Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2019, Sonoco earnings Conference call.
At this time, all participant lines I want to listen only mode.
The speakers presentation, there will be a question and answer session.
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I would now like the hand, the conference over to your speaker today, well just from Vice President of Investor Relations. Please go ahead.
Thank you Sarah and good morning, everyone and welcome to Sunocos Investor Conference call to discuss our fourth quarter and full year 2019 financial results.
Joining me today or is Howard Coker, President Chief Executive Officer, Roger for Executive Vice President and Julie Albrecht, Vice President and Chief Financial Officer.
News release reporting our financial results was issued before the market open today and is available on the Investor Relations website of Sunoco Dot com.
In addition, we were reference a presentation on our fourth quarter results, which also was 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.
Furthermore, today's presentation includes the use of non-GAAP financial measures, which management believes provides useful information to investors about the companys financial condition and results of operation.
Further information about the companies use of non-GAAP financial measures, including definitions as well as reconciliations of those measures. So the most closely related GAAP measure is also available in the Investor Relations section of our website.
Now with that I'd like to turn it over to Howard Coker.
Roger and good morning, everyone. Let me start the plane frankly, how humbled by him to speak to the day of Sonocos New presidency.
Well, we get into.
To the business side of things I didn't want to first thank Rob TD. All these accomplishments 20 year career with America, but leaving the company with a strong leadership team and businesses that are well positioned for success and.
We certainly wish him the very best in his retirement.
That's for me I couldn't be more excited about our future I'm honored to have this opportunity to walk along side or more than 23000 teammates globally as we embark on our next chapter together.
For those of you who were not familiar with me I've spent my entire 35 year career working across the globe a wide range of our consumer and industrial businesses for the past decade about a member of the company's Executive Committee I'm, taking part in helping shape our strategy.
Hi, I'm a believer the great things the business for most of the time in life or not done by one person.
There are ci by a team.
So not go hasn't experienced leadership group that is focused and committed to ensuring a vibrant future.
A recent success has not been tied to any single individual but the contribution to our global thing because of that I don't expect a lot of strategy changes in the near future certainly over time, we'll make some adjustments that they will be based on a shared vision for what is best for our customer.
Our shareholders and our people.
I do expect you'll see more urgency around dealing with some of the the issues we have been discussing over time.
You will find that will rely on mortality teammates to help drive our businesses.
That's why I'm pleased to announce elevation Roger for two executive Vice President, where he will be responsible for all our industrial and consumer operations globally, including our display and packaging and protective solutions segments.
Address deep consumer and industrial experiments, having served the global leadership positions across every part of organization. During his 30 40 years of servers.
Roger as well respected throughout the company.
As well as my customers and industry peers, and he will be and valuable asset to me and our entire team and starting today I've asked Roger to join US during our conference calls. So please don't hesitate to asking the questions.
Now before I turn the call over to Jolie, Let me make.
Make you a commitment.
Promise you that always be honest and transparent as I can I want you to feel free to ask questions provide me your inside of course any feedback.
We may have differing views from time to time, but I hope, we can always agree to listen to each other.
That Joe that would you. Please review our fourth quarter results in full year I'll then come back at the end for some additional false and then your book.
Sure. Thanks, Howard I'll begin on slide three where you see that earlier. This morning, we reported fourth quarter earnings per share on a GAAP basis, a 44 cents.
And base earnings of 75 cents per share, which is the midpoint of the guidance range that we provided last Monday.
74 to 76 cents per share.
This 75 cents a base Es is below our 84 cents of S and the same period of last year, which that period did benefit from several unique items, including six cents of insurance proceeds related to hurricane warrants and five cents due at due to a notably lower effective tax rate.
Overall, we're pleased to have delivered solid fourth quarter operational results in an unpredictable global economic environment.
In terms of the 31 cents difference between base and GAAP EPS.
10 cents was due to restructuring activities.
11 cents was from long term asset impairment charges.
Four cents relates to non operating pension cost.
Three cents, what's from M&A expenses.
And another three cents relates to various non based tax item.
I'll I'll also highlight on this slide that we delivered $3.53 a base earnings per share to shareholders and the full year 2019.
This reflects a solid 4.7% growth over the prior year and of course is in addition to our strong track record of paying dividends to our shareholders.
Moving to the based income statement on slide four and starting with the top line you see that sales were $1.309 billion down 47 million from the prior year period.
Review more details about our key sales drivers on the sales bridge and just a moment.
Gross profit was $247 million 7 million below the prior year quarter as gross profit as a percent sales was solid at 18.9%.
Our S. <unk> expenses of $133 million were lower year over year by 5 million driven by cost reductions across our business.
Oh. This result in operating profit of $114 million, which was $2 million below last year.
Our fourth quarter operating profit as a percent of sale was 8.7% of 15 basis point improvement over the prior year period.
And I'll review the key drivers to operating profit that bridge and a few minutes.
Income taxes, a $23 million were $5 million higher than last year, driven by higher effective tax rate.
Fourth quarter 2019, effective tax rate of 23.2% was higher than the prior year quarter, primarily due to favorable interpretations of the guilty tax calculation that we recognized in the fourth quarter of last year.
Now moving down to net income our fourth quarter 2019 based earnings were $76 million or again 75 cents per share.
I'll also highlight that our base opened doors as a percentage of sales was 13.4% in the fourth quarter. This is a 30 basis point improvement over last year's fourth quarter.
If we exclude the $7 million of unique insurance proceeds that we received last year. Our based open door would have increased by almost 100 basis points.
