Weve invested in the tooling and we've got things ready to go it's just getting their folks ready to.
To make the switch over so that and I'm being very specific around a number of products that are that we've seen I do think that they're also looking at it in terms of assessing sort of the volume dynamics.
What we did see with one of the products that we did kicked off this year was that the volumes far exceeded their expectations, which created and other unique dynamic so.
There was there was a delay in that one for a number of well a couple of months and then it was full speed ahead and so that.
That that created a bit of a challenge for us in terms of from an operational standpoint, because you can only put five gallons into a five gallon peeled off six gallons.
So we we ended up having to work through all of that but from a customer standpoint, it's not that they're struggling or at least we have not seen as george not that they're struggling with the material constructive the package.
Typically is just having the resources available to be able to get this done because a lot of our customers have gone through all kinds of.
Rightsizing and the if you will early retirements are getting some of the newer people up to speed is probably more of the issue than anything else.
Rob. Thanks, I My last quick one I'll turn it over enough for Tech solution. He had a really nice improvement and EBIT you gave some.
Directional commentary in terms of what was driving it you enjoy did can you give us a bit more granularity in terms of what drove that and how sustainable that is going forward. Thank you very much.
That.
George We had we had some really nice volume in our Thermosafe business that offset if you will the local the fiber business and our molded.
Foam and automotive business.
If I take a look at our molded fold and automotive business.
Great cost controls solid productivity year over year and to address if you will rightsizing that business for the volume that's in place.
Our.
Our fiber business same thing solid productivity and then the beauty of the volume.
In Thermosafe helped drive that up to I think it sustainable I think that business is a 10% EBIT business.
And we've had some fluctuations I think are folks are getting their arms around.
Some of the volume challenge business and they're working hard to address that.
Thank you very much.
Thank you. Our next question from Adam Josephson from Keybanc. Your line is now open.
Good morning, everyone, Rob Roger drilling.
Yeah, Rob one on the on just your tubes and cores business. Some of the obviously paper is a big end market for you within that tubes, and cores business and we've all seen in the data how some of those markets coated uncoated have taken a pretty big leg down this year.
What do you make of what's going on there and what are you thinking along those lines for the fourth quarter.
You expect any recovery do you think things you expect things to continue to get worse, what what are your thoughts in terms of the paper market specifically that you Sir.
Right.
Do I think it's going to get worse, Adam from what we've experienced I don't think so we'll there's there's nothing that we're aware of that in terms of someone taking additional downtime that we we haven't built into our forward thinking.
Yeah, but is that market's been challenged absolutely.
And we've seen actually quite frankly.
Specifically the paper side has been a little more challenged and some of the other markets.
I guess, that's the best answer yes, sure sure just one more on the or be industrial business, you talked about some selling price declines at mostly related to the historically low ULCC I'm just wondering how much of the price declines you're just LCC pass there is versus any underlying price weakness within you are they.
Adam Hey, it's truly a paycheck.
In our industrial business about a third of our contracts are tied to FCC and so our more pure pass through on a quarterly basis.
And then the remainder are roughly split between let's say 10 vending chip and just.
The other you know kind of more just broad paper market indices.
Okay. Thank you for that Julie and shot one LCC, Rob obviously, it's historically low do you have any I know it's early days, it's mid October but any expectations for next year, given that China is likely to buy even fewer tons in next year.
I mean that we're right in the planning.
Portion right now as we're thinking about it.
We think it's going to be flat around the 35 dollar a ton level is what we believed to be true and that's taking into consideration that we also believe that China will curtail the a bill the permits from 12 million tons of import to about 6 million tons and north.
Merkel will get us proportionate share.
So that that's our best thinking as of today.
And just thanks, Robert just last one on related Leon recycling, so usually obviously when you're when you're making good money in your.
Industrial business, you're losing money on recycling just because the out the impact that LCC prices have on each of those two businesses can you talk about where recycling fit fits into your strategy and are you willing to lose money. It definitely in that business, assuming LCC stays low as long as you can provide fiber to the rest of your business or how are you thinking about.
Cycling just given what happened in that industry over the past year to with historically low.
