Sonoco Products Co (SON) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sonoco 2015 fourth-quarter earnings conference call.

(Operator Instructions) As a reminder, today's conference may be recorded.

I would like to introduce your host for today's conference, Mr. Roger Schrum, Vice President of Investor Relations.

Sir, please go ahead.

Thank you very much, Michelle.

Good morning and welcome to Sonoco's conference call to discuss our financial results for the fourth quarter and full year of 2015.

This call is being conducted on February 11, 2016.

Joining me today are Jack Sanders, President and Chief Executive Officer, and Barry Saunders, Senior Vice President and Chief Financial Officer.

A news release reporting our financial results was issued before the market opened today and is available on the Investor Relations section of our website at Sonoco.com.

In addition, we'll reference a presentation on the quarter's results which is also posted on the Investor Relations site.

Before we get started, let me remind you that 2014 consolidated financial results referenced in today's call and our press release and investor presentation have been restated.

Information on the restatement is available in the Company's 2014 annual report on Form 10-K/A.

In addition, today's call contains forward-looking statements that are based on current expectations, estimates, and projections.

These statements are not guarantees of future performance and are subject to certain risks and uncertainties.

Therefore, actual results may differ materially.

Additional information about factors that could cause different results and information about the use by the Company of non-GAAP financial measures is available in today's news release and on the Company's website.

Now with that brief introduction I'll turn it over to Barry.

Thank you, Roger.

I'll begin on slide 3 where you see that this morning we reported 2015 fourth-quarter earnings per share on a GAAP basis of $0.55 and base earnings of $0.64, which was at the top end of our guidance of $0.59 to $0.64 and compares to base earnings of $0.61 for the same period in 2014.

The differences between GAAP and base earnings are discussed in our press release, but is primarily driven by an asset impairment charge related to our decision to sell a paper mill in France as well as restructuring charges associated with some plant consolidation opportunities.

These charges were partially offset by the benefit of the release of certain tax valuation allowances in three countries.

On slide 4 you find our base income statement, where you see sales were $1.267 billion, down $49.7 million from the prior year.

I'll explain all the moving pieces of the change on the sales bridge in just a moment; but in summary, the negative impact of translation resulting from a stronger dollar more than offset the benefit of both organic growth and the impact of acquisitions.

Gross profit was $239.3 million, $7 million below the same quarter in 2014, where again some operational improvement was more than offset by the impact of exchange, while our gross profit percent was 18.9%, improved from 18.7% in the fourth quarter of 2014.

Selling, general, and administrative expenses, along with miscellaneous other income and expense items, $136.1 million, which was $3.9 million lower than in 2014 as the normal increases for merit and other inflation in this category was also more than offset by the impact of translation.

All then resulting in base EBIT of $103.2 million, down $3.5 million from 2014.

Again you'll see the drivers of the change in the EBIT bridge in just a moment.

Below EBIT, interest of $14.1 million was essentially unchanged from the prior year, while taxes on base earnings were $26.5 million, with an effective tax rate of 29.7%, pretty much in line with what we had used in our guidance for the fourth quarter of 30.5%, but notably lower than the 2014 fourth-quarter effective tax rate of 35.9%.

This was due to a combination of factors including a more favorable mix of earnings, a greater benefit of the release of a few specific tax reserves due to the expiration of the statute of limitations, and more positive state tax rate and other state adjustments.

Equity in affiliates, when combined with minority interest, was $2.9 million and similar to last year, thus ending up with base earnings of $65.5 million or $0.64 per share.

Turning to the sales bridge on slide 5, you see organic volume growth added $17 million to the top line, or right at 1.3% for the Company as a whole.

Volume was up 2.4% in the Consumer Packaging segment, driven by another strong quarter in flexibles, which was at 6.2%.

Global composite cans as well as the overall plastics businesses were each up 1.4%.

