Q2 2019 Earnings Call
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9393 709.
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Use of non-GAAP financial measures, including definitions as well as reconciliations of those measures to the most closely related GAAP measure is also available on the Investor Relations website.
Today.
Now with that beginning let me turn it over to Julie.
Thank you Roger.
Again on slide three where you see that earlier. This morning, we reported second quarter earnings per share on a GAAP basis of 80 cents.
And base earnings of 95 cents per share, which is within our guidance range of 93 to 99 cents per share and slightly above our base EPS of 93 cents in the same period of last year.
Overall, we had a challenging second quarter with increasing macroeconomic headwinds coupled with certain operational disruptions, but with our focus on managing controllable costs. Our earnings result was solid.
Related to the 15 cents difference between base and GAAP EPS 10 cents is due to restructuring activities and four cents relates to non operating pension costs.
Looking briefly at our base income statement on slide four and starting with the top line you see that sales were $1.360 billion down almost 7 million from the prior year period.
I'll now review more details about our key sales drivers on the sales bridge in just a moment.
Gross profit was $275 million, just 1 million below the prior year's second quarter as gross profit as a percent of sales remained as strong 20.2%.
SGN a expenses of $131 million were favorable year over year by 7 million driven by cost reductions across the business, which more than offset the addition of SGN a from acquisitions.
All thus, resulting in operating profit of $144 million, which was $6 million above last year.
Our second quarter operating profit as a percent of sales was 10.6% a 50 basis point improvement over the prior year period.
And I'll review the key drivers to operating profit on that bridge shortly.
Net interest expense of $16 million was almost 1 million higher than last year, primarily due to higher non U.S. debt balances and reduced interest income a lower offshore cash balances.
Income taxes of $33 million were effectively flat to last year, driven by a combination of higher pre tax profits, but a lower effective tax rate.
Our second quarter 2019 effective base tax rate of 25.9% was lower than the prior year quarter, primarily to a decreased impact of the guilty tax.
And moving down to net income our second quarter 2019 base earnings were $96 million or 95 cents per share.
And looking at the sales bridge on slide five you see volume was lower by $48 million or 3.5% for the company as a whole.
Consumer packaging volume was down $24 million or 3.9% driven mostly by lower demand in rigid paper containers, North America and in plastics, but also by some weakness in our Flexibles business.
Rob will be providing more color about these volume declines in his comments.
Display and packaging had solid volume growth at almost $5 million or 3.2% driven by increased business activity, primarily in our domestic displays business.
Ill note. This does exclude the impact of exiting the Atlanta Pack Center, which is included in the exchange and other category.
Volume in paper and industrial converted products was down almost $27 million or 5.7% due to weak tube and core volumes in all global regions and lower paperboard and corrugated medium demand in the U.S. in Canada.
And sales volume and protective solutions was down by $2 million or 1.6% with the continued trend of strong demand for our temperature assured packaging offset by weak volume in molded foam and consumer fiber packaging, where we serve the automotive consumer electronics and appliance markets.
So moving over to price you see that selling prices were higher year over year by $12 million driven by price increases both to cover higher material and nonmaterial costs as well as other efforts to better realize the value of the products and services, we provide to our customers.
Continuing on to acquisitions, you see an impact on the top line of $67 million, which was primarily driven by the kinetics acquisition in the fourth quarter of last year.
And finally exchange and other was negative by $37 million driven by a $27 million negative impact from foreign exchange translation and $16 million of lower sales from the Atlanta Pack Center exit in September of 2018.
Moving to the operating profit bridge on slide six and starting with volume mix.
Our lower sales volume offset somewhat by a positive mix of business had a negative impact on operating profit of $16 million.
This impact was spread among our segments generally in line with the sales volume changes.
Shifting over to price cost, we had $2 million of positive price cost in the second quarter, driven by our consumer packaging and paper and industrial converted products segments.
There is a slide in the appendix that shows recent Oh see see prices, where you see that Oh see see prices averaged $42 per ton in the second quarter of this year.
Compared to an $82 per ton average in last years second quarter.
Although some of our third quarter customer contracts have reset at this lower level for Odisi, we have been successful in implementing price adjustments on non contract business, along with having a good mix of contracts with pricing that is based on market paper indices, such as 10, bending chip, which are actually higher year over year.
Next you see that the impact of acquisitions added $7 million to earnings this quarter, which is primarily related to our kinda techs acquisition in the industrial segment.
Continuing to total productivity you see that our total productivity was positive year over year by $11 million and was spread across the segments.
The main contributors to this positive impact were procurement and fixed cost productivity.
And finally, the change in exchange and other was favorable driven primarily by the positive earnings impact from the exit of the Atlanta Pack Center last September .
Now moving to slide seven you will find our segment summary, we see that consumer packaging sales were down 2.2% due most notably to softer demand, which also drove operating profits down by 1.1%.
The consumer segment margin was 10.4% slightly above the second quarter of last year.
Display and packaging sales were down 5.9% due to the Atlanta Pack Center exit last September , but partially offset by strong volumes in the remaining business.
Operating profit increased well over 100% to $5.9 million and operating margin, which was negative last year largely due to the Atlanta pack center improved to 4.4%.
Earnings also benefited from the volume gains in display and retail security packaging.
