sonoco products\' (son) ceo rob tiede on q2 2018 results - earnings call transcript

by:Yucai     2020-01-12
Sonoko Products Co. , Ltd. (NYSE:SON)
At 11: 00 a. m. on July 19, 2018, etexecuesroger P. 2018 Earnings CallSchrum -
Corporate Vice President of IR & affaffaffairsrob CTiede -
President and CEOBarry L. Saunders -
Senior Vice President and CFOAnalystsEdlain Rodrígues
Panjabi-Robert W.
BairdGeorge Staphos-
Bank of America Merrill Lynch
Barkley Saidan Josephine
Capital market
Goldman Sachs-Wilder
Bank of hajidmuntega-
Debbie Jones, Wells Fargo Securities
Deutsche Bank-Dillon
Ladies and gentlemen, have a great day and welcome you to the 2018 Sonoco earnings conference call for the second quarter.
At this time, all the participants were listening. only mode.
We will have a question later-and-
Answer sessions and instructions will be followed at that time. [
Operation instructions].
As a reminder, the meeting is being recorded.
I would now like to introduce Roger Schram, the moderator of today\'s meeting and vice president of investor relations. You may begin. Roger P.
Thank you, Ji.
Good morning, welcome to Sonoco\'s investor conference call to discuss our 2018 financial results for the second quarter.
Today with me is Barry Sanders, President and CEO Rob tie and senior vice president and chief financial officer.
A press release was released before the market opened today covering our financial results and can be found in the Investor Relations section of the sonoco website. com.
In addition, we will refer to our second-quarter results report, which was also posted on the Investor Relations website this morning.
Before we discuss further, let me remind you that today\'s phone call and presentation contains some forward-looking content
Forward-looking statements based on current expectations, estimates and forecasts.
These statements are not the guarantee of future performance, and there are certain risks and uncertainties.
As a result, there may be significant differences in actual results.
In addition, today\'s presentation includes the use of non-
Management believes that the GAAP financial indicators provide investors with useful information about the company\'s financial position and results of operations.
About the company\'s use of non-
GAAP financial measures, including definitions and reconciliation of these measures with the most closely related GAAP measures, can also be found in the Investor Relations section of our website.
Now, let me hand it over to Barry. Barry L.
Thank you, Roger.
I will start with slide 3 and you will see that earlier this morning we reported second quarter earnings at $0 per share for GAAP.
88 and basic income is $0. 93 which is $0.
04 above our guide high-end $0. 83 to $0.
All of this is compared to base income of $0.
The same period last year was 71.
So it\'s a very good quarter to be fair.
Depending on the difference between base and GAAP $0.
02 is due to the cost of restructuring, which does not include the amount of personal attention and $0.
02 related to the acquisition cost.
Looking at the simple base profit and loss statement, slide the top line of the month and see sales of 1 billion 0. 366 billion high to more than 0. 126 billion. due to the favorable impact of global sourcing, high volume, higher overall sales price and translation, you will see all these quantified things on the sales Bridge.
Gross profit was 276.
5 million, 38 million higher than the previous year, mainly due to favorable price costs, but also due to the impact of increased volume, acquisition and manufacturing productivity
Material bloat, but you will see more details of the driver in the operating profit bridge in a flash.
Our gross profit margin has increased by 20.
It was 2% age points higher than last year.
Sales, general and administrative and other income and expense items are 138.
2 million, an increase of 18 million over last year, mainly due to the impact of the acquisition, and also due to the management incentive to increase the accrued items and the overall inflation rate.
All of this resulted in a 138 basic operating profit.
3 million, an increase of 20 million over the previous year.
Low operating profit.
In contrast, service pension income is only $130,000.
Service fee 3.
3 million last year. Interest of 15. 1 million is 2.
Mainly due to the impact of acquisitions, financing, and slightly higher interest rates to a lesser extent, 3 million higher than last year.
The income tax of 33 million is basically unchanged, as the effect of a significant increase in pre-tax profits is largely offset by a lower effective rate of 26.
7% due to the impact of the tax law.
The equity and affiliates at the time of the merger with minority equity are 3.
5 million was nearly 1 million higher than last year, with a final base income of 93. $8 million or $0. 93 per share.
Take a look at the sales Bridge on slide 5 and you\'ll find that sales rose 35 million or 2 in the second quarter.
The whole company is 8%.
In terms of the number of segments, the number of our consumer packaging has increased by 1, which is encouraging.
8%, while the flexible volume increased by 5.
5%, driven by growth in Europe and Asia, the number of global composites is likely to grow by 2%, all partially offset by a 2% drop in plastics.
However, if you exclude the impact of some changes in revenue recognition under the standard for this quarter, the plastic industry is really flat.
Due to the new battery packaging operation, the volume of the display and packaging parts has increased by 17%.
The number of paper and industrial conversion products has also increased by about 1.
2% while growth and global paper and our reals business have been globally managed and core sales down by about 2%, sales have declined in all major regions of the world except Latin America.
Especially in the United States. S.
The volume of the tube core decreased by about 2.
7% most of them come from smaller accounts directly related to our customer optimization strategy.