The Display and Packaging segment volume was up 1.2%, and Protective Solutions had another solid quarter, with volume up 5.6% as temperature-assured packaging was up 12% and paper-based protective packaging up right at 10%.

The growth in these three segments was then partially offset by a 1.2% decline in the Paper and Industrial Converted Products segment that was really caused by lower sales in corrugating medium and lower volume and our reels business.

Global tube and core volume was actually up 1.7%, with Europe volume up over 5% and volume essentially flat in North America.

Prices were unfavorable by $13 million for the quarter, most notably in the Consumer segment this quarter and almost entirely related to the plastics business, related to lower resin prices.

Net acquisitions added $29 million to the top line, due to the Weidenhammer acquisition, which became grandfathered at the end of October in terms of activity falling into the acquisition line.

Exchange and other was negative by $82 million due primarily to the translation associated with the stronger dollar; the euro was weaker by about 12% year-over-year and other currencies even more so.

Turning to the EBIT bridge on slide 6, you'll see that the dropthrough impact of the volume on EBIT was $2 million, representing roughly a 12% contribution margin on the overall volume due to the negative mix of business in both Display and Packaging and in the Paper and Industrial Converted Products segments, where the mix had a notable impact on the profit from the sale of corrugating medium.

Price/cost, including the benefit of procurement productivity, was once again very favorable by $11 million, most notably in the Consumer segment, spread almost evenly over rigid paper, flexibles, and plastics.

Acquisitions added $5 million to EBIT, again primarily from the Weidenhammer acquisition.

I'll go ahead and mention they had a solid quarter and accounted for $0.05 in earnings per share, therefore accretive year-over-year by about 3.5% -- $0.035, excuse me, bringing the full-year benefit to $0.13, even when excluding some procurement synergies realized by the North American business.

Manufacturing productivity was actually negative for the quarter by right at $1 million.

But this was driven by the fact that 2014 fourth quarter included a $6 million pickup from the recovery from a supplier of excess cost related to an ink issue that we had in our flexibles business.

However, even when adjusting for that, manufacturing productivity would still have been weaker than our targets across many businesses.

Moving on down the page, you see the change in the all other category on a year-over-year basis had a negative impact of $17 million.

This includes normal inflation of roughly $12 million and roughly $6 million due simply to translation associated with the stronger dollar.

I'll go ahead and mention that on a year-over-year basis, translation of earnings in foreign currencies had a negative impact on earnings per share of roughly $0.04, based on what earnings for the quarter would've been at 2014 rates.

But that would've been offset by $0.01 or so in transactional benefit.

Finally, as expected, pension costs were higher by $4 million.

Turning to slide 7, you see our results by segment.

For the Consumer segment, sales were up 1% while EBIT grew at a faster rate, up 8.3% with another very solid quarter from a margin percent perspective, improving to 11.8% versus 11% for the same period in 2014.

Display and Packaging sales were down due most notably to translation, but earnings improved due to the agreement with the customer for some reimbursement of cost from previous periods, thus resulting in improvement in the margin to 2.3%.

Paper and Industrial Converted Product trade sales were down 9.5% on lower volume and the impact of translation.

But earnings were $12 million lower, a 32% drop.

Results were negatively impacted by the lower volume and light manufacturing productivity, which did not offset inflation and other cost changes, as well as higher pension costs.

More than half of the decline in the earnings for this segment can really be attributed to the impact of our one corrugating medium machine, with the balance of the decline being attributable to the higher pension cost and the impact of translation, all then resulting in an EBIT margin of 5.8% versus 7.8% in 2014.

Protective Solutions had another strong quarter with sales up 3% due to the volume growth, while EBIT improved by 11.5% due to volume and price/cost, resulting in an EBIT margin of 7.5% versus 6.9% in 2014.

Turning to slide 8, we find our outlook for the first quarter and full year.

Our outlook for 2016 is essentially unchanged from what was provided at our Analyst Day in December, other than it has been adjusted to now reflect a lower weighted average number of shares outstanding.

