Q2 2021 Sonoco Products Co Earnings Call
[music].
Good day, and thank you for standing by and welcome to the second quarter 2021, Sonoco earnings Conference call. At this time, all participant lines and I'm in listen only mode.
After the presentation, there will be a question and answer session.
Ask a question during the session you'll need the press Star then 1 on your telephone keypad.
Please be advised the today's conference maybe recorded.
If you require any further assistance. Please press star then zero.
I'd now like to hand, the conference over to Roger Schrum, Vice President of Investor Relations.
Thank you.
Everyone and welcome to the Sunoco and the second quarter Investor Conference call.
And me today are Howard Coker, President and Chief Executive Officer, Rodger Fuller Executive Vice President and Julie Albrecht, Vice President and Chief Financial Officer.
The news release reporting our financial results was issued before the market opened today and is available on the Investor Relations website at Sonoco Dot Com. In addition, we will be referencing a presentation on our second 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.
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 company's financial condition and results of operations further information about the company's use of non-GAAP financial measures, including definitions as well as reconciliations of those measures to the most closely.
The related GAAP measure is also available and the Investor Relations section of our website.
Now, let me turn it over to Julie.
Thanks, Roger I'll begin on slide 3 where you see that earlier. This morning, we reported a second quarter loss on a GAAP basis of $3.34 per share and base earnings of 84 cents per share, which is just shy of the midpoint of our guidance range of 82 to 80.
The 8 cents per share.
Despite strong volume growth and many of our businesses our second quarter operational results were challenged by unparalleled raw material and other operating cost inflation that did outpace or significant price increases and the solid solid productivity result across our.
Leo.
In terms of the 4 dollar and 18th sent the difference between base and GAAP EPS by far of the largest item was the $4 and <unk> noncash charge related to the settlement of approximately $1.4 billion of U S pension liabilities as our pension termination.
Process substantially wrapped up in June the.
This charge was just below the estimates that we've been communicating for a while.
The next largest item also relates to the unique transaction and the second quarter and May we completed a tender offer for a portion of our 575% bonds. Due in 2040 that resulted in a debt repayment of $63 million.
This transaction also resulted in an after tax loss on the early extinguishment of debt of 15 cents per share.
Next you see our adjustments for normal non operating pension costs at 6 cents per share.
As well as 2 cents related to net favorable restructuring and asset impairments.
The last item all other at 5 cents per share is mostly composed of a 3 cent foreign exchange hedge gains on our euro denominated loan repayment and another 3 gain on favorable on a favorable foreign VAT refund plus interest.
So moving to our base income statement on slide 4 and starting with the top line you see the sales were $1 billion $383 million up $138 million or 11% from the prior year period.
I'll review more details about key sales drivers on the sales bridge and just a moment.
Gross profit was $263 million $15 million above the prior year quarter.
This performance resulted in a 19% gross profit as a percentage of sales, which was 90 basis points below the second quarter of last year.
SG&A expenses net of other income were $134 million and increase of $13 million year over year.
This increase was expected and key drivers were higher expenses for normalized management incentives.
Increased group medical spend and higher costs for property insurance premiums and strategic activities.
All of US, resulting in second quarter 2021 operating profit of $129 million.
And I will discuss the key drivers on the operating profit bridge and a few minutes.
Net interest expense of $17 million was $2 million lower than last year due to reduced debt balances and a more favorable mix of fixed and floating rate debt.
Income tax expense of $30 million was $1 million higher than last year due to our higher pretax profit somewhat reduced by a modestly lower effective tax rate.
Our current quarter's base effective tax rate was 26, 4%.
Moving down to net income our second quarter of 2021 base earnings were $85 million compared to $80 million last year.
Now looking at the sales bridge on slide 5 you see volume mix with higher by $95 million or 7.6% for the company as a whole with our industrial segment and all other businesses seeing widespread recovery from the pandemic.
<unk> reduced by lower volumes as expected and our consumer segment.
Consumer packaging volume was down $12 million or 2.1% as our global rigid paper containers demand declined almost 6%.
This was partially offset by solid growth and our plastics food businesses, which were up nearly 5% and modest recovery and our flexible volume, which was partially offset by an unfavorable mix of sales.
Moving to industrial paper packaging volume mix was up $65 million or over 14% with a surge and post COVID-19 economic recovery across most of this business.
Our global tube and of course franchise Roes over 13% and global paper grew by nearly 4%.
In addition, our cones and protective fiber businesses saw outstanding rebounds and demand.
And finally, our all other group saw volume mix growth of $42 million or 32% when excluding DNP display and packaging from 2020.
The significant recovery was very broad across these businesses.
Now moving to price you see the selling prices were higher year over year by $89 million as we increased prices to battle inflation globally. This was mostly driven by our industrial segment as we work to recover escalating OCC freight and energy costs.
We are proactively increasing prices and our consumer segment.
And all other group, but the timing of contractual price resets pushes some recovery of cost inflation into the third and fourth quarters.
Moving to acquisitions and divestitures, you see of topline negative impact of $80 million, which is driven by the recent divestitures of our display and packaging European and U S operations, partially offset by the can packaging acquisition completed and lap in August of.
Last year.
And finally, the sales impact from foreign exchange and other was positive by $34 million with the primary driver being foreign exchange translation associated with the weaker U S dollar year over year.
Uh huh.
Moving to the operating profit bridge on slide 6 and starting with volume mix, our higher sales volume of $95 million combined with the impact of mix had a positive impact on operating profit of $28 million.
Shifting to price cost I will remind you that this category includes the earnings benefit from higher selling prices as well as the impact of total inflation.
And the second quarter, we had $26 million of unfavorable price cost with most of this impact falling and our consumer packaging segment.
Within our consumer businesses, the inflation of resin pricing is much greater than expected and resulted in higher material cost of approximately $15 million and the second quarter.
And our all other business group resin is also of key raw materials and this inflation drove almost $10 million of higher costs.
And our industrial segment, we were chasing higher OCC pricing during the second quarter, but were slightly positive and price costs due to sales price increases.
As usual there is a slide in the appendix that shows recent OCC price trends and you'll see there that southeast OCC official board market pricing started the quarter or came into the quarter and March at $90 per ton until market pressures caused the jumped to 125.