LCC and other recycling prices.
It's a if I think about recycling and why we're in recycling goes obviously to ensure that we get good quality fiber as an input into our paper mill system.
Do we.
If I had a business and said that the I'm going to lose money indefinitely. The answer is no we wouldn't do that.
But again this is an integrated play for us.
So a couple of things that we have been doing a as it relates to.
Our recycling business as you know, it's nice that otcs that $35, a ton, but theres a cost associated with picking that up I think the vast majority of our customers understand that so.
If you will addressing that and going to our customers with respect to some of those respective challenges and they get it I think the other thing that we have done as I as I think about our Mers and I think we've talked about this in the past as well it has to do with how we have changed the model and where we used to pay.
For material, we're now going to the municipalities and saying at these price points, we're gonna have to revert back to where you're going to have to contribute towards us addressing that that has been underway for the better part of a year.
Then the then ultimately the question is alright, if this it's really about the feedstock for US we're constantly assessing what we need and where we need it and what that overall footprint might look like so lots of things going on as we're thinking about it but oh, we're getting arms wrapped around it but it's a critical part of.
If you will our integrated play.
If magically we said gosh, we had an unlimited supply that would never be disrupted and we could buy down a fair price would be another assumption you'd built into it and take a look at sure. Thanks, Yeah and I appreciate it thanks, Rob you bet.
Thank you. Our next question is trying to steal share kind of five from D.A. Davidson. Your line is now open.
Thank you good morning, everyone. Good morning.
My first question is just a modeling question can you give us the profit drag from the Atlanta Pack center through the first three quarters of last year, and I guess for the full year as well.
Could you just speak up a little bit because we're having a hard time here in <unk>.
Sure I was just wondering if you could tell us what the profit impact was from the Atlanta Pack Center.
For the first three quarters of last year than for the full year.
Let us look that let's set up and they will go to your next question will look it up all your yeah.
You could you go back Okay. The second one is more theoretical if you were to forego acquisitions going forward and held exchange rates flat do you have a view of how your volumes would trend across your segments.
It's a beach I'm going to go back to say that again, so if we said exchange rate held flat.
Positions do you think that your segments are growing over not not next quarter, but going forward longer term.
Yes. The answer is yes, I really do believe that they would be growing.
And as I am just sort of thinking through a as I look at as I think about next year and what my expectation would be there is absolutely I would expect to see some a moderate organic growth.
And when I say moderate moderate organic growth and I also know that we've got some carryover in terms of acquisition sales dollars as I think about next year.
Okay, and then finally.
Thanks, Good high teens against Julie up to your question about the up year over year positive impact on operating profit from exiting the Atlanta Pack center, that's about $7 million of year over year benefit and just as a reminder, that falls into the other category on our operating profit.
Rich.
Okay. Thanks, Julie and then my last question is with respect to be the summit sustainability somewhat you hosted the September well attended and are there any highlights that you'd like to share with us.
Yeah.
There were 170 people that attended.
The summit it was a number of cpgs.
We also had and Geos, we had a couple of folks from government. We also had a few folks from some of the.
Packaging associations join us as well as academia.
The objective of the summit was to bring all these groups together to try to connect the dots between not just a what I'll call. The unintended consequences of making decisions on immaterial construct without thinking through what the ramifications were and that that was a.
It was the start of what I hope to be an annual event.
That will allow clemson to to carry the ball forward and bring more companies together what was the pleasant surprise that take away a number of our competitors has now ask whether they could participate.
As we move forward on that and I view that as a positive because this goes back to questions that a one of your colleagues asked how are you going to get the.
The conversation growing you can't do it as just a packaging organization you got to bring the cpgs as well as the a.
Supply side to the table in one of the folks that did talk was from Dell I'm. So I was pleased in fact I was.
It surpassed my expectations quite frankly in terms of the folks that came and the feedback that we received from a from the two days.
Great. Thank you.
Thank you.
Thank you.
Next question I'm trying to save high teens from Wells Fargo. Your line is now Ben.
Good morning, Rob Julie.
Turning to.