Sales in the quarter were basically flat, and protective solutions had some good growth in the temperature assurance packaging business, which grew by about 10% --over-
Demand fell and transport parts fell by 7% due to continued weakness in car-related sales, offsetting the impact of the year.
Turn to the price on the bridge and you will see the price rising year by yearover-
Driven by rising prices, it is growing by 11 million per year to cover higher material costs, particularly paper, resin, steel and aluminum, and non-
Material inflation including freight, wages and other operating expenses.
The overall price of the consumer packaging part is higher, but lowerover-
Due to the contract reset portion in the business related to the lower OCC price, the year of the paper and industrial conversion product portion.
Moving to the acquisition, you will see 62 million of the top products in the consumer packaging sector affected, about half of them from last year\'s Clear Lam acquisition and the other half from the Highland acquisition that was closed in April.
Finally, the main reason for the change is $17 million, especially in the early stage of a small decline.
Turning to the operating profit bridge on slide 6, when combined with the mixture, the higher volume of transactions increased revenue by 6 million.
From the discussion of the sales Bridge, you may remember that the biggest batch improvement is in the display and packaging section, or that the profit margin is much lower than the rest of our traditional manufacturing business.
We also have some negative combinations in some other businesses.
Price costs, including purchasing benefits and productivity, were very favorable this quarter, up nearly 32 million, of which the difference of about 2 out of 3 came from the fact that the price of OCC was lower-over-
The second quarter averaged $82 a tonne, compared to $165 last year.
We have also succeeded in increasing the price of tubes, cores and paper that are not related to the index, which is a year in which all regions have reported favorable years globally --over-
The year difference in price cost.
Even in Europe, where pricing has been difficult for years, paper systems have tightened, allowing price increases to continue.
Of course, we have also seen some improvements in price and core gated media.
The impact of the acquisition of Clear Lam and Highland increased operating income by 3 million, and to be fair, the results of Clear Lam were a bit below our expectations, but Highland had a very solid quarter.
Moving to manufacturing productivity, you will see that 5 million of the performance and consumer packaging are positive in composite tanks and in our flexible business.
The productivity of paper and industrial conversion products is very similar to that of our pipeline and core business in North America, driven by some deleveraging associated with lower volumes.
And the continuous impact of implementing factory integration.
But it also works well in our recycling business, as it meets the additional classification requirements, enabling us to use mixed paper more efficiently.
But it\'s fair to say that our factory system in the United States. S.
Canada runs very well.
We also saw the continued positive productivity of protective solutions this quarter.
Changes in all other aspects of the last yearover-
Driven mainly by normal inflation, the year-round base is not 26 million unfavorable, not material inflation, but the impact of a significant increase in management incentive accrual programs, especially in the display and packaging sections, our startup costs associated with battery packaging operations are less than 3 million.
In Slide 7, you can see the results by market segment, where consumer packaging sales increased by 18%, the most significant reason being the impact of the acquisition, while operating profit increased by 5.
5% operating margins rose by 10 due to acquisitions, lower operating margins for sales, and the impact of the mix.
3% compared to 11.
The same period last year was 6%.
Sales of display and packaging increased by 24% due to new battery packaging activities, but operated [ph]
Profits fell by 2 million due to ongoing operational and start-up problems in the region.
Sales of paper and industrial conversion products increased slightly by about 1%, but operating profit increased by US $16 million due to very favorable price costs, and operating profit margin reached 13%, compared with 9.
The previous year was 7%.
Finally, sales of protection solutions decreased slightly, but operating profit increased by 2.
Driven by favorable price costs and strong manufacturing productivity, operating margins are raised to 10 at 6 million or 24%. 3%.
All of this ended with a 10% increase in the company\'s total sales and nearly 17% increase in operating profit and a 10 increase in the company\'s operating profit margin. 1%.
Although not indicated on this slide, our percentage of operating profit before depreciation and amortization is as high as 14.
4%, up from 14% last year, in order to achieve the 2020 target of 16% in the right direction.
Looking ahead to our guidance on slide 8, you will see our outlook for the third quarter and the rest of the year.
Starting throughout the year, we will update our top and bottom guides for $0.
05 due to strong second-quarter results, the annual range reached $3. 27 to $3. 37 per share.
In the third quarter, we expect base earnings to be within $0. 82 to $0. 88.
At the midpoint, due to the slightly higher cost of materials, including the impact of rising tariffs and OCC costs and the normal seasonality of our European operations, this is down from the second quarter.
In Slide 9, from earnings to cash flow, you will see that we have another very solid quarter --to-
Date Cash from operations to 0. 251 billion, 0. 102 billion in the first half of last year.
The improvement in operating cash comes from several factors, including an increase in net income, an increase in depreciation and amortization, a decrease in pension contributions, and an annual decrease in cash taxes --over-
In the year, the collection of some miscellaneous Accounts receivable, as well as the net changes in the chargeback, were large, and most of these changes were as expected.
However, given the latest earnings estimates for the previous quarter and this quarter, we are now increasing the annual estimate of operating cash by 10 million to reach the range of 0. 57 billion to 0. 59 billion, and in our dividend on capital expenditures and actually no change, we now predict that free cash flow will be 10 million higher than our original estimate, and the annual update range is now between 0. 19 billion and 0. 21 billion.