Paper and industrial converted product sales were up 3.6% driven by the kinetics acquisition and partially reduced by lower demand.
Operating profit was relatively flat due to these sales drivers as well as positive price cost and total productivity.
The industrial segment's operating profit was a solid 12.5% for the second quarter of this year.
And finally protective solutions sales were down 1.6%, but operating profit improved by almost 5% due to strong productivity results.
This segment's margin of 10.9% improved by approximately 70 basis points from the prior year quarter.
For the total company sales were down one half of 1% while base operating profit was higher by 4.4%, resulting in a company wide operating margin of 10.6%.
On slide eight you'll find our outlook for the third quarter. We are forecasting based earnings to be in the range of 88 to 94 cents per share.
Our full year guidance range is unchanged at $3.52 to $3.62 per share.
Our guidance does assume no significant change in the underlying economic activity, but does reflect approximately three cents of higher interest costs associated with the short term debt funding of our recent pension contributions.
Turning to cash flow on slide nine you see that our operating cash flow for the first six months of 2019 was $40 million compared with $251 million in the same period of 2018.
This $211 million decrease was driven by the year to date $175 million after tax cash impact of the voluntary U.S. pension contribution that we made in may.
This pension contribution was for $190 million and we had a related second quarter cash tax benefit of $15 million.
Mid way down this slide you see that our working capital balances increased during the first six months of this year by $66 million, which was a $21 million increase in cash usage by working capital versus the prior year period.
The primary driver to this increase was timing of accounts payable activity.
So after net capital spending a $101 million and after paying dividends of $84 million, our free cash flow in the first six months of 2019 was a use of $145 million.
Excluding the impact of the voluntary pension contribution our 2019 year to date free cash flow would have been a positive 30 million.
Due specifically to the full year after tax cash flow impact of $165 million from our voluntary U.S. pension contributions.
Our outlook for this year's operating cash flow is now 435 million to $455 million.
And our updated outlook for free cash flow is $60 million to $80 million.
I'll note that this 165 million full year adjustment to our GAAP cash flow guidance reflects our total voluntary pension contributions of 200 million, partially offset by an expected $35 million positive cash tax impact.
On slide 10, you see that our balance sheet and our liquidity position remains strong.
Our second quarter 2019, consolidated cash balance of $96 million reflects a $24 million decrease from our year end cash balance of 120 million.
This decrease was mostly driven by the repatriation of offshore cash balances that were used to repay short term debt in the U.S. and in Canada.
Next looking at our debt balances our consolidated debt totaled 1.5 billion at the end of the second quarter, an increase of $160 million from year end 2018.
The main driver to this higher debt balance was a new short term bank term loan used to fund the recent voluntary U.S. pension contribution.
I'll also highlight that related to the pension contribution our liability for pension and other post retirement benefits decreased by $196 million since year end 2008.
This concludes my review of our second quarter financial results. So I'll now turn it over to Rob.
Thanks Julie.
Let me speak briefly about our performance in the second quarter as well as the first half of 2019, and then I will speak to what we see as we enter the second half of the year, including addressing some of the measures. We are and have been taking to help us meet our financial and operational goals.
Sonoco produced extremely strong results in the first half of 2019. This was despite the clear slowing in the global macroeconomic activity, which impacted demand in many of our served markets along with the impact of several unforeseen fires a flood and other events, which damage four of our operations in the second quarter.
Reflecting on the second quarter I was really proud of how our team responded to these challenges while producing record base earnings which are well within our guidance as most of you know on the numbers guys will point out that the base operating profit of $144 million was an all time record and our operating margin of 10.6% was up approximately 50 basis points compared to last year's quarter and up 110 basis points from the first quarter. In fact, we did a little digging and you'd have to go back to the third quarter of 2001 defined by a higher base operating margin performance by the company.
Regarding the unforeseen events that impacted four of our operations during the quarter, let me start by saying thankfully none of our associates were injured.
Several of the events occurred in the month of June , including the fire at our Waco, Texas flexible packaging operation, which damage. They rotogravure press no customer orders were lost as a result of the press being down for repairs for approximately a month as our team did a terrific job in moving business to our other flexible operations to ensure uninterrupted service.
Also in June a spillway malfunctioned, along the trend River in Ontario, Canada, which flooded our Trent Valley paper mill shutting down operations for six days.
Again, our team did a great job and drying out the mill, obtaining and installing new motors and electrical switches and getting the mill back in production.
Also in our industrial segment, a tube and core operation in Perth, Australia was completely destroyed due to a fire at a neighboring customers operations.
And finally, we are continuing to deal with the near roof collapse at our Hayward, California, Thermosafe protective packaging plant, where we have two evacuated a significant portion of the facility.
Again, our team has done a great job in securing the structure and making sure none of our customers are negatively impacted.
Combined these unforeseen events cost us about two cents per share in the quarter to cover insurance deductibles and other business losses.
Looking more closely at our first half performance you will see sales were up a modest 1.5% due primarily to acquisitions, while base earnings were up a solid 8.7% to $182.7 million or $1.81 cents per share results in the first half benefited from earnings from acquisition productivity improvements and a positive price cost relationship, which more than offset lower volume mix and the negative impact of foreign exchange.