Oh I wanted to ask on the paper industrial converting segment.
Given some of the weakness that we're seeing across again kind of printing paper grades and impact on cores.
You guys talked about mostly focusing on optimizing that.
Segment.
Can you talk at all in terms of your matching your supply and demand.
On the you RB side and or on the converting side.
You guys have been kind of quietly doing that along the way, but anything that stands out to you.
Kind of.
You talked a little bit sell that operating rates are kind of mid mid nineties.
Any thoughts there.
Sure I would tell you that on the Orbi side, we're continuing to raw run very strong and we're seeing prices for the most part hold up what what has changed as any contractual arrangements. We have those are the ones we've made the adjustments to but.
We were running in the 98% range in the U. RBC side, where we clearly as and with that said I want to make sure that I understand your question gave appropriately so if I Miss it just come back and make sure that I answer it.
As it relates to.
Volume in terms of tons, obviously with the acquisition of the Correnso.
Business, we picked up a nother mill, which.
Im very pleased with the asset that we have there I think it allows us to take a look at our network through a different lens.
And that was part of.
Part of the process that we started back in 2017, when we said, we're going to invest $68 million into our paper network here in North America to invest in our best machines and.
If and when the situation arose that we don't be surprised if there was some curtailment of some of the.
The high cost machines.
As we move forward. So our objective is to make sure first and foremost that we have the best and the lowest cost supply of paper into.
Our converting side, the tube and core side and as well as into our post business in the protective solutions business as well as into.
Our consumer side of the business for the cans.
And so that's what our real focus is with respect to the paper network.
That I assume you're very helpful.
It did Ron absolutely.
I wanted to switch gears to the cost control figure that you threw out I think you said you upsized it to.
20 to 25 million.
For this year and I was curious if you could comment at all how much of that might be I'll call it structural or permanent.
Are you know.
Things do come back in 2020 or the volume trajectory improves.
How much that might come back next year.
The expectation is none of that is going to come back next year. This this is focus about permanent takeout.
And it's a it's a broad spectrum of things I would also tell you that we're investing in some technology. So that it allows us to address that the cost structure of the company further down the road in a more.
Sustainable way.
And I bore you with all kinds of details, but a the devil isn't the detail.
And working through all those things. So we we this is.
This is just something that quite frankly is the course of what we as a management team need to do and have been doing we saw the a storm clouds coming.
Early in the year, we see we started the process beginning in late January and set out some targets.
Our folks have come back with a lot more than what we had initially set out so we've got a game plan going forward.
We do expect to see some some of that impact the fourth quarter as well as we continue through the balance of the year. So initially our target was $15 million range bumped it up to 20.
I'm very confident that we should be able to achieve 25.
Excellent. Thank you.
Thank you. Our next question is from Brian Maguire from Goldman Sachs. Your line is now Ben.
Hi, Good morning, Rob Julie.
Just wanted to follow up on an earlier one on the some of the Orbi production data I think you talked about being in that high Ninetys operating rate just wonder if it could.
To help reconcile that versus some of the industry data, we get it seems to reflect maybe more like low nineties.
And just wondering kind of comment on your own backlogs there. It sounds like there is still pretty high by the industry data again is maybe indicate any weaken a little bit through the year.
Maybe directionally are things still looking is strong in there as they as they were when the or started.
Yeah, I would tell you that right now based on what we see a we expect our system to be full from line of sight that I see a certainly through a through November where quite frankly, Brian where where if you will if I think about our paper system, where I see some of the challenges is really our number 10 machine or medium mill.
She.
Where where we have been challenged with some volume, which you would expect given where linerboard isn't box demand is et cetera, but.
Right now from what we have line of sight of were Oh, we see the volume continuing to be fairly strong and our mill system.
Certainly here in North America, as well as in Europe .
Through through the through the fourth quarter as best we can do as best we can see it today.
Okay.
And then just switching gears just a question on the portfolio.
You have actually laid out some aggressive M&A targets for 2020.
Which seems like they'll probably be just be hard hit given the environment and deal multiples being high in general just wonder if you could comment on.