We are pleased to announce that our Board has approved a share repurchase program of up to $100 million, which we expect to begin immediately.

If purchased throughout the year, the weighted average reduction in shares outstanding would have a full-year impact of increasing earnings per share by $0.03, thus bringing our updated full-year guidance on base earnings to $2.64 to $2.74 per share.

And specifically for the first quarter, our guidance is $0.57 to $0.62.

As a reminder, our full-year guidance is built around 2% overall volume growth before consideration of the impact of a customer's decision to not renew a contract for a packaging center in Mexico.

The plan also expects manufacturing productivity to exceed all other nonmaterial cost increases, lower pension costs, and an effective tax rate of 31.2%, and just modest incremental headwinds from translation.

Moving from earnings to cash flow on slide 9, you see cash from operations was $145.5 million versus $150.5 million for the same period in 2014.

Although earnings were higher, we had some higher cash tax payments in the quarter that resulted in cash from operations just being slightly lower.

Capital spending was $61 million, compared to $40 million a year earlier.

The more notable reasons for the increase included spending for the new flexible press and laminators to support the growth we're seeing in that business.

After dividends of $35 million, we had a very solid free cash flow for the quarter of $49 million, and $155 million year-to-date, which was above the $140 million we had targeted to deliver for the year.

As mentioned at our Analyst Day in New York, we're targeting to deliver roughly $140 million in free cash flow in 2016 as well.

Given our very solid balance sheet and not having any immediate known acquisitions in front of us, as just mentioned, we are moving forward with up to $100 million share repurchase program as we continue to return cash to our shareholders.

On slide 10, you find our balance sheet for the quarter.

I won't spend a lot of time reviewing it, other than to point out down in the liabilities section you see debt was reduced by $67 million, due primarily to another $50 million payment on the term loan used to finance the Weidenhammer acquisition, with net debt to total capital improving to 38.3%, representing a very solid balance sheet from which we can continue to grow our businesses organically as well as through acquisitions.

That completes my review for the quarter, and I'll now turn it back over to Jack for some additional comments.

Thanks, Barry.

Let me touch on our consolidated results for 2015 and then talk briefly about what we see going into 2016.

Our targeted growth segments, Consumer Packaging and Protective Solutions, achieved record sales and base earnings in 2015, while we focused on optimizing our Industrial segments which face difficult economic conditions in many of our global markets.

The Consumer Packaging segment achieved record sales, up 8.1%, while operating profits increased to a record $231.6 million, up 15.5%, and operating margins grew to 10.9%.

An important part of our Consumer's strong performance was the successful integration of the Weidenhammer acquisition.

We achieved the high end of our pro-forma earnings target by delivering $0.13 per share in 2015.

I'm extremely proud of the job our team did in leveraging our operations to secure the planned synergies and drive growth into new markets.

Additional opportunities remain to both grow and optimize our customers' operations in Europe.

We also continue to expand international composite can growth with the startup a new plant in Malaysia, and we will ramp up production at this facility throughout 2016.

Our global plastics business increased operating profits by 31.2% in 2015 by consolidating our thermoforming, blow-molding, injection-molding, and extrusion operations under a single structure to better optimize the collective resources.

In 2015 our flexible packaging business experienced sales growth of 9.8% and expanded operating profit by 21.7%, through market share expansion, price/cost management, and solid productivity improvements.

We are adding a new triplex laminator and a new rotogravure press during the first half of this year, and we expect this business to continue to grow.

Finally in Display and Packaging, sales declined 9.1%, driven primarily by the impact of foreign currency translation, while operating profit was essentially flat year-over-year.

As mentioned in our press release our 2016 outlook reflects the recent decision by our customer to not renew the contract with our Irapuato, Mexico, pack center.

As a result, we will be transitioning this operation to our customer over the next six months.

We believe the loss of this business will have a modest impact on second-half sales, about $50 million, but minimal impact year-over-year relative to operating profit.