And by June <unk>.
Resulting in an average of $107 per ton and the second quarter.
This represents a $7 increase relative to the second quarter of last year, and importantly of $20 sequential increase over this year's first quarter.
Next is the impact of productivity, which includes all results from our from our productivity actions, including manufacturing procurement and fixed cost.
And you see that our total productivity was a solid $22 million year over year with a favorable impact across all 3 segments.
Our productivity actions remain a very important focus area across our business as we work to overcome inflation and protect our margins.
Moving to acquisitions and divestitures, the $6 million decrease and operating profit is the net impact from the display and packaging divestitures and the can packaging acquisition.
And finally, the operating profit change and foreign exchange and other was unfavorable by $16 million with various moving pieces, but mostly within the SG&A expenses.
Moving to the segment analysis on slide 7 you see that consumer packaging sales were up over 4% driven by higher selling prices positive foreign exchange translation and the addition of can packaging somewhat reduced by lower volumes as COVID-19 eat at home behaviors have.
Moderated from the pandemic driven highs of last year.
Consumer segment operating profit fell by 29% driven by significantly unfavorable price cost and the softer demand.
Our consumer segment margin declined to 10% versus the second quarter of last year. When the margin was a very strong 14, 7%.
Our industrial segment sales grew by almost 34% due to year over year price increases strong recovering demand as well as the impact from positive foreign exchange translation.
Industrial the operating profit surged by 74% driven by the significant global turnaround and demand and the associate associated leveraging impact on manufacturing productivity.
The segment's earnings were also lifted by favorable price cost and procurement productivity.
Our industrial segment's operating profit was 9.5% a strong 220 basis point increase when compared to 7.3% and the second quarter of last year.
And finally, all other sales declined by nearly 19% driven by the sale of our display and packaging businesses, but significantly offset by the great demand across the segments businesses.
Despite the sale of display and packaging operating profit increased by 23% due to the strong demand and the associated positive impact on productivity of.
Operating margins improved to 6.2% 210 basis points higher than the prior year's 4.1%.
For the total company sales were up 11% and operating profit improved by 1.6%, resulting in a companywide operating profit margin of 9.3%.
Moving to cash flow on slide 8 and the middle of this slide you see that our year to date second quarter operating cash flow was $102 million.
Compared with $282 million last year, a decrease of $180 million.
The primary driver to these lower cash flows was our contribution and the second quarter of $133 million related to our pension settlement and termination process.
In addition, we consumed $19 million more dollars cash more cash and our net working capital balances, which was driven by both inflation and increased level of business activity.
Overall, our management of net working capital remained remains very strong.
So back to the top of the slide we had year to date GAAP net loss of $262 million.
Compared to a profit of $135 million and the prior year period.
Most of this decrease was the $406 million after tax noncash settlement charge related to our pension termination process.
Moving down to our year to date Capex spend our net spend was $93 million. So far this year compared to $72 million per year to date at second quarter 2020.
This $21 million increase is mostly due to spending on project horizon.
We do expect our capex spend of ramp up over the balance of this year as we progress on project horizon and other important projects.
And we'll be providing additional comments about project horizon and a few minutes.
So this takes us to free cash flow of $9 million.
Compared with $210 million for the same period of last year again, mostly driven by the pension termination process.
Increased working capital and higher Capex spend.
Finally, we paid cash dividends of $90 million year to date this year compared to $86 million for the same period last year.
Yes.
Yeah.
On slide 9 you see that our balance sheet and our liquidity position remains very strong and reflect several strategic actions executed during the second quarter.
Our second quarter 2021, consolidated cash balance was $264 million of $301 million decrease from year end 2020.
This decrease was driven by significant deployments of cash which included the accelerated share repurchase of $150 million.
The tender offer for our 2040 bonds, which retired $63 million of principal.
The repayment of our maturing $100 million 180 million dollar euro denominated debt and finally, the $133 million of pension contributions.
These cash usage were somewhat offset by the display and packaging U S. Gross proceeds of approximately $80 million and operating cash generated by our businesses.
Our consolidated debt at the end of the second quarter was approximately $1.6 billion a decrease of $102 million from year end.
This decrease was driven by the debt repayments that I, just mentioned, partially offset by our return to the commercial paper market.
Finally on slide 10 for your reference we've included our quarterly earnings history for the last 2 years at the top.
You can note that the now divested display and packaging businesses contributed 8.
And 9 of EPS in 2019, and 2020, respectively.
But focusing on this year and our third quarter guidance, you see that our range for Q3 base EPS is <unk> 87 to 93 per share.
As Howard will describe further in his comments. This guidance assumes continued solid demand for our products, but also continued inflation headwinds.
I'll highlight that our base earnings effective tax rate in the third quarter is estimated at approximately 21.5%.
Embedded in this assumption are an approximate 26% tax rate on base earnings and the positive impact from our unique onetime $5.5 million release of a reserve for uncertain tax positions.
Specific to our expected full year effective tax rate, we continue to assume a rate of approximately 25% the.
This is unchanged since our original guidance in February and has always included the impact of this $5.5 million dollar benefit we were previously uncertain of the timing, but now have visibility for the third quarter.
You also see on the slide that we are not changing our full year base earnings per share guidance range of $3 and to $3.62, I'm sorry of $3.50.
The $3.60.
And we're also not changing our full year free cash flow guidance of 270 million to $300 million, which does exclude the $133 million of pension contributions contributions made and the second quarter to fund our U S pension liability settlement.
So this concludes my review of our second quarter results and our outlook for the third quarter and full year, So I'll turn it over to Howard.
Thank you Julia and good morning, everyone. Let me provide you with my thoughts and our second quarter performance also give you a brief update on project horizon, and our new sustainability commitments.
Those with what we see of entering the second half of the year.
Our balanced portfolio of consumer and industrial businesses did well and the second quarter as we were well within our guidance range, despite unprecedented and inflation from the lingering effects of COVID-19 for the remainder of Lockdowns and parts of Asia, Europe, and Latin America of all top spots here in North America.
And our industrial segment and all other group of businesses experienced double digit volume growth during the second quarter with demand returning to near pandemic levels.
As we anticipated the consumer volumes normalize from the pantry stocking and record.