Those valuations that you're seeing in general if they've come down any and then maybe a little bit more specifically.
Yeah, obviously, obviously you operate and recycle rate and you are b of the medium machine.
Yes, I think there's some CRB assets that might come available just wondered if you would have any interesting getting into that grade. If you think there could be any synergies by having.
Boxboard grades as part of the portfolio.
Yeah, no to the CRB.
Our focus is really on are driving around the consumer side as we've talked about we've talked about doing some bolt ons as it related to our paper assets, where it makes good sense as evidenced by context as evidenced by Correnso.
And then growing out on the on the consumer side, we've talked of what we want to do in that space clearly as you take a look at multiples I think the the expectations quite frankly.
[noise] dependent upon clearly on markets bus specificity, but if.
If I, if I think about where where some of things are right now.
I see a slight.
A slight movement I think the private the private side has not yet caught up with the public multiples, but I think you're starting to see some reality said in so.
That's my view of the World, we'll see whether or not that that ultimately comes to fruition.
Okay, just less less I probably for Julie.
Just with the sort of slight tweak down in the Sky just wondering how.
How we keep the free cash flow guided flat is that just a little bit more working capital sounds like just general destocking into year end.
Yes, we do a continued to have a target to have our working capital of the flat.
From year end 18 into your 19, if not slightly below that so we have our teams working very hard across the working capital spectrum.
You know I mentioned as well, we will have a a 10 million dollar estimated cash tax benefit in the fourth quarter still related to the pension voluntary pension contributions we made this year.
And you know kind of some other kind of nits and nats that are unique positive cash flow items in the fourth quarter. So.
You know, we still have line of sight to that to the cash flow I mean again, our fourth quarter is generally you know kind of trends down seasonality wise anyway. So we always.
Had call it slightly lower net income in our cash flow model for Q4, So there's really not a dramatic change under but again we have these other.
Levers and opportunities that I've mentioned to help us get to the the full year guidance.
Okay. Thanks very much.
Thank you Brian .
Thank you. Our next question that's from Mark Wilde from Bank of Montreal headline is now Ben.
Good morning, Rob Julie running.
Come back to the logistic cost take out.
The 20 to 25 million dollar number first of all is that a actual number for this year is on a run rate number.
That is that is an actual number for this year.
Okay, and it's all of that Rob.
[noise] SGN, a or is that kind of in SGN <unk> and other areas.
It's a.
Markets, mostly in SGN, a there is some in other areas, but it's mostly in this unit.
And because you had it like a huge jump this quarter and.
The sort of the positive benefit in SGN I, just wondered if you could give us any sense on a year over year basis, Julie what that might look like in the fourth quarter.
You know we are expecting a kind of the quarterly run rate for S. DNA to be similar in the fourth quarter as it wasn't a third quarter.
Okay. All right. That's that's very helpful.
I Wonder just turned to kind of consumer plastic packaging right now just.
Are you seeing any impact from kind of all of the negative pressure that we're seeing kind of around single serve plastics is is that having any effect anywhere in your portfolio.
Mark.
The two places.
One we talked about and that goes back to late last year.
When we talked about a customer.
Who took.
One product line or product line.
Out of plastic and put it into a fiber bowl here in North America.
And the only other one that I can think of in terms of having a direct impact on us.
Has been in Europe with her amazingly enough.
A European took a 100% recyclable plastic construct put it into a fiber poly coded material that is not recyclable.
So don't know what the outcome of wide is.
Or is that will happen in Europe do we do we get calls.
In Europe more so than in the U.S. in terms of talking about plastic and find fiber.
Yes, but when you think about the product the portfolio. We have we're predominantly in the in Europe . We are predominantly in plastic on the industrial side. So we're dealing with heavy duty type product, that's fiber isn't going to be able to participate in.
And then we also in the medical space with the product that's going into the operating theatre, so that's not going to be a changeover.
So that's that's where we're seeing it the most pronounced.
Would be there in Europe , and so while while we had conversations early on I think what we're now starting to see in light of what we did at the summit and what others are doing I think people are starting to recognize there's a lot more to this issue than simply saying we must stop the other thing I would say too.