And you'll find our full year base income statement in the appendix on slide 15.
There, you'll see that our 2019 full year base open as a percent of sales was 14.2% a solid 70 basis point increase over 2018.
So looking at the sales bridge on slide five you see volume was lower by $33 million or 2.5% for the company as a whole.
Consumer packaging volume was down $11 million or 1.9%.
Primarily driven by North American paperboard containers, which had a larger than expected drop off in volume in December due mostly to year end customer destocking.
Fourth quarter volumes in both our flexible and plastics business were relatively flat year over year and I'll note that in both of these businesses, we had sequential quarterly improvement in the volume trends as many of the changes that we're making in these businesses are starting to take hold.
Display and packaging was down $6 million or 4.5% driven by decreases in our retail security business volume.
Volume in paper and industrial converted products was down $9 million or 1.9% due to weakening paper demand across the globe.
Our global tube and core volumes were effectively flat with solid growth in Asia, Latin America, and Brazil, offset by slightly weaker demand in both North America in Europe.
And finally sales volume in protective solutions was down $7 million or just over 5% with a continued trend of weak volume in automotive and consumer packaging, but very strong demand for temperature assured packaging.
In fact, our Thermosafe business had low double digit volume growth for the full year of 2019 and continues to have a strong funnel of new business opportunities.
Moving over to price you see the selling prices were lower year over year by $21 million driven by lower raw material costs, partially offset by our work to better realized the value of the product and services, we provide to our customers.
Moving to acquisitions, you see an impact on the top line of $19 million, which was solely driven by the Correnso acquisition in early August as kind of text reached its 12 month anniversary at the beginning of the fourth quarter.
And finally other was negative by $12 million driven by a 10 million dollar negative impact from foreign exchange translation as well as the exit of a forming films operation in our Flexibles business and all this was slightly offset by an increase in low margin pack center volume.
And while I will cover the full year sales and operating bridges and these prepared comments. We have included this information on this slide and the next slide for your reference.
So moving to the operating profit bridge on slide six and starting with volume mix.
Lower sales volume across all segments was the primary driver to the $12 million negative impact on operating profit. Although there was some impact from negative mix in our North American paper business.
Shifting over to price cost, we had $5 million of unfavorable price cost in the fourth quarter, driven mostly by our industrial segment, but with some offset from a positive price cost impact in our consumer business.
As usual, there's a slide in the appendix that shows recent Oh cc price trends and you'll see there that southeast Oh see prices averaged $35 per ton in the fourth quarter of 2019 compared to an $88 per ton average in the prior years fourth quarter.
I'll note that although some of our customer contracts did reset at this lower level in 2019, we have been successful and implementing price increases on noncontract business, along with having a good mix of industrial contract with pricing that is based on paper indices, such as 10 been.
Being chip, which remain flat year over year.
Next you see that the impact of acquisitions added $4 million to operating profit this quarter and that's again related to our Correnso acquisition.
Continuing to total productivity you see that our productivity contribution was positive year over year by $16 million and this was spread across the segment.
The main overall contributors to this positive impact where procurement and fix cost productivity.
And finally, the change in the other category was unfavorable by $5 million, primarily driven by the nonrecurring insurance recovery in the fourth quarter of last year again related to Hurricane Florence.
Moving to slide seven you'll find our segment analysis, where you see that consumer packaging sales were down 2.5% due mostly to softer demand, but also our decision to exit the flexibles forming films operation. This was all somewhat offset by price improvement.
Operating profits in the consumer segment were higher by 6.6% and operating margin was 8.3% a solid 70 basis point improvement over last year's fourth quarter.
Display and packaging sales were down 3.2% due to lower retail security volume and their operating profit decreased by $2 million to 6 million, an operating margin declined to 2% to 4.7% driven by the volume decreased and the related operational de leveraging.
Our industrial segment sales were down 4.1% driven by lower demand and lower prices those partially offset by the Correnso acquisition.
Operating profit for industrial was down 10.5% driven by the lower demand and negative price cost all partially offset with strong productivity gains and again the Correnso addition.
The industrial segments operating profit was 10.2 per cent for the fourth quarter of 2019 down slightly from 10.9% in the fourth quarter of 2018.
And finally protective solutions sales were down 5.5%, but operating profit surged by 34% due to solid productivity as well as a favorable mix of business.
This segment's margin of 9% improved by 270 basis point from the prior year quarter.
So for total Sunoco, our fourth quarter 2019 sales were down by 3.4% well operating profit declined by 1.9%.
Oh, resulting in a 15 basis point improvement in company wide operating margin to 8.7%.
You'll find our full year segment analysis on page 16 in the appendix.
So moving to slide eight you see our guidance for the first quarter and full year of 2020 per base earnings well, we're projecting to earn between 83 and 89 cents per share for the first quarter compared to 85 cents in the same period of 2019.
Our Q1 projection reflects the benefit of both the Correnso Antech acquisitions, which were made in 2019 offset by a higher effective tax rate and weakening global paper market as well as the in the impact of the Corona virus in Asia.
I'll add that our full year guidance reflects a five cents reduction in base and projected base S. From the guidance that we provided at our analyst day in December.
The key drivers to this reduction in our current estimates for the Corona virus impact to our operation as well as recent movement in receive medium price index.
So turning to cash flow on slide nine you see that our operating cash flow for 2019 was $426 million compared with four or 590 million in 2018.
This 164 million dollar decrease was specifically driven by the 165 million dollar after tax cash impact the voluntary U.S. pension contribution that we made in 2019.
These pension contributions totaled $200 million and there was a related cash tax benefit of approximately 35 million.