During the second quarter of last year.
Although demand remains above pre pandemic levels.
As Julian mentioned, our biggest challenge and the second quarter and frankly, the rest of 2021 is battling significant raw material and non material inflation.
And our consumer business.
We have seen some resin prices nearly double from last year's level of film models paper packaging and freight are up mid single to double digits.
Old corrugated containers, our largest raw material have moved up from $85 a ton in January of $245 a ton of July.
We now expect our external expenses, excluding OCC and label to raws and additional 2 and 5% over our prior estimate made just last quarter.
This means of our coal globally will increase approximately 8% and <unk>.
Addition of Julian noted, we've seen F&I expenses increased due to higher property insurance and more normal medical and incentive accruals and additional vehicles having.
Having said that I am extremely proud of how our global team has worked to pull all levers to cover these calls, including driving productivity controlling expenses and implementing necessary price increases to fully recover all commodities and other cost increases.
And the fundamentals of our business are in good shape volume productivity working capital cash management and all are exceeding expectation inflation is the issue.
<unk>.
Now, let me switch gears and give you a brief update on project horizon.
The $115 million conversion of our number 10 and corrugated medium machine into a state of the art uncoated recycled board machine with approximately 180000 tonnes of annual capacity.
We now expect the conversion to be completed by the end of the second quarter of 2022.
And there are a number of significant construction projects underway that will modernize the infrastructure of the entire complex and allow for more efficient and handling of raw materials and finished goods.
A key element of the project raws and as construction of the new stock prep system to provide approximately 650 tons per day of recycled fiber to the rebuilt number 10 machine and the other harmful cylinder machine the new stock prep system will allow for increased consumption of lower cost mixed paper along with.
OCC.
We expect this system to be operational by the end of October.
And as previously announced we expect to exit the corrugated medium market by early 2022.
To allow time for the conversion and our strategy is to keep our <unk> capacity neutral of approximately $1.2 million tonnes as.
As a result, we recently announced the we expect of permanently shut down of Hartsville number 1 and number 9 machines, which will reduce annual capacity by approximately 70000 tons.
The exact timing of these closures will depend on market conditions as well as the startup of the converted the number 10 machine.
As a reminder, last year, we permanently shut down of 30000 ton per year machine and Portugal.
And our 95000 ton per year of Trent Valley, Ontario paper Mill, which the particular machine and produce both recycled linerboard and your booth.
Project Horizon and expected to drive approximately $30 million of annual cost savings by 2023 and <unk>.
Sure of the long term viability of the Hartsville paper more complex and place our U S and Canada mill system and to the <unk>.
Quarter, all the performance and cost perspective.
More and more investors are asking us about sustainability sort of thought I would provide some update regarding new commitments, we've made the reduce our environmental footprint.
And if we can all agree the packaging plays a fundamental role of providing sustainable safe and hygienic delivery systems for food and medicine and other of central products around the world.
Of the top of soccer and the U S and the global leader and the production of recycled paper board, along with providing a diverse mix of consumer and industrial healthcare and protective packaging.
We believe and it's our responsibility to address environmental challenges such as climate change based on data driven scientific criteria.
While we have reduced our normalized greenhouse gas emissions by approximately 25% since 2009, we're committed to doing more.
After months of research and planning, we have set ambitious new targets to reduce our global greenhouse gas emissions in line with the Paris climate agreement.
The limit global temperatures to warming the well below 2 degrees above.
Above preindustrial levels.
Pacifically, we've committed to reduce absolute scope, 1 and 2 greenhouse gas emissions of about 25% by 2030 from our base.
2020 baseline we are also committed to reduce absolute scope 3 greenhouse gas emissions by 13 of them personally.
In addition, we're actively studying necessary operational changes technology developments and market changes that the.
The required to achieve net zero greenhouse gas emissions by 2050.
And I'm pleased that our targets have been reviewed and validated by the science based target initiative.
The drive compliance of our goals will begin incorporating our sustainability and environmental metrics into each of our business units plans and.
Management's incentives.
To help our customers achieve their sustainability targets, we continue to expand our environment from a more sustainable packaging and incorporates increased recycled content and the improved recyclability.
And while our sense is represented across our portfolio of from rigid plastics to flexible to our iconic the type of containers.
We're working with customers in Europe, and transition their products and around <unk> and paper.
The owners today, we expect this trend to continue.
We will be providing more detailed information on all of our environmental social and governance activities, both from a commercial and corporate perspective next week.
<unk> of our annual corporate responsibility report.
And we hope you will take some time to download and better understand our commitment to our purpose our people and our planet, which happens to be the title of our annual report.
Let me close by going over some of the things, we're seeing heading into the second half of the year.
And said that the only thing we know about the future is that it's going to be different clearly what we were expecting just 6 months ago around inflation.
The difference than what we're seeing now as.
As we entered the third quarter, we remain confident that our business will continue to benefit from the post pandemic economic recovery and.
And our consumer related businesses, we expect volumes to remain above the pre pandemic levels. Despite more normalized demand for food packaging of consumers moderate the at home eating patterns.
And wherever we also expect certain COVID-19 impact more of goods, such as confectionery and food service and even the construction products should continue to benefit.
We also expect further recovery and our industrial markets.
As illustrated by the historically high backlogs for our paperboard globally.
And demand for global tubes, cores, and cones, which our strength and strengthening to pre pandemic levels.
Our biggest challenge will continue to be managing and recovering escalating raw materials of non material inflation.
And we believe prices from most resins ordinary and at peak and prices could began to ease and through the fourth quarter.
Recovered paper prices on the other hand, and they still rise this quarter due to strong domestic demand that said, we still believe OCC prices will fall of historic patterns and likely the crime and the fourth quarter as collections improve.
And demand should flow.
We're currently behind the price cost curve and several of our businesses. However, our price recovery mechanisms, including announced price increases so should allow us to fully recover these costs over time.
We believe sonoco is well positioned given our resiliency over the last year and improving trends and our primary served markets our strong financial position and supports our value creation strategy to invest and ourselves to drive growth and margin improvement while consistently returning cash to shareholders.
And with that operator, we would be pleased to review of any questions.
If you'd like to ask a question at this time. Please press. The Star then the number 1 key on your Touchtone telephone to withdraw your.