You is the vast majority the vast majority of our products in both Flexibles and.
And in rigid plastics are not single use.
Yeah, Rob just kind of follow on there are you seeing any kind of opportunities to say take that.
Composite can into some markets that may move away from plastic.
Yes, we are.
Okay.
That's good.
Finally, I wondered if you could just kind of update us on prospective portfolio moves because.
Not only talk to us about sort of.
Industrial and growing and consumer but.
You've also got some pieces of the portfolio that you've hinted might be.
Disposals candidates at some point so could you just kind of update us on on where you're at from that perspective.
Sure. We're mark as you know, we're always looking at the portfolio to address what makes the most sense for the long term for the company and that will continue.
As we look at or anything and everything within side the portfolio, but we also have been pretty clear in terms of where we said we want to invest that is in the paper side in the plastics rigid plastics, specifically in thermoforming and into specific markets.
As well as in the flexible space and in the flexible space again into specific markets.
That's about all that I'll comment on at this time.
Okay, Alright sounds good good luck in the fourth quarter and into next year.
Thank you Mark.
Thank you.
Ladies and gentlemen, if you have a question. Please press star isn't a number one key.
Touchtone telephone.
And our next question from Salvatore T. I know from vertical research. Your line is now open.
Hi, Rob Chilean Roger Thanks for taking my question some late.
The coal.
Sure. It's 12 I wanted to clarify we'll beat them built on a Adam's question on pricing pressure in the paper industrial business.
More specifically you know you had your price goes that was negative here and here. Despite the main.
Coast ULCC being down significantly since last summer so I couldn't get elaborate there will be to what is the pricing pressure you see makes us all the contractual pass throughs and you know what specific end markets are contributing vats and how should we think about it from the next few quarters.
Sure. This Julie I'll take that I think Rob's already mentioned that in our Corrugating area with the number 10 machine we are seeing.
Market weakness in that area, so that that had a contribution to that negative price cost for operating profit and and as well in the industrial area. We've we've kinda. We've just had in the four in the third quarter, some timing of contractual resets, where we are.
No kind of catching up to some of that the market dynamics around the lower as cc versus the cost of operating in some of that Rob mentioned as well so.
Two main drivers there and industrial one being the of some weakness in the corrugating market and the other being timing of some contractual reset and various parts of the industrial segment.
Perfect and just as a follow up thought that was just wondering you know you mentioned, reflecting one third of the business things is contractually to the bending chip index ride for your B and you sort of some Steve if you can provide now or perhaps can follow up later with regard to what would happen. If we see the seem Dick's repriced by you know.
$10 or any other amount you would like to provide.
So this is Roger Oh, you know as we've talked we generally looking at the portfolio because we have a mix of of contracts that are either tied to 10 bending ship or ULCC or.
Generally speaking, we give you know up plus 10 or minus 10 has general direction of a plus or minus $1 million EBIT impact as you see movements in raw material.
Perfect. Thank you very much.
Okay. So.
Thank you.
Next question from Cape High teens, some wells Fargo. Your line is now open.
Thanks for taking the follow up real quick on a protective packaging segment.
In growth and temperature assured products, one I know that tends to follow sometimes certain treatment after the approvals or what have you but.
One do you foresee continued growth in that.
Area and then to do you have the capacity to accommodate that.
Yeah I gave the the answer to specifically your question around service safe.
We broadened out if you will the markets that we're participating in so we're seeing growth part of the growth is coming from.
Clearly dealing with the biologics that a that are that were serving.
But we've also broaden out into some other markets, where that's starting to grow fairly nicely.
And that's what's driving it and do we have the capacity. The answer is yes, we have the capacity to continue to serve and continue to grow that business.
Thank you good luck.
Thank you.
Thank you. Our next question is from Adam Josephson from Keybanc. Your line is now open.
Thanks, So much for taking my follow up Rob just one more on the inventory issue and your discussion about if I know you said at the beginning of each quarter you see.