Our operating profit for the first half of 2019 was up 8.2% to $272.3 million and operating margin was a solid 10%.
An increase of 60 basis points from last year and consumer packaging base operating profit in the first half was up just slightly from last year to $125.1 million and base operating margin was essentially flat at 10.5%.
The consumer segments operating profit benefited from productivity improvements earnings from acquisitions, and a positive price cost relationship, which again offset the impact of lower volume mix and negative impact of foreign exchange.
I would say volume in our consumer business has been disappointing.
Particularly in the second quarter rigid paper containers, which had a solid start to the year saw slow some slowing in the second quarter, particularly towards the end of the quarter, which may have been a combination of slowing demand and de stocking.
Our flexibles converting business continues to do well in our primary confectionary your hard baked goods segments. We did see some softness and other served markets and as we mentioned previously we were closing the forming films operation and our Elk Grove facility at the end of the second quarter, which will drive operational improvement in the second half of the year.
However, closing the forming films Department did reduce sales slightly in the second quarter and that will lead to reduced sales for the balance of the year, but as I said it will drive operational improvement going forward.
Rigid plastics volume continues to lag due primarily to poor perimeter of the store performance, partially due to the weather and then quite frankly, partially due to some of our operations, where we continue to deal with the consolidation of the facility and relocation of four thermoforming lines into three operating facilities. The plastics business also experienced a slowdown in some of our industrial serve markets.
Switching to our paper and industrial converted products segment results for the first half of the year were up 8.2% to $109.6 million, while operating margin was 11.1% up about 30 basis points from last year.
Earnings from the contents ex acquisition, the positive price cost relationship and productivity improvements again more than offset vol, a lower volume mix and negative impact of foreign exchange.
As Julie mentioned clearly volumes struggled in the second quarter and global tubes, and cores as well as paper.
Both in uncoated recycle paperboard and Corrugating medium, we're continuing to run some recycled pulp in our corrugated medium operations and hartsfield offset lower orders from medium.
Also in the quarter, we signed a definitive agreement to acquire Correnso Holdings America for $110 million Correnso produced sales of approximately $75 million in 2018 and operates a 108000 ton per year, you are being mill in Wisconsin Rapids, as well as to core converting facilities.
Correnso as attractive assets.
And customer mix and 100% of its products are made from recycled paper, which further enhances our commitment to increase the amount of material, we recycle or cost to be recycled relative to the volume of products, we put into the marketplace. We expect the transaction to close by the end of the third quarter.
Our display and packaging segment in the first half showed a strong turnaround with operating profit of $12.3 million compared to 1.2 million last year, you'll recall, we struggled with the Atlanta Pack center last year and have since exited that contract.
And finally, our protective solutions segment.
Had a good first half with operating profit up 4% to $25.3 million and operating margin at 9.8% up about 60 basis points. We continue to experience strong productivity improvements in this segment and volume growth in our Thermosafe temperature assured protective business is more than offsetting weaker volume in our automotive molding and fiber based consumer protective packaging businesses.
Let me conclude by addressing what we see entering the second half of 2019.
At the end of 2018, we became concerned that global macroeconomic conditions would deteriorate in 2019, which we clearly felt in the second quarter.
That is why starting in the first quarter, we had been quietly implementing several fixed cost restructuring actions and have set in place further efforts, which are targeted to lower costs between $15 million to $20 million. This year.
As a result of these efforts and others, we are maintaining our earnings guidance for 2019.
And we expect to be able to absorb an additional three cents per share and higher interest expense coming from the term loan, which we took out in may to substantially fund the transition in our U.S defined pension plans.
As Julie mentioned the voluntary contribution to the plan is the sole reason why we have lowered our operating cash flow and free cash flow projections.
In conclusion, we are pleased with how we manage our business in the first half of 2019 in the face of headwinds, which were mostly unexpected and beyond our control our ability to adapt and adjust when faced with unforeseen events, whether driven by nature or other factors continues to be a strength of our organization the rigor and discipline, we apply the focusing on what we can control while being flexible when needed has and will serve us well as we move through the remainder of the year.
However, no matter the environment, we remain intensely focused on doing what we need to do to drive profitable growth margin expansion and solid free cash flow.
Now with that Crystal would you. Please review the question and answer procedures.
Thank you ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key once again to ask a question. Please press star and then one now.
And our first question comes from Atlantic Rodriguez from Yes. Your line is open.
Hi, good morning, guys.
Good morning, Glenn.
Well I have a couple of questions on volume what was the impact of all those natural disasters on different audience and fire on volume and when you look at consumer packaging, it's supposed to be a little more defensive but we've seen weakness all across the board I mean, what exactly is going on in there.
Sure. So let me start with the the volume of the unforeseen events.
For the most part I would tell you that the volume in our Flexibles business, where we had the fire we were able to move the business around albeit it was running a little less efficiently and other operations. So I don't think from a volume perspective, we had a significant event there.
When I think about the flooding that occurred in our operation and Trent Valley, We were down six days, Italy, and I would say directionally. It was about a loss of 2000 tons.
Or so as a result of that activity.
Before we got back up and running.
When I look at the consumer side.
Let me try to break it down a little bit for you.