Your question press the pound key.
Our first question comes from George Staphos with Bank of America.
Hi, everyone. Good morning.
Thanks for taking my question thanks for the detail.
Just a quick question, maybe the storage for the third quarter, Howard and Julie could you give us your rough approximation of what you think price cost will be either.
And millions of dollars of just from an EPS standpoint and related to that just for comparison purposes. I think you said the net display.
The display and packaging divestiture divested businesses were something like 8 or 9 cents a quarter. If I heard you correctly would that be fair as an adjustment factor, we should look at for the third quarter as well.
Let me know what should be the case there. So that's the start.
Thank you Ryan on the E&ps.
Based on the specificity.
Pass onto June Thanks, Howard and Hi, George Yes, So, yes, youre right the.
The divestiture of DNP with a little bit of offset from the can packaging acquisitions. So call. It all of our M&A. There, it's about <unk> of kind of of call. It a headwind of pull out from Q3 of last year.
And from a price cost perspective.
And I'd say, we are expecting that to continue to be slightly negative in the in the third quarter as we obviously and Howard and Rodger can provide more color, obviously, a lot of dynamics going around the all round.
Contract reset timing around price increases as well as just open market price increases but I.
I think nonetheless with the inflation, we continue to expect.
Still slightly negative year over year.
Okay, but that implies that you'll see some fairly.
Good.
<unk> sequentially and price cost <unk> and should we assume that both industrial and consumer are slightly negative on price cost or can the industrial keep it's net positive as it was and <unk>.
On a price cost basis and <unk>.
Yes, we are expecting industrial to stay slightly positive price cost, although I mean, there is and it could be neutral again, the OCC headwinds Roger and Howard can talk a little bit more about that obviously kind of uncertain, there, but upward upward price increases.
And so it's you know I think.
Puts and takes quite frankly across the segments and it really is going to depend on the continued inflation and resins and OCC or especially.
But I don't know of Roger do you want to add any more color on that.
And the consumer side, George as you would expect a fairly significant price increases going through and July most of the major CPG and the consumer business, we of quarterly price change mechanisms, where we recover the RASM and 3 months and arrears. So for instance, and July we're implementing March April.
March April may and increases, we calculate and gene we put that and enforce and July. So we saw more increases in June and July. So we will still see some negative price costs and consumer around resin and the third quarter, we expect to start catching that up we will cash setup and the fourth quarter.
Okay. Thanks, Roger and my last 1 and I'll turn it over.
Can you.
Reflect on what you've learned about your consumer packaging businesses.
And kind of the top 2 or 3.1 as we look out the next several years right.
The paper cans composite cans at of surge and now they're normalizing. The obviously, there's a lot of margin that business flexible.
Pain somewhat pressured from a volume standpoint, although a lot of that is.
And the convenience angle and confectionery and youre seeing growth and consumer.
What do you think is the right growth outlook for those businesses looking out the next couple of years and how much do you think the consumer has.
Maybe re adopted what increment to growth normalize do you think you've gained and that business relative to what would've been the case pre COVID-19. Thank you very much and good luck in the quarter.
Thanks George.
And I'm not going to probably the <unk>.
Forecast of the exact percentage, but just talk and generally.
If you talk about a paper can business.
And as we noted.
Volumes are ahead of 2019 levels. We do think Theres been contained continued adoption here in North America and some of the categories.
Really exciting and at this point and time is what we're saying on the international perspective.
The.
And the anti.
And let's just call the sustainability efforts, we're just where our funnel is good.
And to build and drop through in terms of folks wanting to the.
Switch over to the paper container from another substrate.
And it really is and exciting.
Opportunity if we look at on campus off of the Asia, and we're seeing double digit growth.
This quarter over quarter over quarter for a number of years now and.
And we expect that to continue as well.
Flexible strength.
And out of the plastic tray business.
And we're really happy with how all of that business specifically.
And specifically flexible as the and manage right now.
Relatively flat and the quarter, but we saw really good productivity throughout the business.
We're going to see pick up.
And I think as we head into the future, where we saw softness and confectionery of.
Other convenience and the holiday related.
Products it was actually a bit of a drag on that business. So we expect that to be on the positive slant as we move forward and.
The noted quickly about our plastic food frozen side.
Because that's the 1 that's really interesting that it's actually the volume is actually tracked ahead of last year.
During the pantry stocking and I think that one's carry and probably more long term new consumer activity.
And any other and and the.
And the work from home.
And we'll settle down, but there will be more people working from home than ever and.
Because of these consumers of the driven to the market the pantry stocking and the fund and the products.
That's good.
There'll be working from home and there'll be grabbing frozen meals out of the.
And out of their freezers, so really feel very very bullish about the consumer sector and in totality.
Not through just the end of this year, but into the future.
Thank you very much.
Our next question comes from Josh Spector with UBS.
Okay.
Yeah, Hey, guys. Thanks for taking my question.
Maybe just a follow up on some of the sequential bridging I guess, if I listen to what you are saying about volumes being consistently strong and <unk>.
Talking about things getting better you're getting pricing and the second half, but your updated guidance kind of implies flattish operating income and <unk> and maybe similar for <unk>. So what are the incremental negative factors in the second half, which hold back you from perhaps lifting guidance versus prior expectations.
Yeah.
Josh really is just the continuation and lag of recovery of our.
Of this hyperinflation period that we're in right now and that Roger did a good job of explaining and particularly resin and I mean, that's the 1 that is.
As the escalated the most.
We have we have.
Solid recovery mechanisms is just timing.
And I think as Roger pointed out its on average.
Net.
3 months and arrears with the fourth month of the month prior to the quarter.
The calculation months.
And as we look at Q.
To inflation that we saw and June is going to carry into Q3 and.
And we still are expecting to see inflation and early Q3.
With that moderating.
Moderating as we and that quarter and go into Q4, and that's how we're expecting things to play out.
So just sort of I understand the GAAP doesn't get any better sequentially. It still remains similar to what it wasn't QQ and <unk> because of that catch up.
And that's with.
Exactly the point.
Okay and I appreciate that and just 1 other question just on.
On the rigid plastic side.
Reading more about some challenging growing conditions for sue.