Moving down to net capital expenditures.
Our net capex spending of $181 million in 2019 was $13 million higher than last year or in 2018. The two main drivers to this year over year change were $3 million of higher growth capex spend and $9 million of lower asset sale.
Proceed.
As a reminder, 2018 asset sale proceeds included $17 million related to the Atlanta, Pacsun or exit at the end of the Q3 of 2018.
So after 2019 net capital spending and paying dividends of $170 million, our free cash flow was 74 million.
Excluding the impact of the voluntary pension contribution our 2019 free cash flow would've been a very strong $239 million.
At the bottom of the slide you see our cash flow guidance for 2020, which is unchanged from what we discussed in December.
We continue to expect operating cash flow to be in the range of $625 million to $645 million and free cash flow to be between 250 and $270 million.
The midpoint of our free cash flow guidance.
Range reflects almost 9% growth over our adjusted 2019 cash flow of 239 million.
And as a reminder, this year's operating cash flow and free cash flow guidance do not include the potential contribution into our U.S. pension plan related to the termination and Annuitization process.
Our current best estimate continues to be a country based contribution between 125 and $175 million before the related tax benefit with timing expected to be late this year.
Now on slide 10, you see that our balance sheet and our liquidity position remained very strong.
Our fourth quarter 2019, consolidated cash balance of $145 million reflects a 25 million dollar increase from our yearend cash balance at 2018.
Now looking at our debt balances our consolidated debt was approximately $1.7 billion at the end of the fourth quarter, an increase of almost 300 million from the end of 2018.
The main drivers to this higher debt balance, where the U.S. pension contribution as well as the acquisitions of Correnso INTECH, all partially offset with our strong free cash flow generation.
I'll also highlight that our yearend 2019 balance sheet reflects the adoption of the new lease accounting standard as well as the addition of kinda text and tech.
That concludes my review of our fourth quarter financial results and so now I'll turn it back over to Howard.
Thanks, Julien let me make a few comments from key issues were focused so starting with the industrial side of our both <unk>.
We're very pleased power global paper to scores in constant adjusted to slowing global manufacturing activity.
Able to produce strong sales and operating profit and 29 teen.
Margins improving slightly to 11.1%.
Most of them proven sales and earnings Wars, all of the 2018 acquisition of contacts and the August 29, <unk> acquisition of friends are holding from Wisconsin.
Integration of both of these businesses.
Has gone extremely well and they will continue to be contributors in 2020.
Back in December to New York Analyst meeting I gave you an update regarding our North American paper asset optimization initiative, where we spent about $68 million over the past several years to modernize our best Mills. This program has led to improved margins and increased cash generation.
We completed our last project in January and we're clearly seeing the benefits of those investments.
When we said we started this optimization effort.
That we would likely reduce rationalize capacity from our lower performing higher cost machines as market conditions dictate.
We left so we've taken steps to reduce approximately 50000 tons view RB production from our Canadian mills and replace that volume with recycled pulp, which has been shipped to China to meet their need for cost effective.
High quality recycled fiber.
In addition to this action.
Back to take out additional you are being capacity in the first half of the year and leverage customer orders across our remaining North American system.
Now shifting gears, Julie mentioned, we're making a slight adjustment to our 2020 base earnings guidance due to the current impact on operations in China for the crop from the Parana virus and the recent price adjustments corrugated medium.
Snuck up 10 operations in China, mostly located along the coast, where we where we produce you Orbi foods course and paperboard can.
We have 835 teammates working in a facilities and our total sales represent only about 2.5% or roughly $829 million right.
By fully to the best run knowledge, none of our associates for their families having second by the virus.
Like most manufacturers in China.
Our operations.
Remain down for the extended lunar new year holiday through the first of this week since our employees are primarily located near operations. We have been able to restart most facilities are slowly beginning to work on back orders, we have been coordinating with local authorities and carrying out virus protection safety measures, including having facial.
Mask available for our associates.
As you know conditions are evolving.
I'll provide you updates as appropriate.
As far as corrugated medium, we continue to face demand and pricing pressures on our number 10 machine, which is embedded in our manufacturing complex and horse.
The successful and keeping the machine fully loaded bus supplementing production again with recycled pulp as we explore.
We have a working this issue extensively including bringing in some outside experts and we expect to be in a position to report on a long term solution for this machine and the next few months.
Now I'll speak for a moment about our consumer related businesses.
I told you we face some challenges and 29 thing for customers order patterns became unpredictable responded to market uncertainties.
Still a consumer packaging side and that was able to slightly improve earnings and 29 same wallet shaving almost 10% offer anymore.
Our global Paperboard can business had a strong year and made progress in improving our flexible the flexible packaging businesses as well.
Unfortunately, our plastic business continued to struggle, particularly in our parameters for industrial operations.
Fathers my leadership changes in both flexible packaging and rigid plastics.
I'm restructured our consumer marketing and technology organization <unk> more direct accountability.
The drive improvement in organic.
We're also making investments in new machinery in tooling to improve quality and operating performance and our prime in the store business.
We saw improvement our flexibles business in the fourth quarter, and we're optimistic we'll be able to improve operating performance in both of these businesses throughout 2020.
We're extremely pleased with our yearend acquisition of Tech, which will help drive our strategy to further grow our capabilities and the fast growing and higher margin medical packaging space.
We have initiated integration efforts and last week, we hosted the <unk> leadership team I'm hopeful we continue the identified synergies and growth opportunities together and I might add detect leadership team is excited to be a part of the smoke a family.