When I think about our can business, where we have a drop off and I sort of reflected on this the other day and took a look at where we were last year last year in the first quarter, we had a very slow first quarter with a rebound in the second quarter when I take a look at this year I saw a very strong first quarter with a slowdown in the second quarter and I don't know if we saw some de stocking associated with that towards the end of the second quarter, adding a little more color to it when I think about how everything performed.
On the consumer side in the second quarter, we had a very strong April we had a good may and June , especially the second half of June things really slowed down so I don't know thousand anticipation for holidays or not and that's why I said I'm not sure if we're seeing a destocking.
In the business when I take a look at our Flexibles business.
The bookings continued to be buoyant, we talk about this being a segment that we expect to grow 3% to 4% a year and.
Clearly the bookings support that as we look out.
And move forward now one of the things we did in the flexible business, we talk about shuddering.
The forming films.
Department in our Elk Grove facility that bid that really started towards the middle of the first quarter, and then sort of tailed off through the end of the second.
Quarter end it is now closed.
So that had a slight impact in terms of volume and sales dollars and then let me talk about the plastics and hopefully this is giving you some granularity.
When I think about our plastics business.
Clearly if I, if I take the perimeter of the store.
We you know weather did have an impact on the first quarter and we had an exceptionally strong.
April as the weather broke and product flowed out I think we saw some volume.
Especially in certain of the berries really flood the retail market. We did see a diversion in may have some of that volume into processed product as opposed to fresh product.
And then.
The other thing that I that I mentioned, if you go back to the fourth quarter, we talked about closing a plant specifically the Hollister plant in California, and reallocating equipment to a number of our facilities we moved it.
Two or three different facilities for different machines.
And and extruder.
And.
Is that the turn on of those machines has not gone as well as we had expected.
We have worked through some of those issues, we still have a little bit of lingering on that but I would tell you that that had a negative impact on volume because sorry, we couldnt service our customers to the level that we wanted and Directionally that was north of $7 million that we we simply were not able to provide the service to the customer in the near term.
So thats the consumer if you will impact if I then take and maybe answer question before you ask it if I then take and look ahead to the balance of the year as it relates to consumer.
My expectation is that we will be flat to down 1% holistically across the board on on the consumer side for the balance of the year based on everything that we see.
Hopefully that helps settling no that definitely does so just to put all this together so backend.
During the Investor Day, you talked about lack of volume expectation of 1% for the year for the whole portfolio.
What does that look like now given that the first half is already down almost two and a half.
Yes, but if I think about the second half of the year I would tell you on the way I'm looking at the balance of the year based on what we know today and this is coupling the consumer and the industrial side. So maybe to give you some color on the on the industrial side I do expect the industrial side to be down about 4%. So basically what we're seeing.
As we move through the first half of the year.
And then flat to down 1%.
In terms of volume for the consumer side in sales dollars I expect it to be Directionally flattish for the second half of the year in comparison to.
The second half of last year.
Okay. Thank you very much.
Well.
Thank you. Our next question comes from Ghansham Panjabi from Baird. Your line is open.
Hi, good morning, everyone.
Gotcha.
Good morning, Rob I guess, Rob picking up on your final prepared comments.
We open it up to Q and you were talking about the outlook.
Obviously, you have a very sluggish industrial economy, not just here in the U.S., but Europe as well.
Consumer came in below your expectations. Your interest expense is higher than you initially thought given the bond offering.
What are the positive offsets too.
So to give you the confidence of maintaining your guidance.
You mentioned cost cutting maybe you can kind of scale that for us in terms of size et cetera. Thank you.
Sure.
I think it's a couple of things if you if.
As you recall, we've talked about a number of different things over the past 18 months or so in terms of actions that weve taken weve talked about looking at our business Holistically.
And making some tough decisions around some business that we have and are we being.
Paid for the value that we bring and and.
As I think about what transpired clearly we have put some business at risk because we we made some hard decisions around some business.
The other thing that we have done is going again on that holistic business approach if you recall.
We we we took a very focused look at as starting with our tube and core business here in North America, which was really the operation that.
Tested out our thesis or hypothesis, if you will.
Where we took a look at our business is that can we do more drive more utilization off fewer machines. If we have fewer rooftops that that journey is well underway here in the in the US where we have taken a number of cost. So we have also made some investments in lines, what I'll call New state of the art lines, which have a significant impact on the on the operations, where it makes sense, we have taken that same level of activity.
To Europe and the team there is starting to do exactly that and I spent.
Time with the team members in last two weeks and.
I am very impressed with the plan that they've laid out in terms of taking on exactly the same actions we've done here in North America.
If you recall, we made a pretty significant investment.
Into our paper assets here, putting money into our best machines and had certain expectations related to the returns associated with those machines.
And we are four six the way or I guess, two thirds kohei through that activity. We will we will finish off mid point next year.
And then we also said when we made that investment as and when things are appropriately were going to take some high cost.
Equipment out of line, if that made sense and so we're we're looking at that.
And we will act on that appropriately if the market conditions warranted.
And then lastly in terms of the cost to cost out.
I referenced in my comments, taking up $15 million to $20 million of cost that work really commenced in the beginning of the.