This completes my financial review for the quarter and will now hand it over to Rob for some additional input. Rob C.
Thank you, Barry.
Let me give you my opinion on the performance of the first half of the year, then talk about our acquisition and profit improvement efforts, and finally talk about our opportunities and challenges in the second half of 2018.
We did well in the first half and I have to tell you that I am very proud of what our team has achieved, including the creation of twice the driving record
The combination of digital top line and bottom line results, generating strong cash flow and free cash flow from operations, and the base operating profit margin increases by 35 basis points while increasing by 13 basis points.
The 8% EBITDA profit margin is about 80 basis points higher than in the first half of last year.
We also completed the acquisition of Highland packaging solutions in April, which further enhanced our expansion capabilities and opportunities in the fast-growing fresh food sector in supermarkets.
I can add that the Highlands performed very well in the second quarter of the harvest season.
We signed a final agreement with Texpack.
In the end, May will acquire its 70% interest in Spain at a price of about $0. 143 billion in our Connex Sonoko joint venture and composite tanks.
We believe that we should be able to complete the transaction before the start of the fourth quarter, which will create opportunities for us to further develop the paper and industrial transformation products sector, especially in the faster-growing Asian market.
In addition to the record results in the first half of the year, this is Sonoco\'s fourth consecutive quarter to achieve record basic income, we exceeded the high end of the second quarter guidance at $0. 04 per share.
I believe this clearly demonstrates the strength of our balanced portfolio of consumer industry-related businesses.
In the first half of 2018, our two largest segments, consumer packaging and paper and industrial conversion products, accounted for 80% of our revenue and 90% of our operating profits.
In the first half of the year, consumer packaging sales increased by 18%, mainly due to acquisitions, while operating profit increased by 4. 2%.
Operating profit margin fell to 10. 5% from 11.
9% is mainly due to changes in the business portfolio brought about by the acquisition, as well as the impact of rising resin, freight and other operating costs.
Our goal is that the operating margin of the consumer segment is between 10% and 12%, and I believe we have the ability to increase the profit margin of this segment for the rest of 2018.
In the second quarter, the number of flexible packaging and our international composite can business has increased, and as new product sales will reach about $60 million this year, we are still in line with expectations this year.
In the first half of the year, records were created for paper and industrial conversion products.
Market Segment sales grew slightly.
5% with the price of recycled paper falling, the number of paper in North America and Europe remained strong.
Operating profit increased 42% year on yearto-
Dates are mainly due to the fact that most of this area has a positive price-cost relationship in addition to our recycling business.
Operating profit margin of 10 in the first half.
8% increased by 300 basis points over last year.
A wise man once said that good luck is at the intersection of preparation and opportunity.
The reason I say this is because our business excellence program has done a lot of preparation and a lot of effort, which has helped to drive our positive price cost results.
This is not only a case of the decline in the price of OCC driving the performance of our business.
We have a positive plan to achieve the value of our products and services, which allows us to better manage prices.
In addition to our optimization efforts in the industrial sector, our tube core and mill operations in the US and Canada are also driving improvements in profit margins and cash flows.
I believe that the successful implementation of these efforts by 2020 will lead to a gradual change in performance in this segment.
Now, we are turning to our protection solutions division, and as operating profit margins in the first half of the year have increased by 80 basis points over last year, our business performance has changed well. Year-to-
Due to the continued weakness of auto parts, date sales are basically flat, which basically offset the improvements in ThermoSafe and our paper-based protection postal business.
Finally, the operating profit of our display and packaging department decreased in the first half with the increase of quantity, positive price-cost relationship, the increase in productivity is offset by the negative combination of the business and the continued increase in operating costs due to the increase in the operation of the Atlanta packaging center.
As we improve our case preparation standards, we continue to add new production lines and hire and train more workers to operate these lines, which will drive the cost growth.
At this time last year, we just installed three lines and we started to hire workers.
Today we are operating and/or certifying 18 automatic lines and three other high automatic lines will be installed in the third and fourth quarters.
Obviously, we need to work to bring this business to an acceptable level of performance and we are working closely with our customers to achieve acceptable operational results.
As Barry mentioned, our operating cash flow and free cash flow for the first half of the year were very strong, and after we paid, we increased the free cash flow guidance for the whole year to a mid-point target of about $0. 2 billion to dividends 0. 165 billion to shareholders.
Although the performance of working capital has improved year by yearover-
In order to achieve our goals, we must also have a strong second half.
As mentioned earlier, we linked part of the management incentive to the improvement of working capital, which clearly promoted the improvement of performance, especially in accounts receivable.
Looking ahead, we plan this yearover-
The one-year improvement in the second half of the year has raised our guidance of 2018 to the mid-point target of $3.
32 per share after dilution.
Our growth and profit improvement targets are still on track, and we are excited about the prospect of Connex Sonoma\'s acquisition.
However, like many companies, we are faced with inflationary cost pressures from rising freight charges, wages, energy and material costs (especially resin), and uncertainty from newly imposed or threatened tariffs
Specifically, we expect the tariff cost for the second half of the year to be between $7 million and $9 million, mainly for steel and aluminum, including foil laminated materials and labels.
This does not include any impact from recent announcements that have not yet been released.