Finally, I'd be remiss if it did not mention all growing sustainability efforts to the launch of our new and Bowers.
Portfolio and more sustainable products.
We have many exciting development developments, including production of our trellis fiber bowls, which will be used for final kitchen, and the launch of new frozen meals.
Going into a whole foods some spots in April.
It was also plays a smoker was named for the second consecutive year to Barents hundred most sustainable companies in America.
And our former safe temperature assured business had a record year on both sales and earnings of 2019.
Expected launched two new product categories. This year.
Former safe has also developed more sustainable temperature assured shipper, which has made from a paperboard hansbrough or ways and as 100% curbside recyclable behind the lever medical products. The milk is.
Let me conclude by addressing what we see answering them before for business activity in January appears to be slightly better than our expectations coming off a pronounced year on slowdown. However, as we've said for the past several quarters or custom order patterns have been choppy. So it's difficult to see if this is a change.
And longer term trends.
Well, China is a small part of our global business. We will do remain concerned about parana virus I'm a powerful empaque. It could have not only on Asia, but also on the global economy.
We're already hearing for many of our customers asking questions about supply chain concerns.
Most of our products produced in China, and and other Asian countries are consumed in the local markets that said, we have proactively developed an internet based micro site to assist our associates and providing updated information as request.
2020 start to new decades, and a new year with new opportunities certainly there'll be some more of a challenge.
But there will also opportunities that should allow us to drive steady growth in margins earnings and free cash flow.
Continuing to return value to our shareholders.
As I mentioned I don't see many changes in our current strategy, which is focused on building our businesses to meet the market changes consumers are driving.
Which in turn drives the business of our customers.
Finally, our strategy based on market dynamics, and continuing to focus on driving improvement in our key industrial and consumer businesses. We believe we are differentiating ourselves from our competitors and <unk> and I believe defining our next decade.
Now with that operator would you. Please review the question and answer for C.
Certainly.
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Our first question comes from the line of George Staphos with Bank of America. Your line is now open.
Thanks, Operator, hi, everyone. Good morning.
Howard and water congratulations on your new responsibilities and congratulations as well to Rob on his retirement I wanted to ask a couple of near term question. Then a couple of longer term questions quickly I'll turn it over you know first as you enter the first quarter what are your expectations for price cost.
The major business is my guess is gonna be down an aggregate because of what's happened in medium, but if you could provide a bit more color maybe.
But that based on what you're saying with some of your contract resets et cetera, and then the other short term question on volume.
You know, it's obviously as you mentioned been kind of a choppy period for Sunoco last a couple of years, you're up against some easy comparisons on a recall and your volume was down.
Is there any additional information you can provide in terms of how volumes trended versus your expectations and why we were down.
This quarter off easy comp thanks.
Okay Fine Georgia.
Your opening comments.
Thanks.
So on previous calls for Q1, Yeah, we expect that we'll see some downward from.
As it relates as you know it's.
Particularly on the corrugated medium recent 15 dollar and Todd.
Obviously that was reflected in the commentary.
Forecast.
They do fill some pressure.
As it relates to that.
For the same time are saying.
Positive outlooks as it relates to.
Oh rather than.
Actually dropping.
Right.
We'll continue to.
That's a.
The worse I should say stay flat, but enough.
The positive for us is as far as volume trends.
I would say when I left the others.
In here as well, but I'd say is coming from a sequential basis, we feel pretty good about.
That's true.
As the kind of go through the different sectors.
Julie commented about the somewhat of a surprise of the de stocking that we saw only can doesn't.
Anytime we saw.
The sequential basis that's classes.
Really remain.
Actually year over year.
Hmm.
And flexible.
Lower but the run rate as much better so on the consumer side of thing.
The changes that Roger is taken.
Last half of this.
Here is really started to show and.
Good.
<unk>.
Okay.
Yeah, Hi, George I'll, just add that as Howard said, we made a number of changes last year structural and process changes, they're taking hold so we look at the Julie mentioned the fourth quarter. You know we were actually pleased.
Ah flat volumes in both rigid plastics in Flexibles listed third quarter in a row, where we saw improvement in those two growth businesses.
We expect that trend to continue into the first quarter and I think as you look at the year on year comparison 20.
The second quarters, where we really get into.
I would call all the easier comparisons.
And then I think the fix on the perimeter store plastics business that we've been implementing over the last few quarters.
Rebuilding equipment and tooling on the West Coast <unk> plastics business.
Isn't flowing through through the second half of last year that'll continue into the first two courses. This year. So we see sequential improvement.
There as well I think I'd give you a little bit more flavor on volumes.
Okay.
Oh go ahead.
That's a a cautiously optimistic.
Yes.
Please.
Okay forget you know what I'll turn it over I'll come back thanks very much.
Our next question from the line of Ghansham Panjabi.
With Baird. Your line is now open.
Yes, good morning, and congrats to you Howard and a Rogers well best wishes for the future.
I guess first off on on the paper segment, if you separate out the impact from the insurance recovery looks like operating profit was more or less flat in Fourq you you every year.
How should we think about operating profit specific to that segment for 2020.
The corrugated pricing will be a negative variance what are the positive offsets in the second floor for 24.
Well, that's partly as a went through the <unk> the completion of the names project.
Three year old initiatives that are.
We finished the last of that $68 million project a in fact in January the whole point behind that investment was to take out.
Oh, lower coal smells and to be able to.
Improve our overall supply chain Mccall's perspective.