Fruit vegetables, and specialty crops and the West Coast and North America, specifically is that something that you are seeing have an impact on your rigid plastics demand or could have an impact and is anything from that perspective baked into your guidance for the second half.
Josh It's Roger we are.
Thanks, Tom impact and the crops, primarily in the northwest of the United States, we built that the headwind into our sales forecast for the second half of the year same.
Same story there.
Since the first of year is up 30%, 30% ish, so we're moving prices and that business as well, but any headwinds from weather of fires and all of that we have built that into our forecast and but the answer is yes for some specific crops and the northwest we have seen some impact.
Okay. Thank you.
Our next question comes from Mark Wilde with bank of Montreal.
Great. Good morning, Howard morning, Julia Roger.
The marketing.
I wanted just to start out you have done a good job of kind of walking us through some of the lag there and.
The classic Bank and anything you can do to help us with just the cadence of kind of price cost catch up in other parts of the portfolio.
Yes.
Turn it over to Roger but what I would say the headline here is related to resin and when you say all of the parts of the portfolio. If you look across.
Where do you see that resin influence really hit us hard.
And the all other category, which is effectively of resin based.
Business and of.
Of course, as we've just said and the consumer side.
But Roger any any further calls and I think that's right. If you look at the freight inflation.
Asia and packaging you name it Mark as you know, they're all escalating faster than expected were out.
On a regular basis with.
The increases in those areas outside of our normal price change mechanisms, so thats happening and I'm sure, we'll come onto the OCC and the industrial side and a minute, but as you're aware, we've announced our $450 increase from <unk>, which went into effect July 15th that went well and followed with the 6% to 7% and <unk>.
And core increase which has gone well so we're trying to stay out in front of industrial and that's part of the reason we announced that when we did we were expecting more headwinds and OCC and the second quarter with the upward bias to OCC prices throughout this quarter.
Okay. That's helpful and is there any difference Roger and sort of the.
Both of the order of magnitude of the.
Cost increases on OCC, and your European business versus North America and.
And also any timing difference between kind of of North America, Europe and the other markets.
Well Europe from a faster if you convert the European Euro.
Euro metric ton to the U S short term and they are up to about $175 a ton of on average.
And the team there has done a really nice job of staying out in front of that so I'd say the run off this happened in front of the U S.
I'm not sure of that tells us exactly where the U S is going but that's the comparison.
But again our team has done a good job there of recovering so far.
Okay and the other question I have is I guess, probably for easily and I'm. Just curious if I heard you correctly it sounds like youre going to stop medium production and hartsville at the end of the fourth quarter, but the ramp up on the U R. B.
Is not until the end of the second quarter next year and just.
Kind of looking at the corrugated medium market. This year I would assume that that machine has to be quite profitable. This year. So I'm. Just curious if you can give us any help as we think about next year of the move into next year and what the earnings impact of the.
The phase out of corrugated medium and the ramp up of your base what that may be on a year.
Year over year basis.
Yeah. Good question Mark.
In fact, it's probably going to go down a lot of part of the first quarter of next year and will be down for 6 of 7 weeks as we make that conversion.
We're not of the point at this point in time, and we have even sat down and looked at the overall.
Impact and how that.
The.
And would be reflected and our 2022 assumptions.
It'll be coming but it wont be of 'twenty and won't be this year it'll be a lot of part of the first quarter and into the second quarter of next year.
And so Howard without.
And trying to lead the too far and this but would it be reasonable to assume the you might take a little bit of and earnings in 2000, and just because youre going to give up very profitable medium production this year and youre going to have.
Not only of period, where the machine is not running but youre going to have kind of the startup curve after the rebuilt sure.
And that's a fair assumption, but I.
And I guess, where I'm coming from we'll have to see what the entire corporate rollout looks like and how many of them and the material that is going to be.
But any time, yes, you youre, starting up of new process, new plants new equipment.
Got it and you've got to work through that.
Okay last 1 real quickly from me how is the Halloween Susan and welcome.
Flexible packaging both actually.
And you need to get the trick or treat and stuff ready because of the Cpg's R. R.
And of this business as normal.
Okay, Alright sounds good thanks Howard.
Our next question comes from Ghansham Panjabi with Baird.
Hi, Good morning. This is actually Matt create of Mac Krieger sitting in for Ghansham, how are you doing today.
Hum.
Great Great. So I was hoping that we.
And we could talk touch on volumes for the back half of the year. So what are your embedded volume assumptions on the segment basis for the second half of 2021, and what type of underlying market environments are you kind of projecting within these assumptions. If you could provide any detail by by region or by product line.
And it kind of the major product basis that would be really helpful.
God share whether from a macro perspective.
And might help to to talk about where we thought we were going to be this year, which is about 2% for the year and Lisa and Q1 up 4% Q2s of 8% and.
Our forecast now for Q3 is just over 5% and with the bulk of that well.
The consumer side slightly up 1 the 1.5%.
And the industrial side and continuing to trend upward of 75 per cent or so and.
And the all other category showing the biggest ramp up and this particular quarter.
About 12%.
I don't know if we're prepared to really talk about each individual business within the.
And the sectors that we do expect to see volume to the.
And very positive.
Going forward.
Great that's helpful and then.
I guess I just wanted to touch on.
And maybe see if you could talk about how inventory levels are trending across the various end markets and which you play have you incurred any incremental cost of service customers and and out of pattern manner from a freight or supply perspective, and if you had any challenges and gaining access to raw materials and any specific markets.
Or instances.
Yes, Matt.
Yes, so all of the of of inventories are tight.
And particularly in the and.
And the mill system, where it's driving more changeovers, which does impact productivity, but then again.
Across the company very pleased with.
And we've managed productivity, but it certainly has been.
A very dynamic situation for us on and income and enrolled material perspective, yeah.
At this time.
We are and we're managing the literally particularly resin and base and Thats.
The resins and Thats it.
As of.
And we're having to manage that almost all the while we are not almost daily if not a 7 day of week type situation.
Outbound freight similarly.
We are working weekends to make sure that we've got trucks that can come in and make a make the shipments that we've committed to each of our customers and so.
It is a very interesting dynamic situation right now.
But again I can't tell you how pleased I am with how well our team is managing through this.