This increase in costs requires us to drive the economic recovery through proactive price increases, including the US rigid paper container price that we recently announced came into effect on August 1, up 4%.
Finally, although the price of recycled paper seems to have stabilized for the time being, experts believe that they should increase some in the second half of the year, in which case we will not enjoy the same price-cost benefits as in the first half of the year.
Overall, we are optimistic about overall economic activity and believe that the breadth of our diversified consumer, industrial and protection businesses increases our ability to create consistent returns, high returns and greater returns for shareholders
Would you please review these questions? and-
Answer procedure. Question-and-
Operator [answer]
Operation instructions].
Our first question came from Edlain Rodriguez at UBS.
Your line is now open.
Thank you all. good morning, everyone. Rob C.
Good morning.
Edlain RodriguezWell quick question, can you talk about the M & A prospects and pipeline and what you see there? Especially in your desire to become bigger in flexible packaging, what does the pipe look like there? Rob C.
TiedeI will tell you that when we have a 2020 strategy in place, we continue to be very active in the area of finding opportunities.
We made it very clear that we needed--
In order to achieve this goal, we have set a goal to drive a net acquisition growth of about $1 billion over the next three years.
So we\'re having a conversation, but we won\'t talk about that until we get to a place that makes sense to us.
Edlain RodriguezThat makes sense, there is a quick one on display and packaging.
Well, there doesn\'t seem to be much improvement in profit margins there, like Will we see an improvement in the industry? How long are you willing to wait before you decide to take any drastic action? Rob C.
TiedeYeah, Edlain asked me to answer this question this way, if I look at the performance of our business in Europe, and even good performance in display activities in North America, challenges, facilities, the actions we have been talking about, and the busy seasons we are entering the hurricane and holiday season, we are still bringing in equipment and training personnel.
We want--
We will have to deal with these things in a very positive way.
We have seen some operational improvements, but we still have a long way to go, and I expect some challenges for profit at the end of this year.
Edlain RodriguezOkay, thank you very much.
Thank you.
Our next question is Ghansham Panjabi from Baird.
Your line is now open.
Good morning, guys.
I think the first thing is that the volume of the tube and core is down 2%, and you think the degree of decline is related to your price increase plan and related customer optimization, also related to your feelings about the growth of the entire market in terms of the global economy and the best we have seen in the last decade or so? Rob C.
I will let you know. -
The decline is in line with our expectations if you wish.
When we price some customers or some customers, some small customers actually take some action based on the pricing.
I\'m sure there are some, but I also want to tell you that we did see a steady growth of target markets and customers this quarter.
So we are satisfied with that.
And then, when we look at it on a global scale, one of the things we\'re not talking about is that we \'ve also applied the holistic vision in Europe, in the second quarter, we did a large part of the facility where the shutter took up a lot of its decline.
So this is in line with the plan we have made and we are satisfied with the results from pipeline and core business.
Ghansham panjabiget it, and then based on the decline in operating profit margins of 100 basis points for consumers and the second quarter, you mentioned that there should be some improvement in the second half, considering higher operating costs and freight charges, can you give us more colors to drive this improvement? Wait? Thanks so much. Rob C.
Of course.
We have been pursuing material prices for polymers in the second quarter, so a reset is underway in the third quarter, which will have a positive impact.
I\'ll tell you another thing, Barry mentioned this in his comments, and we--
I think we did a very quick and thorough integration work in our Clear Lam facility, which consumed a lot of people\'s time.
We have brought these people back to focus on what they need to focus on because a lot of heavy work has been done.
When we were shopping around the store, we saw other parts of the business, and the performance of these acquisitions was exactly what we thought.
But the first half was also affected due to the Wigan panic, especially in the salad area, which did have an impact on some of our customers.
So we see them back in the market, so we are excited to get into the second half and see some profit.
However, our consumer business portfolio has also changed, so it will have an impact, but we do expect a profit increase.
Panjabi is perfect.
Thank you very much.
Thank you. our next question is George stamp.
Bank of America Merrill Lynch.
Your line is now open.
Good morning, thanks for all the details.
Hey Rob, first question, I don\'t want to do much because it\'s not the biggest business, but we \'ve been talking about Atlanta in terms of presentation and packaging, starting last fall, it seems really because of issues like hurricanes, and as you can see a step back could be part of the problem, maybe the quantity is not priced correctly, so relative to the cost base, your profit margin is lower than what you should have purely because you \'ve been playing based on--
It\'s not your fault, the weather-related obstacles you had to overcome in the second half of last year? Barry L.
SaundersI thinks this is a few things.
I think volume is volume and the volume we expect.
I think some of George\'s lines are complicated, some of them are very highly integrated lines that are not easy to change and it will take a while for people to understand how to do this effectively.
I think the other thing is that we have been recruiting people in advance, which will add some cost.
And then like I said, I think we both have a little more understanding of the reality of operations, and now we \'ve been talking about it for a year, even though it\'s accelerating, what are we talking about? -
How to deal with these types of problems.
It was helpful and clear to George stapphosokai.