So we see that as being a nice pick up yeah, we've talked about Firenzas, Oh, and the great Onboarding that we've seen there and the impact it had in the fourth quarter, but we have yet not done with friends and take advantage of its low cost position. So as we complete now now this week.
Now within our legacy mill not work.
It's a much improved cost structures, you've got friends, who added through that and now we're in the process of a rationalization and making sure that those volumes and up in the most local so.
Mills within our network. So we feel very good about the profit profile going forward not perspective, nothing I'd note is that last year, a particularly through the first three quarters. The year, we really struggled on our recycling sector not to say that they weren't the team was not.
Actively engaged in and working to improve the situation under the current environment and what we saw in the fourth quarter was a very nice improvement from a run rate perspective, we saw it again in January.
And we see in that that will continue but what I'm, reflecting here is under the current a low cost commodity environment changing from a pay basis to.
To through a charge basis as it relates to a lot of the commodities, we've been picking up you're saying that across the total recycling sector as well. So you put all these together I feel pretty good about about the go forward.
Okay. So just to quantify based on what you just said you realize 47 million productivity 19 on a full year basis for the company. How should we think about 2020, specifically relative to that 47 million numbered how much of that will flow through the paper segment.
So do you have like on that level, yeah, well for the on at a total company perspective in 2020, we've kind of got Oh, I see a similar amount of total productivity or you know in the budget for the company and that really is spread across the segments every business works on procurement and fixed costs.
I'd you know I guess, having said that brought the comments a little bit there's a little more room for productivity improvement this year in our consumer business really specifically related to some of the operational challenges. We've had in parts of our plastics business. So I guess that manufacturing productivity as a maybe a little more weighted and our consumer business.
But you know again at a high level, though for the company, it's a pretty similar year over year a productivity improvement.
Got it thanks, so much.
Thank you. Our next question comes from the line of Adam Josephson.
With Keybanc capital markets. Your line is now open.
Thanks, Good morning, everyone and Howard and Roger Let me add my congratulations to you as well and Julian Roger Good morning.
Yep.
Howard we just one one question just on strategy I imagine not we shouldn't expect wholesale strategy changes you talked about I think more urgency and deal dealing with certain issues. I was just hoping you could expand on that comment a little bit and then just somewhat related league addressed the company's outstanding long term.
Hi, good including the 16% EBITDA margin is that something that you still think stance.
Yeah, Thanks, Yeah, and fine luxury early comments on strategy Yeah, right now we're staying the course you have a set of my commentary.
You will see some some tweaks along the way.
The I guess the biggest point as it relates to urgency.
As.
Ties to some of the topic since you've heard us talk about year on year. All one great example of that I'll use us only as an example is the number 10 situation and the volatility that is driven through the.
The through the years quite frankly.
As you all are aware it is the one machine that a this does not having integrated value to the company were exposed as it relates to what's going on on the broader.
Packaging side of the paper sector, and so that as well as it does a great example, where I expect in the next couple of months, you'll be hearing promise with a solution enhance oh that is exactly where where that a that comment was coming from on the the second comment a 16% a target absolutely I think we've made.
Hi, I'm really nice progress over the last several years.
Sequentially.
Not remains Oh, I'd like to say the bottom end of our targets, but the point is is that we are absolutely committed to growing.
Our off at the margins year on year out for the encore quarter out so that does not change and then ever board.
Thanks, Howard interested two other questions one on volume that you talked about customer order patterns, having been choppy you said activity in January I think was slightly better than your expectations on I think on the last call Rob talked about having seen some customer de stocking last year should do you think you're seeing any kind of restart.
Looking or or what would you attribute perhaps January January having been slightly better than your your expectations too if I if anything.
I'd say.
Say.
It's pretty much then relatively stable.
Oh, I guess from our our Oh my comments as it relates to better performance assortment from a bottom line perspective perspective for volume right. Now is Ah, it's just pretty much or too early to call a relative to what we've seen them last couple of months.
Sure. Thanks, Howard just my obligatory LCC question for whoever wants to deal with it obviously export LCC has surged in the last couple of months China Guy.
Proportionate percentage of their import permits in the first quarter can you just talking about what you're expecting in March and beyond with respect to export FCC and domestic RCC for that matter and if your full year LCC price forecast has changed <unk> changed at all as a result in what we saw in January and even more so in February.
Right well of course, we sold $5 a couple of weeks ago, and you're right. It has to do the export side of things Andy as of now following are some of the other particularly China, a and an Asian markets not taking mix. So that's where we're seeing the the drive a you know it's really too early for us.
The say right now we're managing through I think we will manage for successfully the five hour inquiries.
Uh huh.
[laughter], what's going on globally with a run a virus. There's just so many uncertainties, it's really tough to try to nail target to to share with you. This morning.
Sure. Thanks, so much Howard sure.
Thank you. Our next question comes from the line of Mark Wilde would be M. all capital markets. Your line is now open.
Morning, Howard Roger Congratulations on a new roles.
Uh huh.
I Wonder can we go back to the just the industrial market I think I heard Julie say that in aggregate.
Tube and core volumes were flat globally, which seems to be is my my recollection better number than we've had in a in recent quarters. So can you just confirm that maybe give us some sense of what you're seeing in terms of industrial activity.
Yeah. Mark This is Julie Yeah, you are right, our global tubes, and core volumes have been really in the other three core the three three prior quarters of 2019 kind of down more in that 4% to 5% range. So I'm. It wasn't a an improved right point or improved quarter up you know from a year over year.
Perspective, there so I don't know if Roger how or when adding more comments on that but that is that is a good observation.