Our Protective Solutions segment achieved record sales, up 4.3%, and record operating profits, up 35.3% to $46 million, while operating margins grew 210 basis points to 9.1%.

As a market leader in highly engineered multi-material protective packaging, we expect volume growth to be in the 5% to 6% range for this business in 2016.

2015 our Industrial segment saw sales decline 9.1%, with operating profits down 24.5% to $124.1 million, reflecting the weakness we experienced throughout the year in global paper markets, lower recovered paper prices, and the negative impact of foreign currency translation.

To improve performance in 2016, we remain focused on further optimizing our footprint, consolidating our structure, and driving manufacturing productivity through continued implementation of the Sonoco Performance System, or SPS, which is our operating excellence process.

We did see some benefit in the fourth quarter from the announced 5% to 8% price increase for tubes and core in the US and Canada, and that should continue into 2016.

As Barry mentioned, Sonoco continues to be a strong generator of cash, with free cash flow after dividends increasing 29% to $155 million.

We used a significant amount of cash to both grow our business and reduce debt following the Weidenhammer acquisition.

I'm pleased to report our Board has authorized to immediately begin the repurchase of up to $100 million of the Company's outstanding common share stock through open market purchases.

Based on yesterday's stock price, this authorization would reduce the Company's current outstanding share count by approximately 2.6%.

Also, the Board restored the Company's residual common stock repurchase authorization to its original 5 million shares.

Sonoco has a 90-year history of returning cash to shareholders in the form of dividends and share repurchases.

With expected dividends and this new common stock repurchase program, the Company expects to return approximately $240 million of cash to shareholders in 2016.

In addition, with both a strong balance sheet and strong free cash flow we are well positioned to pursue targeted acquisitions to create greater relevance in selected markets.

As we ended the new year, it's my opinion in 2016 will be somewhat to 2015, with some sectors of the economy improving while manufacturing continues to struggle.

Sonoco should mirror this divergence, with our Consumer and Protective Solutions businesses continuing to grow while our Industrial businesses deal with difficult market conditions.

However, I do expect improvement in our Industrial-related businesses in 2016.

Business activity has started the year in pretty good shape; and for the first time in two years we are hopeful we won't see a significant winter weather impact to our operations.

In closing, we remain firmly committed to our grow and optimize strategy and, as such, we're focused on volume growth by converting many of our i6 customer engagements to meaningful orders, improving operating margins through an increased focus on manufacturing productivity and reducing our fixed cost, working to impact the portfolio and shift our business mix to more of a Consumer and Protective Solutions orientation, and finally maximizing free cash flow and returning cash to shareholders.

Operator, we'll now take your questions.

(Operator Instructions) George Staphos, Bank of America Merrill Lynch.

Hi, everyone; good morning.

Thanks for the details, and congratulations on the year.

I guess the first question that I had for you, Jack -- I'm pretty sure I know what the answer is, but just want to make sure.

The announcement of the buyback, does that in any way reflect what your views are of alternative uses of capital -- specifically what the M&A pipeline or opportunity set looks like -- or is it just a reflection of what you would view as relative intrinsic value and the opportunity therein for the stock?

George, I think it's more representative of the strength of the balance sheet.

We think we can use the balance sheet to make any acquisition that we would really need in the foreseeable future.

Okay.

Then next thing I wanted to ask you, Jack, you talked about adding a new rotogravure press and also a tri-laminator, if I heard you correctly, on the flexibles side as well.

Can you update us on your thoughts, one, in terms of your own ability to produce film and the potential down the road to have greater film and co-extrusion capacity really?

And then just on roto versus flexible, historically Sonoco ever since Engraph has really pursued roto.

Do you -- is that a misperception on my part, or have you been favoring it over flexo, and why?

Well, we do have flexo assets.

I think we do have some flexible assets primarily in Canada -- six or seven presses actually I think is the actual number.

But you're right, we do have a tendency to roto, and it's more to our strategy: our strategy around flexibles is high-impact graphics and, let's say, highly capable structures.