Understood understood. That's very helpful. Just 1 follow up and then I'll drop off is there any timeline for normalization there that you could.
The feel is reasonable or is it just kind of of day to day assessment.
And as the macro issue, it's not of Sunoco issues. This throughout North America.
We're managing and the day by day basis, and I really really couldnt forecast out what we're saying the this type of cost and and.
And the issues that we're facing and are going to continue.
For some time of the Com.
Our biggest lever that we're going to be able to pull with the all of the the.
The headwinds that we're facing and is getting this material cost recovery from our customers.
And just managing the rest of it the best we can.
Great Thats it from me thanks.
Our next question comes from Adam Josephson with Keybanc.
Howard Rodger good morning, hope you're well.
Alright, good morning.
And of that.
Howard and how.
And Roger can you just.
On resin and OCC, just a little more clarification. If you don't mind. So as of last quarter. I think you were expecting 10% resin cost.
Inflation for the year would be interested in knowing what.
What that expectation is now on OCC I think the last call you were thinking and OCC would go up to 120 by June and and you nailed it and of went up by another 20 and July and I think Julie or Roger said, you expect further upward pressure can you just put a little more meat on that bone and then lastly.
The on freight just can you remind me what your expectations were for the year and are now.
Hi items, Roger I'll give a shot and then the Howard or Julie can and add to this but yeah on the resin. If you look at what we're expecting now for the calendar year of 2021, and this is expecting some moderation and potentially slight reductions in and of the year, we're expecting of 30% of inquiries for the year as you know.
The year over year and in many cases as I think as Julie said the restaurants have doubled polypropylene is up 140%. So we buy a basket of resins, we bought about 120 million pounds of quarter.
No.
Over half of that is P based about 30% of polypropylene and a bunch of all the others. So we're looking at the 30% increase now, but again and that's.
Assuming we get moderation and the back of the.
And the back of the year of 2021.
As you know has already moved to 141, 40, and 45 and the month of July and.
And what I said earlier, there is an upward bias the container meals are still pulling the very heavily.
And we're seeing premiums and the marketplace.
At this point.
I can tell you exactly what it's going to do in the coming months, but there is an upward bias and that's the way we're looking at it.
Good day on freight I believe we said, 6% to 7% for the year and then.
The first quarter were now of 9 to 10.
Which is not that significant of move that the the comments Howard made us for and they are even more important as of the availability.
Of trucks, and trailers and drivers and the added cost of.
<unk> schedules that this has been a bigger headwind for us but.
That's more color if you need more we can answer yes, no. Thanks, Roger and just 1 follow up on the cost issue, which is I think you mentioned and Europe OCC is up the.
U S equivalent of 175 box.
And I forgot over what timeframe you were talking about but in the U S.
Year to date southeast prices are up 60, I believe so are you.
Would that lead you to think of it there's a lot more to go in the U S or how are you thinking about that relationship between Europe and the U S. In terms of the year to date inflation.
Yeah, I'll, just say and the equivalent price of what we're paying today in Europe and the U S short tons would be $175 of Oh Im sorry, yeah. So that was that was the point.
And again I'm, not saying, we're going to go to 175, but that just shows you the demand globally and again, the containerboard mills and pulling heavily so we do see upward bias in the quarter and.
And Adam I'm, not so sure you can totally create a correlation between the Europe situation and the U S.
To make an assumption of whatever levels. They are we may be getting maybe heading to.
I think we've seen that historically is basically the independent market and market dynamics.
Thanks, Howard and Rodger and and on <unk>.
The demand by region can you just talk about what Youre seeing obviously U S. Brazil.
And then exceptionally strong all year of Europe's got and better China is getting worse, depending on what you read markedly worse. So can you just talk about what youre seeing by region. What you think is going on and China, Obviously southeast Asia, having COVID-19 problems China's halving of.
Their problem and just what youre seeing by region and your expectations along those lines as embedded in your guidance.
Yeah and I. Thank you you've covered it pretty well actually.
And if you look at Latin America.
Just real side very strong same dynamics, we're seeing here of order backlogs et cetera, and our mill.
The system in South America as you noted the same our consumer business and South America is also very strong.
So the footnote.
We're actually having to do and this is part of the challenges here in North America in terms of mill capacity, but we're actually shipping board out of the U S to supplement our mills and South America, So really and in fact, and it's rolled into the bottom line as well the the South American businesses perform.
Both sides of industrial and consumer you talked about.
Europe Europe is of somewhat.
Somewhat similar to here very very strong and our mills are full.
The man on the tube and core side is the is where.
Where we would hope it would be.
On the consumer side, which is mostly our paper Cam business I made comments earlier to Georges question that the.
Very very <unk>.
Solid.
The current demand and pending.
New orders Asia as the.
We look at it and it's relatively small for us and in the.
The full scheme.
No.
From a COVID-19 a year ago to the day, where.
We're extremely pleased with the turnaround.
And I think our cone business of example is about 97% of.
Of 2019 that was dropping from about 40%.
This time last year, so we're still somewhat enjoying the.
The recovery.
But no doubt about it we're seeing the.
We expect and when things settle down that theres going to be more pressure as it relates to just the overall macro economic conditions in China, and I guess lastly, I'll just point of Southeast Asia of Covid is the.
The real issue for us.
And it's showing in Indonesia, where we have a fairly large paper complex.
And probably the biggest hit has been our consumer business, where we've got.
And our largest Asian.
The paper can facility that has been down for weeks now I'll do the government mandates.
And we and new Lockdowns and that continues.
This is the first quarter, though and I can remember.
And I noted earlier, when we see and double digits just co.
And after quarter and Asia was actually flat because of that reason that debt.
We had a major complex down for the period.
Terrific. Thanks, so much.
Our next question comes from Kyle White with Deutsche Bank.
Hey, good morning, Thanks for taking the question wanted to go to rigid paper containers and food packaging.
Able to provide any kind of cadence or details on how volumes trended throughout the quarter on the month to month basis and into July here, just trying to understand what impact you are seeing as markets reopen and the kind of at home consumption trend weakens here of it.
Yes within the quarter I think we noted that in total we were down about 5%, but we were.
Of.
Above where we were in 2019.