Surge in orders and towards the end do you see just the opposite so is it really kind of just that that you're talking about for December or is there something more to it than that because I think dogen was the one who said he thought general inventories have been run down but it seems like thats been the case all year. So I don't know why now would be.
Really any different than what's been a case earlier this year.
Yes, the only thing that a that I would say is.
During the year end for a lot of our customers they tend to manage to is getting to certain metrics.
The company that they serve and so that is a behavior that we typically see in the fourth quarter and that's why we also see that if you will that seasonal adjustment that I referenced earlier. So that's that's the driver in our thinking right now.
Right. Okay. So you don't see customer inventories being just abnormally low at the moment here, just you're expecting them to run them down at the end of the quarter as they've been doing throughout the year basically that is that is what we believed to be true. Yes. So yes, no. Thanks, Robert just a couple others you mentioned I think mark asked about.
Plastic losing any talks about the fiber of all the fiber poly coda material, that's not recyclable in does that and I know one of your competitors just talked about gaining share and paper cups and paper bowls, but many of that stuff has.
Poly coated material does that seem to be sustainable no pun intended not environmentally friendly, but a sustainable shift if the product costs more and it's not recyclable anyway, I, just don't Hawaii, Cpgs would increasingly gravitate to that kind of product.
Well again, you've talked into this is one man's opinion.
It is such a highly emotionally charged issue as it relates to the polymer constructs and I think part of it is about educating.
Our consumers and allowing them to make a a much better informed decision, but it is a very highly emotional fees. Ultimately if we're really talking about true sustainability and recycling. We've got to look at all of that so I think we're just looking at a portion of it I think the other thing that you didn't ask the key.
Question, but the other pieces as we look at a material cost for capturing all the material will we see a rise in recycled.
If you will materials would exceed the cost of version materials and I would not be surprised if we don't see that in fact, we are seeing that already.
I really appreciate or I'm, just one last one on on.
Plastic see some of your large recent acquisitions have been in companies that make plastic packaging for fresh products in California, Florida, and obviously there have been unusual weather patterns really since you made those deals and many companies not just in the U.S., but elsewhere experiencing abnormal weather patterns how's that.
Factoring your outlook for that this business as you acquired and and how you're managing managing them.
Yeah, Great question.
Clearly there was there was some self inflicted pain, but the weather definitely had a play on it.
You know the way we look at this business is a little bit differently. We don't look at as manufacturing business. It's a service business that happens to manufacture and it's a function of.
Just a having great data to support our customers. So we're doing a lot more work with respect to connecting to those customers to drive more predictive analytics.
Thats a journey that we've started and we're working hard towards doing that and that's where the value is having the product as and when needed and we stumbled a little bit when we as I mentioned earlier shutter the facility in California fourth quarter moved the number of machines to three different sites, along with the tooling and the ramp of Didnt goes.
Well as we'd hope as we look forward I would tell you that.
The acquisitions in terms of the growth opportunities are right in line with what we what we thought they would be the issue is making sure that we capture all of that as appropriately as we can.
Thanks, So much Rob best of luck.
You bet. Thank you.
Thank you at this time I'm showing no further questions I want let's turn the call back over to Rochester Brown for closing remarks.
Well. Thank you Gigi Sunoco, we'll be hosting this annual breakfast meeting with the financial community on Friday December 620, 19 in the billiard room at the New York Palace Hotel at 455 Madison Avenue.
As is our custom breakfast will be serve starting a seventhirty am and presentations will begin just before eight am Rob and other members of our executive leadership team will provide strategy and business updates and Julie will provide a first look at our financial targets for 2020.
Of course, there'll be plenty of time for your questions and as always we'll be very mindful of your time and should be completed around 938, yeah.
Invitations for the event will be going out this afternoon and those interested attending should contact the company through my assistant Robin Hyder or by phone or by email or those who cannot attend of course in person can join us at the meeting via our webcast at Sunoco Dot com under the Investor Relations section.
And as always thank you again for joining US today. We appreciate your interest in the company and as always if you have any further questions. Please don't hesitate to contact us. Thank you very much.
Ladies and gentlemen. This concludes today's conference call. Thank you for participation you may now disconnect.