The first quarter and has started to roll out in the second quarter, and we know what Weve got targeted so we're confident that we can take those costs out of the vast majority of which have already been acted on so we will see that play out over the balance of the year. So its those things that.
That we see and that ultimately it's about driving the margin and that's what's gives us the confidence based on what we see today and what we believe to be true today Ghansham. If we see a wild swing in volume then you know obviously all bets are off but we do not see that at this point in time other than your limits.
And then I guess, just my second question as it relates to paperboard fundamentals in the U.S., especially you are b I mean, clearly LCC prices are quite low industrial markets are quite challenged.
How are you thinking about you ought to be pricing for the balance of the year.
You know I think.
From a volume standpoint were down I think in the second quarter of Directionally, 4%.
So clearly there is some softness in the marketplace, but as I think about it from our perspective, I think we're going to take some appropriate actions as required in the market.
And is there some price challenges that are are creeping into the space. The answer is yes, but we've also had prices hold.
So it's sort of a mixed bag for us and when I think about the input costs going forward.
I don't see much movement in LCC going into the balance of the year. So.
I think we sort of plateaued over the course of the last couple of months.
Or bought unveiled open.
Got it thanks, so much.
You bet.
Thank you. Our next question comes from Adam Josephson from Keybanc. Your line is open.
Roger Julie good morning, and kudos to you on a really solid quarter given the circumstances.
Thank you.
And Robbie if thinking in response to actually add lanes question, you talked about the cadence of some of the consumer businesses volume wise that in some parts of that business April is strongest.
The the last couple of weeks of January the weakest can you talk about that.
On the industrial side, if it was a similar trend in your industrial business that April was the best in June was the worst and into July for that matter.
Yeah, I would tell you Adam it wasn't that pronounced on the industrial side. The same way we saw in the consumer I would tell you that we saw the softness going into the tail end of the first quarter and it pretty much continued on April and May and June .
If there was a fluctuation it wouldn't have been a what I'll call a needle moving fluctuation in any one month over the other so we saw that drop off and then sort of it's hanging in at that 4% reduction level here in the U.S.
As it relates to the paper side.
Which is why correct me if I Miss heard you that you're expecting 4% industrial line declines in the second half similar to what you experienced in the first half is that right.
That is correct on a blended basis with our converting operations yes.
And any differences in terms of medium versus tubes, and cores attach are all down.
Roughly comparable rate are you thinking yeah, I will tell you on the medium side as you know, we're really not a factor in the medium space given our one machine.
And if you recall, we had talked about us.
Supplementing some tons in our medium machine with.
The pulp that we are shipping to our our operation in China.
And so just off and Adam I don't know the exact split, but I do think that our our medium volume was down more than the 4%, but it was offset by some of this pulp activity and.
Maybe it's maybe.
Two or three or 4% more than on the medium side, but again, it's such a small component for us.
And just on the tubes and cores will last question about that Rob that particularly the paper volumes have seem to have fallen off a cliff.
In the last couple of months coded on coated.
No. That's your biggest serve market within tubes and cores, what do you what do you make of what's happening there.
Well I would tell you that what we saw.
What we've seen is a drop off from across all the market segments. So if I think about it in terms of here in the us were down about 4% in our tube and core space and its every segment with the exception of.
A slight uptick in our films business or film core business.
But if I think about our specialty and.
Take business when I think about our textiles, when I think about our paper clearly the paper. We all we all know what's going on with paper. So we see that we've seen some mill downtime as it relates to find writing paper in newsprint.
And and.
And that didn't come as a surprise.
Obviously the.
Tubes, and cores that we make for the the.
Containerboard industry, we saw a decline there again, no shock or surprise there I am pleased that the the film side is up slightly but that again, one quarter does not a trend make so we just need to monitor that closely.
But.
The interesting thing is if I go around the system.
Now that we are are you RB is about 2 million tons, a year and half of a little over half of it is here.
What we did see was paper was actually up in Europe for us, even though our tube and core volume was down.
And then if I if I take a look at the converting side in other regions of the world clearly down in Asia, but it was it was interesting it is a tale of countries.
And when I think about what we saw in Asia, China, and Taiwan definitely down pretty dramatically and I think I attribute that to some of the.
Tariffs that.
The conversations between our president and.
And the Prime minister or the president of China.
And the dialog what's going on there.
If I go to South America, what's interesting is we're we're seeing actually a bit of a bounce in Brazil and.
And that seems to be the only country in the world right now that that's looking positive and has for the last couple of quarters and then the balance of.
South America, including Mexico is very much along the lines of what we're seeing here in North America.
Thank you for that and just one on sustainability, Rob in which specific areas are you hearing from customers either regarding concerns about your existing plastic packaging thermoformed packaging, otherwise or desire to buy more composite cans say in Europe in lieu of plastic.
Well, we clearly we've clearly got a lot of activity going on in Europe with the interest in the all paper can.
And to me if you will the recycling requirements of Germany, which then sets the trend for the rest of 'em.
Europe .
And if I think about the only place that I can say definitively where we did see a switch or was it was with with that paper ball for a frozen meal construct and we talked about that I think in the yeah.
Last year.
And.
I would tell you that the conversations we're having with our customers today are much more.
Collaborative in terms of really trying to understand the whole notion of sustainability and recycling and making sure that we really understand what is possible and what isn't.