That's really what we're looking for.

So to your question about film, I think that what we would do would certainly just stay away from commodity-type films that are readily available around the globe.

But I don't think you should be surprised to see us -- either through an acquisition or perhaps in a direct investment -- get into producing some of the more upper-end films and the more capable barrier-type films for these high-end laminations, which again our strategy is high-impact graphics and high-quality laminations.

Okay; thanks for that, Jack.

One more and I will turn it over.

Can you talk a bit more, maybe provide a little more clarity, in terms of what you hope to achieve in terms of your internal efforts on productivity within the PICP segment -- Paper and Industrial Converted Products segment?

Yes, George, let me answer that as far as the Company as a whole.

This year, we had productivity that exceeded $80 million collectively.

Now we collect productivity in several buckets: there's manufacturing productivity, there's price procurement productivity, then there's fixed cost productivity.

We had a strong year in price and procurement productivity and a strong year in fixed productivity.

But, quite frankly, we did not achieve our goal in manufacturing productivity.

As we move into 2016 our focus is clearly on improving manufacturing productivity and getting us back to that $48 million to $50 million range in manufacturing productivity.

Internally, that's what we've talked about; that's what we're focused on.

We've got groups working on identifying projects today to drive that as soon and as fast as possible.

So for us, it's about a shift to drive -- again, we had good productivity in 2015, but in different areas.

We want to continue to drive manufacturing productivity going into 2016 as well as some fixed cost productivity as well.

I guess, Jack, where I was going with it, you said, again within PICP you're going to optimize the footprint; you're going to optimize the structure; and you're going to use the Sonoco Performance System again to improve performance.

You mentioned even with a challenging environment Industrial should do a little bit better this year.

So recognizing again there is not all that you can say necessarily on a conference call live mic, are there a couple things that you would have us look towards in terms of how you're going to improve the performance in that segment, and what kind of maybe even dollar goal we should be expecting?

Thanks, guys.

I'll turn it over there.

Yes, I think -- thanks for that clarification, George.

As things -- particularly in Industrial, you're going to see several plant consolidations.

Obviously we've talked about the sale of the mill in Schweighouse, France, being a possibility; that's definitely something we're looking at, as well as further fixed-cost reductions across the business.

Now specifically in -- relative to Sonoco Performance Systems, we're seeing significant impact from the facilities where that's implemented.

It usually takes about two to three years to really begin to see the payoff.

We have several other plants now coming through the system to generate that.

So I think it's the safety net for the Industrial side of the business should that top line not materialize like we expect.

I think that's where we could get some -- a good offset relative to profitability from that type of productivity initiatives.

All right.

Thank you, Jack.

Mark Wilde, BMO Markets.

Good morning, Jack.

Jack, I wondered, can we just start off talking about that corrugating medium machine?

It seems like that was a big, big drag for you.

Any solutions in that business?

Well, I can tell you our preferred solution was the solution we had before.

For years we had a partner that was simply a takeout partner.

Yes, that's the [BP] relationship, I think.

Yes, it was a long-term relationship, and we continue to look for those opportunities.

It's a good machine.

It sits inside of a fairly large complex.

It has a good cost structure to it, so we continue to do that.

Outside of that, Mark, there's a whole board full of options and ideas, and we're going to evaluate every one of them and probably move pretty quickly to try to implement as many of those solutions as we can.

But it certainly was a drag for us in the fourth quarter; and as we sit here now, it's going to be a drag going into the new year.

So we definitely have to do something, and we have a lot of options that we are exploring.

Okay, all right.

Then like many packaging companies, price/cost was a nice tailwind for you last year.

Are you seeing any evidence that would suggest some of this is going to get arbitraged back to the customer in 2016?

Well, remember for us that for the vast majority of our businesses on a quarterly basis those changes are already passed through.

So as the year progressed, all that we really keep are the ones that are on noncontract basis.