Let me change two gears now, I turn it over and you take the full year guidance less than the second quarter compared to your previous guidance, and of course if we sit in your seat, i\'m not sure what different things we did, the right thing is to beat it in a better way than the other way, it sounds like part of the problem, because you have accumulated differences in inflation and so on.
Depending on the current cost and not the cost you expect, how much will your guidance change in the third quarter or year, in other words, if you can provide, how much inflation buff did you add to your second half forecast? Barry L.
SaundersI believes that we have not set up any inflation buff in it.
We can make this clear when we talk about tariffs based on what we think we will face, what we know and what we see will continue, we must fight against rising prices.
However, we will have a lag in capturing all of this, because prices will rise after these tariffs have been implemented, so part of it is.
I will tell you George that I do have something I wouldn\'t say about the booking, but I do worry that these fees will go into the market.
As a consumer, you and I will end up having to take on this and at some point, will this affect the vast majority of Americans when they go to the store.
Your gas prices have risen, and it is clear that these costs will have an impact on the ability to handle consumer disposable income.
So hopefully this will answer the question you asked.
George stapphosokai, let me turn it over and I\'m back. Thanks.
Thanks, the next question is Scott Gaffner from Barclays.
Your line is now open.
Good morning, rob. good morning, Barry.
Rob just talked about mergers and acquisitions for a while, and then asked the second question about net acquisitions, but when you look at private companies, there seems to be a considerable disconnect between valuations and public valuations at the moment, A few parts of your portfolio are not necessarily quite the core though. Are you --
Is there an interest in accelerating the divestiture of small businesses that are no longer at the heart of Sonoco\'s franchise? Rob C.
TiedeWell I will tell you that we always evaluate the portfolio Scott, and I think strategically we have been very blunt and direct, where do we want to go, where do we want to go? we put in too much resources.
Obviously in D & P we have a problem that needs to be addressed and we are working very hard and we have talented people working hard to get this result.
As we move forward, we will continue to assess the situation.
Scott Garfield, when you look--
You mentioned that you are allocating some capital to the recycling business in order to clean up some of the materials you are recycling so that they can sell them to the market, but what, given the relatively low-cost material at the moment, you might consider investing in capital to convert more recycled paper, and maybe it stays that way for a while? Rob C.
Okay, Scott.
We are actually investing in that.
We talked about investing $60 million to $70 million in our North American paper system to focus on investing in the recycling business to help clean some of the paper and install the appropriate equipment, so that we can use more paper in the paper making system.
Thank you, Rob. thank you. Rob C. TiedeYou bet.
Thank you.
The next question is Adam Josephson from KeyBanc.
Your line is now open.
Good morning, Adam Joseph Rob, Barry, Roger.
Congrats for a good quarter.
Rob, just a question for this quarter, please forgive me if I miss this, but specifically, what is better than you expected, I mean the price of the OCC has dropped a bit, but not much, which is a beat relative to your expectations for the paper business, and if so, where did it come from? Rob C.
TiedeNo, I want to tell you that it\'s been a good year. over-
Despite the automotive drainage system, our protection solutions business is still improving for one year, and our Thermal Safety business has a solid year --over-
Years of Progress.
Our postal service was solid throughout the quarter.
Our flexible business is growing strongly.
Our can business is growing well worldwide.
There is nothing that can make people eat snacks, watch football and drink beer more than the World Cup.
So we are so shameless to be its benefactor.
Our plastic business is doing well.
So, I will tell you that this is comprehensive and we also see solid volume improvements in our presentation and packaging business, but for the challenges that we have to overcome in our hard-working operations.
So it\'s comprehensive, so I\'m happy with the whole company team and the work they \'ve been doing.
Adam Joseph thanked Rob for his clarification.
I think, in terms of the number of consumers, you said you grew by nearly 2% in the quarter. 8.
One is all organic. If so, help me know, because I know that the increase in the number of consumers in your dormitory in previous years, it is difficult to grow in the number of companies and Frank central companies is a real struggle, there seems to be no improvement in 2Q.
So I\'m just wondering where the acceleration of consumer numbers will come from this quarter? Rob C.
The answer is yes. it\'s all organic.
We have a strong growth-over-year in Europe.
I will give some honors to the World Cup again, but I will also give our team a lot of honors for this. We saw 5.
5% organic growth in our flexible business.
Our plastics business is flat this year. over-
But as I mentioned in thinking about the lettuce issue that started in the first quarter, we were obviously affected.
So if you\'re willing to be a platform on the consumer side, these three areas are growing.
Adam Joseph got it, just two other Rob, in the paper business, the EBIT profit you make in that business is of course the highest I \'ve ever seen.
I don\'t know if this is the highest level in any quarter in the company\'s history, but it\'s definitely high by any historical standard.
Do you think these profits are sustainable or just consider how high it is relative to any other profit you have earned in the last 10 years, 20 years, do you tend to think that it will revert to some more historical averages, especially given your view that the price of recycled fiber will rise by half to a certain extent? Rob C.
Yes, first of all, I want to say that I want them to stay at these levels and I can\'t tell you if I know, but if it\'s not a record that it has to be close to the industrial side, I think the people we have around the world have really come forward and done a great job.
I do think it will depend on the way OCC behaves.
When we talk about the cost of the price, it obviously has an impact, which you and anyone else know.