Yeah. This is Roger Schrum, just kinda give me, where the where the areas. We're we're pretty much flat or in North America.
Europe was also relatively flat and then are you know we were seeing some growth in Latin America, and in Brazil, and Asia as well, so that's kind of how the.
Hello, how it worked out through the quarter.
Okay, all right that's helpful and then.
I wondered if you could just you flagged a couple times in the release the a that kinda consumer security business can we get a little bit more color on what's going on there does that simply kind of a part of that a plastics back last issue and that's why you're bringing in some of these paper based alternatives now.
Yeah. That's got no. It is not related thing as it relates to sustainability that type of a blade Roger It's basically we had one customer that yeah. We had one customer mark excuse me in our in our retail security business that.
We lost it goes back to they exited the Fairbairn pack center into 2018, we retain some of the material into that center for sometime last year, and then that business went away in the fourth quarter. So nothing to do a sustainability just turn of that one customer.
Oh, we don't have released as you said the type of based package and we think that'd be very successful weve. There, we seem very little impact from a sustainability or <unk> point of view on that on retail security business.
Okay, and then finally, Julie just you brought down the S guidance slightly but you didn't adjusted free cash flow number at all can you up can you help us understand what the offset there might be.
Oh, Yeah, we just quite frankly didn't feel like that if yes, a change was really that material when it came to free cash flow or operating cash flow and so.
We continue to target a strong working capital performance, we've really done a really good job across the business in 18, and 19 actually I'll say generating cash flow from lower working capital in each of those years. So while our outlook officially is flat working capital in a 2020 I am.
Optimistic that we will actually once again lower our a working capital through really across the board a our inventory in a p. We continue to have opportunities. There. So really I think just again.
We didn't view that the S changes material to cash flow and again, a very bullish on working capital management.
Okay very good I'll turn it over.
Thank you. Our next question comes from the line of Debbie Jones with Deutsche Bank. Your line is now open.
Hi, Thanks for taking my question Graduations, Howard Roger I wanted to you talked about mine's a couple of times here in consumer I just wanted to touch on the guidance that you gave for the whole year in December the 4% growth in Flexibles on 45% in rigid and see if anything's changed there or in a couple years are still holding.
That is there anything about the cadence that we should think about as the year progressive.
<unk>, Yeah, I think no.
Guidance has not changed Debbie this Roger.
You will see it weighted to the second half the year as we've talked about you know some of the self help actions we've taken a rigid plastics business are taking hold that we've got more investments the making the first half the year. So you'll see that flow more into the second quarter and beyond we've seen good improvement in Flexibles, which we've already talked about and then a rigid paper enclosures.
You know the trends will be basically the same that we've seen the last four or five years, we're counting on sustainability. They give us a nice kick you know every business unit rigid paper flexibles rigid plastics as a full suite analogy environs since products.
Every customer conversation we have today involves sustainability as we said in New York, We view that has a tremendous opportunity for sunoco to be the leader and the feedback we're getting from a number of Cpcs is where we're heading that direction. So they through the self help from last year focus on sustainability improvements we made in the organization.
And we got a number of new products that we talked about as we Rob talked about last year, there were delayed and those are hitting in the first half of this year. So I think we're sticking with the guidance I think you will see it ramped down throughout the year throughout the fourth quarters.
Okay. Thank you that's helpful. On my couple of questions for Howard you said that the strategy really isn't changing but I hope that if you could just frame for us your view around the consumer business, specifically the need for M&A going forward or what's the outlook is for that that business and how you see that Greg. Thanks.
Sure.
Again, our focus is done on on ultimate consumer trends on what's been going on a you just saw the tech acquisition again that we're extremely pleased with.
And quite frankly, we see it very additive to our health care base. If you. If you look at what we're doing a in Rotterdam on a like basis for clean room activities there tier one.
We've got a a good connectivity with with the alloy business as well as with our pharmacy business. So certainly you're going to see continued a focus in that direction.
Remaining on the consumer side, certainly as we see.
Back on.
Those type of things, but everything really relate as going to relate to either one or two things I guess three things that we're focused on right now and that sustainability and we've got some things in the queue right now that that we hope to be talking to you involved and the very near future health care side of things or.
Really the main focus is right now on the industrial side, it's it's a pretty much more of the same how do we continue to add those tacos that then that leverage up our positions around.
Around the world So.
Effectively that's where we stand at this point in time.
Great. Thanks for the comments I'll turn it over.
Thank you. Our next question comes from the line of Brian Maguire with Goldman Sachs. Your line is now open.
Hi, good morning.
Within the yeah, the nickel cut to the full year guidance Wonder if you could kind of break that out between the two components you talked about the.
The pulp and paper, we price cut versus krona virus, and then specific to the accruing a virus impact are you just including kind of what you've seen to date from disruptions around the extension of the lunar new year holiday.
Or are you also kind of projecting out potentially their supply chain or and demand weakness they become a as theyll get looking forward.
Yeah.
Now we are we're looking at other krona as this will we have visibility.
So we have modeled at all and that's reflective.
Within that that nickel and of course, a as noted a number 10 corrugating.
Impact that we see going forward that we have visibility going forward, that's a way to assist roughly a 50 50 type a waiting.
To get to that a five cents area.
Okay, and then just a follow on Debbie's question on the.
Consumer business and the M&A pipeline.
You were very active there and the perimeter of the store a year or two ago seems like there's been some challenges and either integrating those businesses where their performance out of the gate.
Just wondering if that makes you a little bit more gun shy about doing acquisitions and my part of the portfolio.
And the kind of growing conversation around sustainability does that make you.