I think internally in many of our businesses we look at that as a new reset point.

These are -- during the -- after the recession we probably lost margin points because materials were rising rapidly; and now we've gone back to what we're calling internally a baseline zero for noncontract accounts.

Again, I have to go back and say the vast majority of this has passed through or will pass through at the end of every quarter.

Okay.

Then finally, Jack, just any thoughts on the contract packaging business and how that fits into Sonoco going forward?

We've always said that that business for us was about intimacy.

It was about getting us close to our customer and better understanding what they were doing relative to packaging; and that that gave us opportunities to produce packaging for them.

I would tell you that we've had some successes doing that.

So as long as that business continues to generate intimacy and leads us to future sales for packaging substrates that we manufacture, it would remain valuable to us.

Okay, I'll turn it over.

Thanks, Jack.

Good luck in 2016.

Adam Josephson, KeyBanc.

Thanks; good morning, everyone.

Jack, just a couple follow-ups on raw materials.

I know Mark was just alluding to that earlier.

How much of a resin benefit did you have in the quarter and the year?

And how much, if any, are you expecting in 2016?

Well, look, Adam, what I can point you to is the EBIT bridge.

You can see that we had a price/cost benefit of $11 million in the quarter, $40 million for the year.

And I think Barry said earlier that was split evenly over the Consumer businesses, those segments.

Some of that obviously was resin.

So that can give you some directional thought to that.

But I've also got to add that that is not all pure price.

Some of that is simply price procurement or procurement activities that resulted in a formula change for procurement that benefited us, or a logistics change in how it was delivered that benefited us.

That's all captured in there.

But as far as directionally, you can just look at these numbers.

I think Barry said it was going to be split over Consumer.

Just one more on the materials front, Jack.

What's your view regarding what scenario you'd prefer?

Rising raw materials?

Falling raw materials?

Obviously packagers broadly benefited from falling raws in 2015.

But that doesn't seem like a sustainable source of profit growth.

You know, it doesn't.

I think if you ask me what my preference is, it's volatility in raw materials as raw materials go up and they go down, because all of our contract mechanisms are based upon a quarter-lag pass-through.

So this year we did benefit from a quarter-lag pass-through as raw materials went down.

And just the same is true when raw materials go up, we're behind the curve.

But what keeps us -- we've had conversations.

You see our price/cost, which is what we're talking about, over a seven- or eight-year period it's been positive 90% of the time and the reason for that is the volatility: that it goes up and comes down in the same year.

This year's been a bit unusual.

I think next year may be a little unusual as well in that I don't think we're going to see the volatility.

But I don't think we're going to see the steady decline during the course of the year either -- unless oil gets to be where it's free.

Right, right.

Got it, got it.

Just a couple about business conditions.

I think you said earlier, Jack, that business activity started the year -- has started the year in pretty good shape.

But you obviously -- you also said in your press release that the pace of change in your businesses and the markets you serve has accelerated or is accelerating.

Can you help me understand what that comment meant and help me square that with your comment earlier that business activity has started the year pretty well for you?

Well, as we looked at volume in the fourth quarter, obviously it was a good quarter for us from a volume perspective, and an improved quarter in the Industrial business after you take out the corrugated.

Tube and core volume was up about 1.7%, I think, which was solid.

Europe was up.

Latin America is up double digits, and we call that -- that's Mexico, and then the northern South America; and that continues to look very strong.

We saw an improvement in Asia as well relative to volumes from a quarter-over-quarter basis.

So we had a pretty good third quarter on the Industrial side -- fourth quarter, excuse me.

We started the year at expectation relative to volumes on the Industrial side.

So I realize that there is a lot of negativity around manufacturing, but for us on the Industrial side we believe that there is going to be a bit of an offset in construction.

Home construction is going to be a little bit stronger -- or at least it's projected to be -- and that certainly helps the tube and core business on the Industrial side here in the States.

So it's starting inside our expectations, Adam, is the best thing I can tell you.