And then the other conversation that we are having that is much more again I'd say on the collaborative side is if you have something in plastic that is recyclable and weak and we can make sure that it can be recycled.
What are white trade whats the trade off what do I give up in terms of shelf life and am I willing to give up some of those those attributes. If you will the package. So I find those very constructive conversations which are leading to meaningful projects between us and the customer base that we have.
Thanks, So much Rob you bet.
Thank you. Our next question comes from Gabe Hajde today from Wells Fargo Securities. Your line is open.
Morning, Dave Good morning, good morning.
Had a question about the the destocking or I guess, the cadence trajectory of the volume environment for composite cans I was curious if you could maybe reflect back as to.
Other times in the past that you've seen.
Destocking efforts from customers and I know part of that is somewhat conjecture, but.
Might it be in anticipation of lower ULCC costs flowing through the system or something like that.
Or could there be some other factor.
That managing their balance sheets are something that that you can give us some insight into.
Yeah and and.
I'm going to give you a bunch of anecdotal kind of stuff.
But if I if I think about for example, some of the Destocking. We've had we've had it in the snack chips, specifically cans business in the past.
From time to time as a result of either a promotional thing promotional product coming in or about to and.
And they want to flush product out we've seen the same thing on the flexible side from time to time I think part of that is.
Our customers really seeing a buildup of inventory, but its typically around situations.
Depended upon specific events in the market and or they're being a strong belief that theres going to be a significant movement in some of the input costs.
But I would tell you that when I take a look at forecasting from our customers and enhance us doing it same thing to our suppliers chute, we're probably 45% to 50% accurate at best So some of these destocking events that do occur from time to time.
Don't last very long I, clearly think that as we headed into.
The end of the fourth quarter, there was clearly a de stocking activity that took place.
I think the other event.
And I don't know this for certain was the whole issue around Brexit impact on Brexit and.
Was there a run up in the first quarter as a result of some of that.
You know with the benefit of hindsight I think absolutely that was the case.
So more to come I don't know that I am answering your question gave but thats sort of Directionally, what we've seen in the past.
No. That's helpful and then on the flexible side I'm curious if.
If you can comment at all relative to how the overall industry is performing.
And if this is some sort of a little bit of share shift or sustainability issues starting to creep in.
Outside of the onetime or or sort of isolated.
Issues that you guys encountered.
Sure I would tell you that since it's a great question, because I happen to be talking to the CEO of the FDA.
Last week on a couple of other issues and I talked about this specific that specific question. What are you seeing overall the industry continues to grow at a good clip if at 3% clip.
And so I don't think its a sustainability related issue that we're seeing are people, creating new constructs in flexibles based on on what I'll call. Some tradeoffs for that customers can live with so that you can create a uniform construct a one material. Those are conversations that are going on and do you take something from for example, an 18 month shelf life to a nine month shelf life given the distribution channels in place is that sufficient and I think customers have better data today and that allows them to start looking at things like that a little bit differently.
Excellent. Thank you.
You bet.
Thank you.
Our next question comes from George Staphos from Bank of America Merrill Lynch. Your line is open.
Morning, George Hey, Rob how are you. Thanks for taking my question.
Piggybacking on the sustainability discussion, obviously, we've done a fair amount on this topic over time, what are you seeing from the consumer from your research in terms of.
Whether they care about recyclability or actual recycling rates because given our analysis you get different answers, depending on which metric you look at so what do you think will be important for the consumer and therefore ultimately your customers in terms of which packages they choose down the road.
Yes.
George and.
This is going to sound like I'm a politician to reflect this but it's not meant to be that.
I think.
I think part of it is really we've got to work hard at educating the consumer I think the consumer wants to do the right thing and I think the consumer needs to have the docs connected and United had an opportunity to talk about this offline from time to time around the bullish around food waste and allowing them to understand it I think that we need to help connect those dots.
And as a result, we're having a summit in September .
17th and 18th and I hardly invite all of you to join us for that because it's going to be a number of people from different industries talking about how and what we collectively can do and quite frankly, it was an impetus of the conversation you and I have had but how do we bring everybody together. So we got consumer products companies. There, we got ours ourselves there we've got the government there and we have education there.
Academia there so I think it will be a good good platform for us to have a conversation around exactly that issue.
As I said I really do believe the consumer really wants to do the right thing, but they need to understand what that rate thing is.
They don't want they don't want.
Recyclability if the unintended consequence has been more detrimental impact to the environment.
And I think thats really the conversation that we're trying to have with these folks and I think ultimately that's what's going to be most meaningful to the consumer once they understand all that but it's incumbent upon us to help connect those dots.
Okay.
I appreciate as always the the discussion on that Rob.
A quick one related to flexible packaging, you mentioned that the FDA, saying, 3% growth.
From my recollection, they tend to evaluate the growth in nominal terms say, including pricing was that a.
Real volume expectation that they have for the industry because.
Yes, certainly not really seeing it across a lot of end markets. So is that more of a nominal or was that a real volume.
My expectation is that the FDA. If you can comment to that effect, yes, no George it is nominal it is measured in dollars.
I don't think I've ever seen anything based on impressions or four pounds or tons and as you know in the flexible space you down gauge things or you shrink the header of a bag.