Our predictions are based on what many smart people around the world tell us about what they think is true around the OCC.
We expect the OCC to rise in the second quarter and we have built in--I\'m sorry Q2 --
The third quarter, and further growth in the fourth quarter, is the trend we have seen in history.
So I do expect some profit compression, but I still believe that due to some other things that we have been doing in the following areas, we will see some positive price cost optimization activities that we have implemented and discussed before.
Adam JosephsonThanks, the last one on a disposable plastic package;
Straws, cups, bags, discussions you\'re familiar with, what you actually see your customers and other CPG customers doing.
From what I have read, if they are heading towards plastic instead of leaving, it will be the opposite of what we read and care about, can you help us share your thoughts on this issue? Rob C.
This is a great question.
In fact, I was with a food scientist and a chemical engineer yesterday and we were just talking about this week.
Obviously, we don\'t do anything most of the time in the single use category, so straws and cups are not where we are involved.
But what we have seen and a lot of work is done around food waste, I did not divert your problem, but the conversation quickly led to this, we\'re talking about the biggest environmental challenges.
We\'re talking about food waste, and we\'re talking about the polymer that ultimately gives these food groups the best shelf life or the solution to extend it.
So part of it is education, we see it, we see it growing in our flexible space, we see the project we are working on in plastic space, and that\'s not to say, we also didn\'t develop some very interesting all paper solutions in some legacy product lines.
So I think we\'re in a unique situation where the facts of Adam on all of these platforms allow us to have a very interesting understanding of where the market is located.
Adam Joseph is very grateful to rob.
Thank you. our next question is Brian Maguire of Goldman Sachs. your phone is now on.
Good morning, Brian MaguireHey.
Rob returns to the intermediate tariff.
I\'m just wondering if you expect a cost of 79 million in the second half, what is the cost you paid to the government for the tariff side, or are you just talking about the overall inflation of metal prices, is it through the contract or do you have to go, in fact, the price has risen, hope to recover? Rob C.
TiedeYes, so this is the money we paid by counter-payment.
Dumping countervailing duties and duties, so yes, the government got all the money.
With respect to the contract, it is beyond your normal material growth, so we will enter the market to recover the material and then when they ---
If they are relieved, then we will solve the problem in another way.
But our customers know this very well.
No one likes it, but they are all well aware of this and we are going to get into the market to get this back.
Brian maguireok is fine, and then I think in the consumer space, the profit target you\'re giving is probably high end, one percentage point higher than what we talked about last time, just wondering what\'s going on there.
Obviously the shipping is a bit poor just wondering about any other components that we would offset, I think the volume is fairly stable in 2Q, but at margin cost level, are there any other factors leading to a rise in the outlook? Rob C.
TiedeSure, I mean, I want to make sure I understand your question correctly, Brian, so in terms of the expected consumer margin range of 10% to 12% that we \'ve been talking about.
It is clear that we have indeed been hit by rising freight charges.
We have been looking for resin so it has an impact.
We do have a reset and we have entered what I have traditionally said about the market where we see inflation in the market.
We have always said that productivity needs to offset non-
Material inflation, but when it exceeds what you can really do, these are the costs that we have to pay in the market, and these are the prices that we have already paid to our customers.
Did I answer your question, Brian?
Brian maguireyes, no, I think you did, I just have a follow-up to bow to the assumptions in this year\'s guide, do you include URB price increases in the market, on OCC, it sounds like you\'re expecting inflation there, but on resin, you\'re just assuming that it\'s flat with the current, right? Barry L.
Brian, this is Barry.
We certainly got some growth from the announced growth.
Of course, some reflection is expected when the price of the index is published.
Therefore, in our guidance, part of the announced growth has certainly been taken into account.
Brian maguireok is the same as everything else on the resin and you just think the guidance is flat? Rob C.
TiedeCan you say it again, Brian, I\'m sorry I didn\'t catch you.
Brian MaguireJust resin pricing assumptions compared to where we are today, what benefits or disadvantages do you assume from the current price level? Rob C.
No, if I look at it as a whole, I will tell you that we think that the second and fourth quarters will become flat based on what we know. Now that --
We don\'t know what impact the Mexican blast will have on pet suppliers, so this could change tomorrow.
However, this is the bland outlook we put forward in our guide on polymer-based structures in Q3 and Q4.
Thanks a lot to Brian maguireok.
Thank you.
Our next question is from Mark Wilder at the Bank of Montreal.
Your line is now open.
Good morning, good morning, rob, Barry.
Rob, I \'d like to start with some of the mixed questions you raised in the presentation business, can you put a little more color on it? Rob C.
TiedeYeah, I mean, we see the growth of some of the products that are where we combine products, customer products and what we are doing.
In fact, there is no profit associated with some activities.
Then part of it just shows a mix of what I call more case-ready packaging.
So all three types of activities are mixed together.
Mark wildeok, and then I think about two years after the growth of this transparent plastic, transparent forest, Peninsula, highland businesses can you give us an update on how you can assess the progress and performance of these businesses? Rob C.
In fact, we are--
We have just entered for more than a year and we are very pleased with the performance of our peninsula and Highlands.
Now the Highlands have been around for a quarter, but I was impressed with their performance and our existing management team, and I was impressed with the unity of the team to share ideas.