Just back to the statement in the press release about the pace of change accelerating.

Okay.

What exactly did you mean by that?

Yes, I think that it goes back to our customers are consolidating and have consolidated.

We're getting larger customers.

And as these larger customers come together, what they want is changing a bit as well.

They are changing from perhaps innovation in some cases to lower cost in some other cases.

The pace of change for us is also changing, because i6 is generating tremendous interest.

We have over 30 customer engagements today and just everything -- we're getting all kind of different requests from customers to do different things with packaging.

And then our competitors are consolidating.

That's really what I was referencing, is that inside the packaging industry there's a lot of change going on from consolidation.

And that's really impacting what we're seeing as requests from our customers really for help: Help us deal with all this.

Got it.

Jack, and just one last.

I know you love making an OCC price forecast, so I figured I'd give you the opportunity to make another one.

Do you see OCC going up by much, if at all, this year?

Given what's happening in China, given what's happening domestically, etc.

My best guess is it's going to kind of mirror 2015.

I think you're going to trade OCC on a pretty narrow band.

I think it's going to rise in the spring, as it normally would, as we get into this tight generation time.

Does it go up to $90?

Does it go up to $100?

I don't know, but it's going to be in a very tight band from this $80 to $100, I would think.

Thanks very much, Jack.

Best of luck.

Chris Manuel, Wells Fargo.

Good morning, gentlemen, and a couple questions for you.

Most have been answered.

But I wanted to -- you've got your new center opened down there in Hartsville, and wanted to get a sense of -- you've had it now open for a bit.

But how has new business development been?

Have you seen customer order activity and use of the facility continuing to increase?

Has there been any sort of a pause given some of the gyrations we've had?

Just maybe a sense as to what you're seeing or how the new product funnel is filling up.

Chris, I'd say clearly the level of activity is up.

It's one of the things I was referencing earlier.

More and more customers coming through, more and more engagements.

We've got -- we've already won some new business from us.

It's kind of $3 million here, $4 million for me and that's not what I'm looking for.

We're looking for that hit like we talked about in New York on the ClearView container -- on the TruVue container.

That's ramping up.

We're still shooting for an end of first quarter, early second quarter release.

The feedback from customers -- we've made some improvements in the product.

You can go to the website and see some of the things that are going on with it.

That activity is at a very high level and looking forward to releasing that.

But the sheer number -- and it's all types of customers from pet food to coffee.

We're covering the spectrum, so we're continuing to be very excited about it.

The growth you see in flexibles is really an output of i6.

Okay, that's helpful.

I wanted to follow up on with -- and by the way, the rubber bands you gave us in this ClearView container have done a miraculous job of staying very fresh.

(laughter)

Do they taste good?

That's the question.

I'll send some back down for you to sample.

But so as you now have all these different substrates under one roof -- it was a good transition into this next topic -- have you seen customer preference, or I should say your consumer focus groups and things, migrating towards one direction?

Perhaps given the pickup in investment that you're making into some of the flexible side, maybe that's a piece that seems to be winning versus some others.

But are you seeing the consumer products companies you are doing work with migrating one way or another?

Well, we've said for some time that there is a migration in this -- certainly domestically -- to rigid plastics and to flexibles, so we certainly see that.

But I can also tell you that we're putting in a new, what we call an EvoCan line at our composite can plant in Chicago.

EvoCan is a paper bottom can; it's got a different type of recessed membrane; and it's going to bring some new packaging ideas that -- some of the products that we've never packaged before.

We could see it on the bottom shelf for flour or sugars or those types of things and replacing a very difficult package in the market, especially in some of these upper-end or some of these niche market products.

So that will start up later, the latter part of this year, and we see a lot of interest in that when we go through these i6 initiatives.

So although while it is skewed to flexibles and rigid, we still see a lot of interest in paper containers.

Okay, that's helpful.

Thank you.

Good luck, guys.

Danny Moran, Macquarie.