It's.
Unfortunately, it's measured in dollars and that 3% growth is really driven in dollars. So it could be a combination of volume as well as price.
Okay.
Two last ones and I'll turn it over.
The margins that you are seeing the decremental margin.
On the volume.
Loss. So far this year has been running around 30% or so is that what we should expect over the balance of the year is that what you would normally target in terms of a decremental margin.
I would echo I forget who pass mentioned it earlier, maybe as Adam I think you've done a really good job operation. This year, given all of the volume and operational challenges notwithstanding but that's a pretty large decremental any way to improve on that in the second half of the year.
And then my last question and I'll turn it over.
All this discussion about weakness in volume certainly.
The transports and the rails box shipments et cetera are suggesting a sluggish if not weakening outlook for demand.
It was nice to see some improvement in display and packaging realize the comps there are easy but are there any sort of silver linings any positives we should take from.
The benefits you are seeing there in terms of the outlook for the second half and into 2020. Thank you guys. Good luck in the quarter.
Thank you George.
The the decremental margin volume loss that seems high so I would tell you that I would not expect that going forward that the magnitude of that.
With respect to.
Weakness in volume I think we probably looked at the same thing we at CSX with an announced yesterday and I think their CEO spoke to the complexity of the economy that he's seeing yes, clearly see that we also look at the trucking index and take a look at where the number of loads versus the number of tractors available last year versus this year.
Has basically been cut in half so as I take a look at that.
Hi, I am obviously, we I am concerned about what we've what we've seen and I don't see that changing dramatically.
Aren't in the business moving towards if I take a look at the volume increase that we did see in the DNP business. We did win some new business. After we got our people really focused on that I do think folks are trying to.
Push their product in through different venues old bricks, and mortars, which is where the display goes.
And then the other area that I would tell you that.
Is interesting and it does tie into our fresh and natural approach our thermosafe business.
I had a very strong quarter.
In relation to the temperature assured side.
And.
It was strong into two areas one was in the fresh and natural food space, which is an extension of some of the product lines that we have and we saw significant growth there around it and pasteurized product.
And then the other piece that we did see was very strong performance on the the biologic side and the the pharma side. So there are segments of it.
That but if I take a broad brush.
I still got to wait and see attitude to see what's going on because here's what I can correlate.
The retail data that came out to what we are seeing in across all the markets. Thanks.
Alright, Thank you Rob.
You bet.
Thank you. Our next question comes from Steve Chercover from D.A. Davidson Your line is open.
Thanks, Good morning, Steve.
The first one just on core Enzo I mean, you indicated the desire is to get towards an 85%.
Overall recycling content so what's the current level. Please.
We are just over 75% that we recycle or cause to be recycled.
Around the system based on the weight of all the product we put into the marketplace.
Great. Thanks, and then secondly, I and I wouldn't want you to try and predict ULCC pricing.
But at a high level do you get concerned that if prices persist at these current levels.
The entire collection system can break down it seems like it's hardly worth collecting for.
$42 a ton.
Well first of all I don't think you can collect it for $42 a ton there is a lot of cost associated with picking up handling trucking, it and delivering it and all that kind of stuff. So.
We've got a system that collects 2.8 million tons, we consume about 1.31 0.4 of that ourselves. The rest we we trade as a result of the merger that we have the model and we're in that business because we want to have surety of supply of fiber for our system.
Our mill system here.
And then the other piece that I would tell you that we're seeing clearly we're acting on but I would tell you. The most recyclers if not all are already doing is the the pendulum has swung if you go back in time.
The the recyclers charge municipalities to bring on the waste and that pendulum swung to where we bought the ways. The pendulum has now gone back to where we are charging to receive that material and I think the alternative if you've got municipalities that are going to say well, we don't want to do that how are you going to.
In good conscience after educating all of us as consumers that recycling is an important aspect to keeping viewers pure.
Say, what we're going to start bearing all this stuff again, I don't think thats going to play out ultimately you and eyes consumer will pay for it. So I think we'll we'll find a way to make the system work out in necessity.
Great. Thank you.
Thank you.
Our next question comes from Salvatore piano from vertical research your line is open.
Yes, hi.
So first a little bit on.
Great how are you good.
Great. So first question a little bit on M&A.
The past couple of years, you have been doing.
Three acquisitions, six enhancing a little bit the position on the perimeter of the store, which seem to be the issue in the past.
Two quarters actually in consumer packaging. So can you, let us know with regard to volume and operating profitability. How are the companies that you acquired performing versus there.
Their performance at the time of the acquisition.
Sure.
At a high level I would tell you that.
It's mixed.
We've we've had good success in a in portions of the of the perimeter of the store, but if you recall I said earlier part of the challenge that we had is we shuttered a facility move things around and have not executed as well as we should those plans have been negatively impacted as we go through the growing season. Unfortunately, this year, but that is a.
Temporary situation, if I break it down.
Into the acquisitions that we would have talked about publicly very pleased with how Highland is performed and continues to perform along with the portions of what we've got on the West coast, but we've got some work to do and this is a long term play is still very very committed to that market because.
The trends that led us to make those acquisitions are continue.