So I continue to look forward to seeing the growth of our already laid out, and I am excited about what the team expects to be able to do in 2019 of the time around the store.
Clear Lam is part of it, so the flexible space is part of it.
Just some of the development work they are doing to complement the work we do on the store license.
So I think it fits well together. Roger P.
SchrumRob you may want to add a little bit of information about how we can get these businesses to work together. Rob C.
Yes, so we--
What we have-
Thanks Roger when we look at the perimeter of the store as a category, it\'s a real cross functional group, working with our marketing team, with customers, truly assess the preferences of customers and consumers and try to provide the appropriate solutions.
So this is actually a solid cross-functional activity that takes into account not only fresh products and fresh fruits, but also the entire perimeter of the store and uses some technology that we have in our current system
Mark wildeok, and two quick ones.
Can you tell us the productivity target for the whole year? Barry L.
In terms of manufacturing productivity in SaundersIn, our goal for the whole year is to cover non-
This will be just under material inflation of $50 million.
This is only part of manufacturing productivity, excluding purchasing productivity and another fixed-cost productivity target to increase this figure.
As we have acknowledged, we will take some initiatives in customer optimization, paper mill investment, other activities to achieve the actual speed of our operation against Mark.
Mark wildeok, okay, the last one--
Just we talked in a lot of other calls about maybe a different owner of a medium machine or a partner of a medium machine, is there any update? Rob C.
TiedeYeah, strategically, what we have laid out and said is to find and participate, and ultimately finding a partner is still the goal we pursue.
In the meantime, we continue to run the machine as much as we can and continue to do so.
But that hasn\'t changed and we\'re looking for a potential partner.
Mark wildeis is in--
Isn\'t it easier to rob in such a tight market? Rob C. TiedeIt maybe.
This is just a function of finding the right partner.
Okay, that sounds good.
Listen, good luck, good luck in the second half. Rob C. TiedeThank you.
Thank you.
The next question comes from Gabe Hajde of Wells Fargo.
Your line is now open.
Good morning, Gabe HajdeGood, thank you for answering this question.
There is really only one that will revolve around the benefits of having ---
Fully own this Conitex Sonoco joint venture, I mean, this is what you imagine, I mean what you guys are doing seems to be a decent draw to a lot of people
The people who own these assets can bring you closer to your customers, maybe expand the business better, and ask in the context of the previous two acquisitions, what size do you do in the consumer business? Rob C.
TiedeYes, strategically, Gabo, strategically, what we are saying is that we want to expand in industry, especially in emerging markets, where we can take advantage of the infrastructure we may have, or the technology we understand owned by the acquired company
The beauty of the Conitex deal is that it has a lot of influence in Asia, and Howard Cork runs the industrial sector of our business outside North America, which he sees as an opportunity for us.
It allows us to do a few things, one is that it allows us to reunite with some of our past customers, but it also allows us to reach out to customers we don\'t have, first.
Second, it brings a very solid management team to Asia, it gives us a paper mill and a paper source, we can use it in the pipeline and core business in that part of the world and in our composite can business.
Therefore, we are very excited about this opportunity. it gives us more presence in China. we say that China\'s management and core markets are as large as North America, except for the growth of 3%.
Therefore, we also hope to participate in this market through the technologies that we can bring, and we have a clear understanding of them and the ability to supplement them in the rest of the world. So we\'re --
This is the focus of our Conitex deal.
Thank you, Gabriel HajdeGreat. Rob C.
You are welcome.
Thank you.
The next question comes from Debbie Jones at Deutsche Bank.
Your line is now open.
Good morning Debbie Jones, congrats this quarter.
My first question you made some comments earlier on the tightening of the paper market in Europe, and then I just wanted to know if there were any notable increments starting from last quarter, and how do you feel about these increments is the overall balance of supply and demand there? Rob C.
TiedeI will tell you what we are seeing now is that demand in North America, Europe is still very strong and we have seen this in Asia as well.
So I would like to tell you that this is a global phenomenon and obviously we have some business in Brazil and they are very busy as well.
So what we see is the tension in the global paper market, which is not seen in the short term. term.
Debbie Jones OK, my second question about the consumer business, a couple of questions about inflection points and volume, what I want to know is if I should assume [indiscernible]
Impact, are you looking forward to the same growth of the various sub-sects you are calling for this quarter?
Then the second one, because it involves pricing, will you go out and raise the price before the contract passer-by, offset by something like shipping? Rob C.
TiedeYeah, so we do look forward to some plastic customers in terms of volume, especially reference--
Back in the market, we began to see this.
We got the price--
I\'m sorry I wanted to make sure your question was right and it was in advance. . .
Debbie Jones you have a regular contract passer-by, but I\'m just curious if you \'ve been out all the time and adding fees outside of this to offset what might not be in the contract? Rob C.
The answer is yes.
What we are going to go out and discuss is that in addition to the material price increase, we are facing very serious inflation.
I just use shipping as an example, and this is one of those, so yes, we are going to enter the market as prices go up as necessary.
Our customers don\'t like it, but they understand it because they face the exact same thing.
Good Debbie Jones, great, thank you, I will turn it over.