Oh, the more hesitant to do acquisitions and the plastic space in general.
Let me start we ended on sustainability, so not necessarily know, we think plastics wrong and there's always going to be on them as Roger pointed out. We then we have some really good opportunities to.
Two particularly if you add the if you if you look at our integrated basis with our recycling.
Capabilities, except for aside from the sustainability side of it that that is less or overcome song as it relates to prime or the store.
Oh, Yeah, I think it's again as Roger pointed out it's a and you guys know very well, we've got our issues had our issues.
Right now all hands on deck on let's let's turn in what we have around today.
No I feel extremely encouraged by the actions that Roger and the team have taken starting by mid last year.
And with that as Roger noted, we're starting to see some of that show and I will continue to flow through this year, but I think it would be.
Well, it's the right direction for US right now is to focus on what we have on let's turn to turn around and that's the plan well. If you have anything you know just that that we're also seeing some good wins in our flexible business Primrose store with open re close features for a fresh fruits the fresh vegetables that also offer some sustainability for a customer so it's a broader disguise.
And then the clamshell business that we have that we've had some operating issues.
So we still view that as a growth area is a selecting the right areas and then executing on our plans going forward.
Okay and just last one for me just on the number 10 machine you, obviously condition for a lot more favorable year or two ago, there I'm sort of water under the bridge at this point, but.
Good day, they're not to grade.
At the current moment and the outlook for this year.
As part of why the guidance as they can you just kind of maybe explain why Whiting now is the right time to be taken action on this obviously I think it's probably you wish you had done in a little bit sooner, but you know why why now versus kind of waiting for some of these markets to recover a little bit.
Oh.
This again, it's been a conversation for multiple years now.
Finally reached the point, where we felt like we have uncovered the or it looked under every opportunity rock. If you will for a long term solution. Unfortunately, the team as those presented to us what looks like a very very very rock solid or to keep using the word wrong, but a very very solid solution.
To the to the issue and the and the why it's just just you know we we are very very small player and the this market, it's not a strategic to listen anyway.
It is then as pointed out has been extremely volatile.
And I can just say that Oh, I'm thrilled that a with the work that the team has done as I noted with outside help with a lot of resources to say, we've got a solution for those.
And it's going to becoming so so I'll leave it there.
Okay. Thanks very much.
Thank you. Our next question comes from the line to seize share covers with D.A. Davidson. Your line is now open.
Thank you and again congratulations to everyone I see.
So it's it's a bit late in the session. So I just two quickies first of all you had a nice turned into margins in protective solutions. Despite the lower volumes I'm just wondering if that's sustainable and if it's something you can build off.
Yeah, Roger wants to grow yes, Roger.
Yes. It is really strong performance more thermosafe business and 29 seen us that'll continue into 2020, we took a hard look at drug launches there'll be solid for 2020, maybe down slightly but thermosafe the sad.
Compounded annual growth on the top line of almost 9% for the last five years. We expect does continue and then the teams in our consumer.
Business and our auto business did an outstanding job taking cost out of the business last year, so volumes were down.
Higher than we expected that they said they did a good job taking cost out. It's we're rolling in the 2020. So to answer your question I think those margins.
Terrific and then I guess a variation on theme that's been touched on but recognizing that there are unlikely to be major strategic shifts and the important just sustainability.
You have any thoughts on growth or are there any opportunities to grow in paper based consumer packaging.
Oh, absolutely we're already and then we've talked about this in previous quarters, a we're seeing some some really policy.
Europe is a is ahead of everybody and we've we've engaged in and more than a few conversations or direct activities with folks that are looking for paper solution as opposed to a plastic.
So we see this isn't a tremendous opportunity for us on the consumer side of the business with with our paper base a.
Container.
On the industrial side. Similarly, a week, we think we have some opportunities and to look at.
For instance, our protective packaging solution.
Here in North America, expanding that elsewhere, if you think of Ah.
Yes, a particularly in Europe.
Right now there's a major major retail chains that are saying no more easy and obviously that leaves you straight towards a at least to us and our minds the straight towards the paper solution. So we're a were quite bullish about the buses the whole narrative right now and we see it as.
More of an upside and downside.
As we look at our portfolio and global capabilities.
Great. Thank you.
Thank you we do have a follow up question from the line of George Staphos with Bank of America. Your line is now open. Thanks, I guess, thanks for taking the follow on.
How are you you mentioned several times in your opening remarks, something around the theme of of King teamwork teammates and you know look it's obvious that you know great companies build off of their teams, but is there anything you know unique or a specific to your management style that you're trying.
To get across if I read kind of your commentary correctly.
Well first.
George picking up all that.
Directly related.
Got a lot of respect for years ago came up with the places people build businesses and that's in the March in order of Ah.
The overarching.
Theme of how we operate our businesses globally. So.
Oh, yes, that's all it starts with people does it not and it's embedded in the culture of our company.
I'm very fortunate to sit here today with an executive committee that I couldn't be more probably robin friends of the diversity in Mexico, we have on.
I mean that in terms of a lot of difference.
Experiences as well as they're willing to participate and how we were gonna grow this company going forwards.
Well yeah.
This is our culture is built of cultural of inclusion.
And values and I intend to.
To continue that for we've got a great team.
All the way through.
I see it on a global basis, and what's really pleases me as has been involved in the international side of it doesn't so so long as we look at our culture and values here in North America see how they'd rather than it was around the world.
Exactly.
Yeah.
[noise] before it is all about the steep Baltimore.
Second question, Thanks for that Howard.
On perimeter store couple people have asked you know different questions around this.