To be enhanced as just evidenced by what I said earlier around our Thermosafe business, where we're creating additional opportunities for using other packaging that we have to to bolster our offering into that marketplace.
Thank you.
Our next question comes from Mark Wilde from Bank of Montreal. Your line is open for now thank you good morning, Rob.
Rob first I wonder if we could we just talk about how you feel about that $18 million, where the productivity improvement in the first half.
Well I feel good about it [laughter] I have just trying to think about that in the context of what you're trying to generate each year are you are you on track for where you want to be for the full year.
We we are slightly behind as it relates to what we had laid out at the beginning of the year, but some of the activities that were taking on with respect to the cost outs that I mentioned those were outside of the original plan I think that will help us get to where we need to be as we finish off the balance of the year.
Okay and can you is it possible put any kind of just give us a general sense that 15 to 20 million that you talked about what kinds of incremental things are in that.
It's a whole raft of things throughout the organization some of it isn't SGN, a probably a good portion of that would be in the S.G. in a space, but and that's an area that we focus on as you know as we acquired businesses were bringing S.G.N.A.N. one of the things that we have we have talked about is it.
Are there opportunities for us to simplify standardize and automate activities. So that we can they bring things to more of a center of excellence activity in different regions around the world. We've had pockets of it we're trying to expand that so that we deploy our people to more value added activities. So that that's really the driver behind that more.
Okay, and then I wonder just turning to portfolio, Rob you know youve.
Talked with us at Investor day, and another points about sort of the things that you're interested in on the acquisition front and I Wonder if it's possible for you to just talk with us about what you're seeing in terms of acquisitions right now what valuation looks like.
And at the same time, you've also talked about some potential moves on non core businesses and I wondered if we could get a little color on how that process is evolving.
Sure.
I would tell you that we are as active as we've ever been that looking at things getting a engaged in a number of different things overtime. You know, we'll talk about it when we're ready to talk about it but still very active I I honestly I think we probably talked about this before where I thought you know December was going to bring some reality to expectations.
But that is not necessarily the case the the.
Multiple environment still appears to be rather frothy and and it's an opportunity and it's also a frustration if you will.
So as it relates to US taking look first and foremost it's got to be strategic does it help us drive either scale or customer or capability or geographic reach that's critically important for what we've laid out those are the things that we look at so and we will continue to do so.
On the and I think you and I've talked about in the past in terms of if we were to simple or talk about our strategic focus it's about simplification, it's about focusing and three platforms flexibles paper and a rigid plastics and.
And we needed to fix a few things so that we could then assess strategic alternatives and those are the things that were underway and when we can we will talk about where we are in that process.
Okay, and then last one for me I wondered if you could just talk a little bit about the core end, so and yeah, I guess I'm, just particularly curious about sort of.
What the regulatory issues might look like there because the you know the tube and core market is pretty consolidated here in North America. So I'm curious you know how you got comfortable with the your ability to pick up even more of that market.
Yeah, I mean, the market is pretty expensive and we're as you know we're we're one of a couple of larger players but.
There if you look at it I mean, there's really not a lot of barriers to entry if you want to make tubes and cores.
And if I think about Correnso and it goes back to what we had laid out with respect to our thinking around our paper assets, we want to invest in best in class assets we.
We're very pleased with the asset that presented itself and in the.
The Correnso mill and it allows us to take a look at our footprint and through a different light and so I think from that perspective, Oh, we we.
We thought it made good sense for us in terms of our network and we look forward to getting that deal closed in the next 60 or so days. Okay sounds good good luck in the second half Rob. Thank you.
Thank you.
And we do have a follow up from gauge Hot gave hatched <unk> from Wells Fargo Securities. Your line is open.
I will try to make this brief Julie I'm looking back in 10 year funding history for pension.
And averages sign off $55 million or so is there an expectation going forward I'm coming up with 10 to 15 million appreciating that pensions tend to be.
Bernie.
Volatile organisms.
Yeah well.
To your point about pension being volatile that's really really at the core of the recent decisions. We've made with our board on de risking our pension plans that include.
190 million contribution we made in May and then we do have about a 10 million additional kind of top off voluntary contribution that we're going to make in the second half of this year. So beyond that at that point. Our plan is very very close to 100% funded and that's in the U.S., which that's the largest part of our pension liability as you can imagine.
So really on a go forward basis, we've got very limited pension requirements on a go forward again, we put the money in a in May add a little more to go we've shifted up most of those investments pension investments into fixed income into that then immunizes for the most part the funded status and so I would expect.
Next year.
We might have 100 million or so of cash flow going into the pension plan as we kind of wrap up some de risking activities next year.
And then beyond that you know where it's it's extremely limited.
The impact of pension out our cash flow.
Thank you.
Thank you and I am showing no further questions from our phone lines I'd now like to turn the conference back over to Roger Schrum for any closing remarks.
Thank you Crystal again as Rob mentioned, if you have any interest in attending our food waste and sustainability conference or <unk>.
The September please just let us know and we'd be glad to accommodate you also I want to congratulate Rob He became a grandfather during the conference call. So he's already of the grandfather became another at another grandchild. So congratulations.
Again, thank you again for your for joining US today and if you have any further questions. Please don't hesitate to give me a call. Thanks.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program you may all disconnect everyone have a wonderful day.