Thank you. [
Operation instructions].
Our next question comes from the Chip on Chip for vertical research.
Your line is now open.
Good morning. it\'s almost afternoon here.
I would like to ask you if you can talk about your thoughts on recycling, especially now that we hear that China has become more and more serious about imports that may or may even end in fact, in my opinion, for a period of time in OCC, it was a windfall until they got up and started replacing the container board capacity, and I think it would be a huge income because they needed boxes, does this change your opinion on the contract, procurement or collection method? Rob C.
First of all, I am happy that we are recycling because our reason is to make sure there is a stable source of fiber in our paper making system.
This will continue to be the focus of our attention.
Because it involves looking at our contracts from the point of view of collection, and yes, we are looking at things in a different way that we used to pay for certain materials, now, the pendulum has changed differently so we are evaluating and looking for opportunities for cash flow reversal and we will charge for some of these activities.
So time will tell us that, but in terms of keeping our recycling activities going, what it really focuses on is providing enough input for our factory system, which will not change.
Chip dillonok, which is very helpful, when we discuss this topic, I know you guys announce that I believe in some pricing plans in your unquoted cardboard products over the last few weeks.
I think a lot of these or some of them are Formula based, but could you please remind us how we see these time price increases already starting if they are successful, how much did you include in the guide? Rob C.
TiedeSo we have gone out, the second increase of $50 per ton, the first one went out earlier or later last year, I don\'t remember, the first quarter, we went out with the second quarter and it\'s too early to talk about yield.
However, we have a strong yield on the first issue, and I expect we will also have a strong yield on the second issue. And that is --
These are growth beyond the OCC. Barry L.
Add your question further, 35% of our business is not below ---
According to the price arrangement index published by the market rose.
Chip DillonI found you, have they been integrated into the guidance for the whole year? Rob C.
Yes, at this point, our best estimate of production is.
Chip dillonok, then the last one, I think you mentioned, I may have missed this, where the $62 million sales contribution from Lam and Highland was mentioned, I just want to know what\'s going on. -
Those businesses-
Although they have a huge long term
Obviously, on the side of the grocery store, you\'re ---
Compared to what you didn\'t own a year ago, how do these businesses look today, have they grown since then? Rob C.
Because I want to be sure that I understand what you said, the 62 million chip you said, are you talking about sales?
Chip Dillon yes, yes, they do it the way we expect it.
I think it will meet or exceed expectations if I consider the perimeter of the store.
Once again, we do have this kind of Wigan stuff, and it does have an impact on one of the facilities.
Then in terms of the flexibility of the business, we have a very solid integration, and I am very optimistic about the products and projects they are working on.
So I will tell you that their performance is the same as I expected.
Okay, thank you.
Thank you.
Our next question is George staforth from Merrill Lynch.
Your line is now open.
Thank you, thank you for answering the following questions.
So Rob, I just wanted to make sure I understood the new product sales that you mentioned in your opening remarks, or maybe Barry understood, could you talk to us? Or, as you said before, remind us of what these earnings might face, and I guess what target categories we should expect, when you are an analyst day, you may be giving us more colors in December, but will the colors help?
Then my second question, I think you have answered it, but can you comment specifically? -
You mentioned the strength of the global paper market, did you see it? Not only in URB\'s North American cylinder plate, but also at a medium level, can you talk about the tone of the market to illustrate what you saw in the first quarter?
Finally, the question about China, and whether it will gradually reduce RCP imports more significantly, do you think this will bring more structural improvements in the margins of paper industry operators-
I forgot who asked the long term margin question?
Thank you all. good luck for the quarter. Rob C.
Tieright right George, I will try to remember all of this from the beginning of the new product sale.
I did say that we are on track to complete $60 million in new product sales so that through the IPS process you are well aware and understand that this is a year of growth --over-
From 44 million of what we experienced last year.
Most of them are--
Not all of this is primarily consumer.
This is broken in terms of new products.
Since it has something to do with your question about the media, the volume is still very loud.
In fact, running record tons on that machine every day, we can\'t see this happening in the short term
Even in the next year or so, some new capabilities will emerge.
Finally, it\'s too early for China\'s influence, considering the announcement they made yesterday, I need to sit down with some of us and really understand what it all means if we really know if it\'s part of the whole negotiation.
But let\'s say if this site means more factories are going to start running paper here and shipping products through China, it would be great, because then our tube and core volume will grow.
Therefore, our paper system can also provide materials and core systems that are more downstream.
But I\'m not sure I know enough today about what will ultimately affect George.
George StaphosHey Rob the next fixed fee for your product is one or two key categories that you keep us focused on?
Thank you, good luck this quarter. Rob C.
TiedeYeah, a big driving force for flexible packaging.
Some of our conversations in the past revolve around consumers who want to see products, so what we see is a clear and high-barrier structure.
Thank you very much.
I have no further questions at this time.
I would like to transfer this call back to the closing words of Roger Schram, vice president of investor relations. Roger P.
Thank you, Ji.
Let me thank you again for joining us today.
Of course we appreciate your interest in the company, please feel free to call us if you have any further questions.
Thanks again.
Thank you all for attending today\'s meeting.
The program ends here and you can now disconnect.
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