Julien I really don't have that data in front of me and that as much from a of monthly perspective, but I think you know so I think it basically volume trends during the quarter were.
I'd say relatively steady and I don't think anything unusual on a month to month basis during the quarter.
The as Howard just mentioned I think maybe you were talking about global cans being down about 6%.
And but again it was a really tough comp the.
Again, the plastics food business.
You had a very solid.
And again year over year growth after a very strong second quarter of of 2020, and so that that volume growth continues to be b very solid so, but I'd say I don't think theres anything terribly unusual monthly during the second quarter.
Got it and then go into all the other what are you seeing or expecting in terms of the flu season. This year.
For that business, and then and what are what.
What are you hearing from your customers in terms of how sustainable some of the vaccine demand will be going forward.
Yeah, Hi, Roger the flu season, we're expecting a good flu season, and we typically capture over half of that volume $15 million to $20 million..1 thing and we are saying is the main customers are pulling early pulling and earlier with some concerns about supply constraints as we get into the fall. So we saw.
Some of the volume come in and the second quarter, we will see the balance and.
And the third quarter, so we're expecting a normally pretty solid flu season from.
On the Covid vaccine and standpoint is playing out.
Most like we talked last quarter to.
To the point of we see this turning into more of a.
<unk> type of similar to the flu season.
As we get and now the booster shots as we get into some of these shots for younger children thoughts of the 11, what we're hearing from our customers is going to turn into more of a standard.
<unk> package are typically the control package and we expect about 15% to $25 million impact on an annual basis.
Covid vaccine, so really no change to the guidance from the last quarter.
Got it thank you and good luck for the balance of the year.
Thanks.
Our next question comes from Salvator, Tiano with Seaport Research partners.
Yeah, Hi, thanks for taking my questions.
So firstly, Ken and I know you mentioned, the tough comps and rigid paper containers globally.
But how should we look at the kind of the the end market demand can you tell us will be the both the trends of why are you seeing essentially of the deviation with the reach of the rigid plastics, specifically, even though both benefited from her.
Pantry loading.
The trial to make sure I understand your question you're asking.
Why plastics.
Essentially why plastics.
The outperformed the rigid paper containers the floor.
Yeah, I understand I think it's just the nature of the products that the that we're starving back to my earlier points.
With the with the frozen <unk> opening up.
And the fast food.
Assortment and the benefit.
But equally so is that.
Truly the acceptance of the consumer and frozen meals a day some of the consumers reintroduced the firsthand.
Concerned.
Covid or are continuing to go back and continue so we're actually seeing the frozen side.
Slightly up over the peak of of last year. If you look of the can business a lot of that is related to.
<unk> and other items.
The refrigerated.
And.
<unk>.
We just saw net of a pullback here in North America again Europe.
Europe was in good shape.
Actually just slightly off of.
And then I've already talked to the scenario and Asia as it relates to the shutdown and we have there.
Okay great.
I Wonder if you can also elaborate a little bit of the margin differential between the 2 because I think when we think about the 15 million megabit price goes for the consumer packaging business that you mentioned.
That leaves.
The operating income decline year on year, given the just 2% volume. So I can I would imagine of the rigid paper has the <unk>.
Much higher margin was that the reason for the I guess, the decremental margins being so high.
Julie.
Yeah, it's interesting the dynamics among.
And between those kind of the are really several parts of our consumer business.
You've got different dynamics and productivity.
And the labor challenges as well as the different inflation, whether it's very resin oriented and the classic food business and flexible versus other types of inflation and being more prevalent and the cans business. So I think theres no simple answer there quite frankly, the dynamics around <unk>.
And the different raw materials across our consumer businesses.
Again.
Labor challenges I mean, we of up we do we have of broad footprint across all of these businesses and depending on Covid impact labor availability et cetera, obviously impacts productivity and so just lots of moving pieces that really yeah, we won't be able to now get into any more granularity about that with the <unk>.
Dynamics of what's impacting the margins and the different key parts of our consumer segment, Yeah, I'd say Sal and just in summary, the inflation that we're seeing is really as we said and our resin based businesses and so we're getting hit really hard.
And even though volumes were up and the.
And the classic trade side.
We're the <unk>.
Back to this whole price cost.
And capture and that resin inflation.
Okay, perfect and then just quickly.
And I provide little more color on debt.
And the installation of the coastal differential between what Youre seeing and the consumer packaging business from the other businesses the.
Other segment, I guess, because obviously of 10 million from price cost headwinds or other it's super substantial force such a small segment. So.
Can you elaborate some of the differential in terms of pass throughs and resins that you use and the other segment of our consumer packaging.
It's.
It is exactly that is back to the reference.
And all other is almost of 100% raws and.
Base.
Businesses embedded in there so.
It's just the simple of that really.
What's driving that margin all of them.
Okay, great. Thank you very much.
Our next question comes from J P <unk> with Wells Fargo Securities.
Howard Julie Roger.
The afternoon I guess, thanks for taking the questions late in the call.
And I was curious.
There's been a lot of sort of the exogenous factors influencing OCC.
I will say over the past 18 months in terms of China's actions.
Obviously, the Covid impact and then what we're seeing right now in terms of I think no operating rates and stuff like that but I'm curious if there's anything that you would view as instructive and.
In terms of kind.
Kind of what the the new normal might look like for OCC and and.
And really the Genesis or the what's behind the question is and I'm looking at the list of 25% to 30 recycled pulp projects across the globe and it.
It seems like China and kind of has reached.
The upper limit in terms of what they can maybe collect domestically and obviously, we know there and I can be importing OCC, but put potentially obviously of recycled pulp. So I'm just curious if there's potential for OCC to remain.
And now above $100, a ton or something like that and.
And the foreseeable future.
Yes.
Good day.
The potential of certainly there.
And if it does it's really about stability.
<unk>.
The.
Right now we've seen what 9 consecutive months of increase and OCC.
It eventually will reach its plateau.
And hopefully.
And hopefully get back from our normal normal type trend and if its the hunter the Panthers.
The 150 so the.
We've caught up you know the price has been the pass through on the cost is and the pass through and you're back and the normalized situation what is really.
The issue today is just that its month after month after month after month of the chase.
In terms of.
And what.
And the global market is going to settle.