<unk> and a lot of the answer comes back to we need to fix or operating problems. You feel like you have that in hand, and that'll be the base from which you can grow.
You know over time, one of things that we've seen as one company say they have operating issues. What it really means is the cost structure wasn't aligned well relative to what was going to happen in the market either in terms of demand competition and pricing was there any of that in terms of what needed to be reset restructured use whatever term you want to.
In terms of perimeter store.
And if you if you take a step back you know whenever the strategy began and looked at what you thought the horizon west for print for him or store for Sunoco and what it is now is it equivalent.
Less or more.
George This is Roger.
Keep in mind is all about premise.
I think we're talking about primarily due to acquisitions.
Yep.
Just two acquisition.
What was the west coast.
Acquisition for operations up and down.
Oh and packaging was they saw the Florida plant City, Florida, One Mega plant you break those apart.
Hi on acquisition the plant city operations.
Exactly as we expected I'm sorry.
Talk in general about from restore issues with that operations performing well either in the southeast solid they solid cost as well we found the west coast as we simply had wrong.
Level of equipment that we needed from from an operating capability, we have going back and we really rebuilding the equipment and the tooling and we've replaced the manufacturing.
On the West Coast West Coast is more competitive I think it's fair to say <unk> when we get the operating improvement.
In place, we'll take a hard look at where we are from a cost position overall versus our competition. If you can't just do a broad brush on premise for you've got to break it down into those individual buckets.
And again it we're confident you'll see incremental improvement this year and then we'll step back and say, okay, how about where are we versus where we originally thought.
Other parts of from store.
We're playing in rigid paper, we're playing able to question factoring business have been very successful does want to make sure people understand we thought about issues. We're talking about very specific operating issues with that part of the business we bought in the West coast.
Last question and I'll finish up health care I think at one point you targeted back to the analyst day, roughly around 350 million of revenue currently where do you see that in the portfolio Howard how quickly do you think you can grow it you know what or maybe the leverage points that haven't been tapped efficiently.
We not officially but you know things that you think you can can you maybe amplify the growth in that business, how big do you see it getting too over the next five years. Thank you guys. Good luck in the quarter.
Yes exactly.
We roll off the current portfolio, we are roughly in that $50 million.
I'm not prepared to answer the question from where where we will be this time next year for years down the road we bought.
Specifically brings with it the great thing bites of the portfolio.
Portfolio and I frankly, a vision of a of Oh for they intended to goes so I think it's really too early to talk about.
Any specifics, but what I will say is it's certainly something that we are definitely focused on phones.
Of continuing from an investment in and overall organic growth.
Okay. Thank you guys.
Thank you we do have a follow up question from the line of Adam Josephson with Keybanc capital markets. Your line is now open.
Howard Thanks, Thanks for taking my follow up just back to sustainability in plastic packaging for a moment investors seem to have become increasingly concerned about volume trends among the plastic packaging companies and every time one of them reports of volume decline investors seem to attribute they declined to sustainability issues, whether whether true.
We're not does this growing perception among investors that just plastic is bad affect your thinking about the business at all specifically with respect to future M&A I know Brian.
The variation of that question, but I just figured I'd ask it this way and just for lately how much misunderstanding do you think is still out there among investors are the general public, but the future all the plastic compared to say aluminum beverage cans or are there.
Other substrates.
Oh I got from our perspective.
We're not seen any type of issues as it relates to volume and sustainability.
I can't say for some of the larger companies that the data that we are have been looking at says the plastics is actually growing.
On a global basis, and we've got pretty granular data from a from a country market perspective, so and forecasted out to continue to grow. So there is some confusion out there.
Actually what is happening today in terms of.
The impact of sustainability is having on volumes going forward I think there's so much activity related to.
How to solve this issue as.
Recycling et cetera.
You know for me I think more about a the bigger conversation around carbon footprint.
And how that's impacting the world.
It is southern ice and so easy to two to two out to look at a format a bag a bottle or whatever and say how there's our problem there was a solution.
There's there's there's another side of that stories that frankly, I think is more concerning to us and that has to do is just what I said is the carbon footprint that.
Is being created not only from the packing packaging sectors, but others and I am I personally I'm reading more and more about that and that message is starting to to take.
So the just kinda summarized no I don't think that the but there are any serious switches or at least in <unk> and the formats that we are participating in there has been summer, forcing the aluminum side, then that drops back down to that real fundamental question.
Is how serious is this problem around a carbon emissions and on a global warming et cetera.
Thanks, so much Howard.
Thank you we do have a follow up question from the line of by Maguire with Goldman Sachs. Your line is now open.
I know, it's late just a one one quick one.
When you could quantify the what benefit if any you got in the fourth quarter from the.
Drop in resin prices at the time lags and any expected benefit and in one Q from from the same.
Yeah, Brian This is Julie Yeah, I think I mentioned, our consumer segment did have positive price cost in the fourth quarter, even though as a company we weren't net negative they're driven by industrial but you know a part of that was was driven by dropping are.
Declining resin prices and some other slight deflation and other material or kind of support costs. So again, a little bit of positive price cost there on the consumer side and you would expect some of that continue again more specifically in the consumer segment in the first quarter not terribly.
The material, but slightly positive yes.
Okay. Thanks.
Thank you.
Lose today's question and answer session I would now like turn the call back to Roger Smith for closing remarks.
Thank you again, Sarah a again, let me thank everyone for joining US today, we certainly appreciate your interest in the company and as always if you have any further questions. Please don't hesitate to contact us. Thank you again.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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