No.
And the hardest thing.
Yes.
Okay.
Just curious I know I know, it's difficult in terms of visibility but.
I guess from some of the work that we've done it appears as if your customers' inventories are starting to normalize.
Where before it felt like they were live and kind of hand to mouth a little bit.
And any <unk>.
Visibility there in terms of where customer inventories are at.
And then real quick on Capex.
I think you talked about incurring most of our project horizon spend this year of call. It $100 million subset 15 would fall in the next year I know, you're not giving guidance for next year, but.
Directionally and that $200 million of Capex per spend knowing what we know today.
And that's what we've modeled out of the decremental.
Finishing up on our free cash flow guidance and thank you can go to the bridge. The agility provided that we're assuming that we will of.
The spend to that 300 level.
And I can tell you that with.
And with the delays we've seen associated with Covid.
True.
You know that could push out into into next year. It's too early right now for us to make that call.
And by the time, we're together and October we'll be able to to really have pure visibility.
In terms of how much of this capex is going to going to fall into this year or maybe even bleed into next year.
On the other.
Yeah, Hi, this is Roger on the customer side as you said on the food side, Youre, right and I think our customer and customers will stay and their inventories.
The Hep stabilized and so we're not sitting and think anything there just like us are struggling with some raw materials, but I would say on average they are back to more normal levels any any customer of theirs dealing with like appliances and automotive the chip shortage, we're seeing it all of those both in both cases, our sales of those customers were up.
Obviously significantly over the second quarter last year.
The solve more and our customers could have sold more of appliances appliance sales were up 23% year over year, but they could have been up higher automotive sales and you. All know the story there. So I think and anything to do with housing or anything to do with chip. The chip shortage I think our customers still have plenty of upside from a sales standpoint.
Which means upside to us.
Okay. Thank you and good luck.
Our next question comes from George Staphos with Bank of America.
Hey, guys sorry to come in late here.
I'll make it real quick so could you Howard remind us with project horizon. The cost of the projects has moved higher over time to the current level of whatever $150 million how.
How much of that is just inflation and the construction materials and how much of that is flexibility of that perhaps you're building into the system, maybe the optionality that even though your net neutral on capacity with all of the.
Closures that may be.
If you are be grows on a more secular basis coming off of some very strong growth that we're seeing now that you would have the flexibility to hit that demand.
And if that happens and then the second question I had just what preparation and if anything at all of and trying to get pricing up.
Are you doing and advance of.
Hurricane season, which always brings a little bit of volatility tourism. Thanks, guys and again good luck in the quarter.
Thanks George.
We did increase the original capital of horizon, but that was really built on the backs of incremental opportunity that the team had identified.
And after completion of the first capital submission and so the incremental 40 million that rolled it up to that $115 million range with where and <unk>.
Justifiable and a good return opportunity presented itself to to basically redo not just the paper machine, but the complex in terms of raw material flow.
Outside warehousing. So in terms of the campus next you'll see a new 120000 foot warehouse and you'll see how the flow of the OCC now of those as appropriate to the.
And to the backend of the machines.
That's where that incremental amount came from and it was again justified on the.
On the savings we would.
And would achieve by spending that.
The second question was around.
And the demand profile.
And as I noted and my my comments, we've announced the close of a couple of machines.
But that's all pending market conditions, we'll see what things look like.
Hopefully the.
The demand that we're seeing today will continue and that May lead us to continue operations of course breakdown machines, but the closure timing that that I shared with you earlier today.
And it's just our communication to our internal team.
Given the M&A annual notice.
And we can make appropriate our employees can make the appropriate.
Choices.
But it could be.
We're saying, we're going to and we've got the new machine going and the other ones of full 2 and we're going to keep that situation for whatever time period that the.
And that goes hurricane crop book.
And.
We've talked a lot of the and.
And for Us Hurricane prep.
And there's not an operational issue, but more of a supply chain issue.
And we should all be concerned about that yes.
Inventories as Roger spoke to were low.
Supply chains are being managed on the day to day basis, So you're not seeing.
Within the Gulf Coast supply chain.
Of the normal.
The pre bill of materials and anticipation of.
Such and events.
And it's something that we should all be concerned about.
But we'll look and see what mother nature brings us there.
Alright, Thank you very much.
Our next question comes from Adam Josephson with Keybanc.
Alright. Thanks, so much for taking my follow ups, just really quickly on that hurricane issue just to be clear are you.
I know, it's impossible to forecast hurricanes, but what if any supply chain disruptions or are you expecting in your and your updated full year resin cost forecast and then in terms of your OCC assumption I think youre expecting OCC prices to go down and the fourth quarter as collections improve and demand slows, but obviously with <unk>.
E Commerce box demand has been exceptionally strong and recent fourth quarter. So I'm. Just wondering why you would expect demand to slow and therefore OCC prices to go down seasonally in the fourth quarter. Thanks very much.
Phosphate and.
And this is nothing new.
We have never really built and any type of forecast of what can happen if.
If we have a hurricane.
The.
However, we have we've always managed to.
And maintained stock.
And the event that our suppliers go down for a week or whatever period of time. They may go down.
To ensure that we have raw materials to continue to operate and I only point here and it's something I could never just cannot forecast.
We will figure a way we always do that.
We are and I assume others, including our suppliers, who typically push and push material out of ahead of the season, that's not happening this year.
The.
Theres no way to forecast, what the ultimate impact of that would be.
The OCC.
And.
Roger you May want to talk about I think you spoke with the majority of this morning, but.
Just following of the traditional seasonal trends.
And I will say, 1 thing and whether the carry through the fourth quarter I don't know, but we have seen that the.
Exports of starting to drop as the prices have risen and we're seeing India and others starting to pull and further back out of the market and that's creating more.
More supply within North America.
As you know that's very complicated the dynamic.
Market.
But that is our expectation at this point and time that we should see things starting to moderate to come down.
Great. Thanks, a lot Howard.
I'm showing no further questions in queue at this time.
Yeah.
Well, thank you Liz and thank you everyone for joining us today and again, if you sort of.
And we appreciate your interest and the company and as always if you have further questions. Please don't hesitate to.
Contact us and would be glad to talk further thanks for the per call today.
Okay.
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