Hey, good morning, guys.

Congrats on the quarter.

Can you just say how trends are tracking relative to your expectations at the time of your Analyst Day in December?

It sounds like Consumer might be tracking a little bit better than Industrial.

I just want to get your sense on any changes to expectations for price/cost and productivity as well.

Danny, I would tell you that relative to when we were in New York, trends are pretty much on what our expectations were.

I think the one issue might be that corrugating medium machine and what's going on in that industry would be the only difference.

Fourth quarter was a pretty tough comp for us, especially on Consumer, but even on the Industrial side.

And we fared coming out of that with growth over that quarter, so I felt good about that.

I think as we're entering this new year we're well within expectation on volumes, both sides of the business.

Again, corrugated medium notwithstanding.

Okay, thanks, Jack.

Then can you remind us the financial impact for changes in OCC prices?

I think the OCC expectations you referenced earlier might be a bit lower than the $100 per ton you were assuming at your Investor Day.

Yes, I think financially, because of the pass-through mechanisms and some other things, there may be slight benefit from lower OCC prices.

But it's not going to be significant because of the amount of OCC we sell externally offsets some of the benefit that we have internally.

Okay, great.

Then can you just talk about your international composite can expansion opportunities and how much this contributed in the quarter?

Should we see this accelerate as you ramp production?

Well, again, we continue to expand composite can internationally and you're seeing benefit now from -- as these facilities begin to be better leveraged, and we're putting more volume through them.

Some of that benefit is definitely coming through in 2016.

But offsetting some of that, further expansion.

Further expansion of the facility in Poland, and opportunities to continue to expand in Asia as well.

So we're ahead of the curve.

We're excited about the expansion; but until they are fully utilized you're not going to get to that full margin potential.

But I'd rather be chasing the growth curve on this one.

Right, of course; okay.

Then last one for me, just on Display and Packaging.

Is this a good run rate or good margin to use going forward in 2016?

Well, I think that the margins this year were a little bit lower than what we would expect going forward.

As this business -- the Display piece of this business has done very well over the last several years, been steadily improving, continue to be pleased with the progress.

As that business continues to improve, I would see margins in this segment also continuing to improve, moving back in 2016 probably into that 3%, 4% range and then longer-term getting above that, getting above the 4% number as we, again, shift more to Display inside this business.

Got it.

Thanks, Jack.

Best of luck in the year.

Ghansham Panjabi, Robert W. Baird.

Hi, this is actually Mehul Dalia sitting in for Ghansham.

How are you doing?

Good.

How are you?

Great.

With the solid performance in Consumer, are you picking up share, or is it just market growth that you're falling in line with?

And how much of the improvement is from new product introduction?

I didn't get the last part of the question.

What?

How much of the improvement is from new product introductions?

Just the volume growth that you saw in Consumer in the fourth quarter.

Well, new products is a difficult thing to quantify, so we talk about volume growth year-over-year regardless of where it comes from.

I think that what's actually happening in Consumer is we're continuing to see shifts out of certain formats into different formats.

In flexibles, a lot of different format changes are impacting the growth in flexibles; so we're definitely ahead of the market here in flexibles from a volume perspective.

Are we picking up share?

Potentially, but not necessarily share inside flexibles.

We're picking up share as they transfer from perhaps a rigid plastic container or a glass container, moving into a flexible-type container on that side of the business.

The same would be true -- well, in plastics I think we actually may be picking up some share in our thermoforming operations.

So a bit of mix of both.

Great.

And as your --

I was just going to say new products are absolutely critical to all this.

When I say a new product I'm really talking about a customer engagement where they come to us with an opportunity and we're able to create a solution that meets their needs.

Makes sense.

As your customers consolidate, has that been a net benefit for Sonoco in terms of, I guess, more volumes?

Or a net negative, given maybe the price squeeze or something like that, given that you have a bigger customer?

Both.

I think this certainly presents opportunities we may not had before.

But there is no doubt obviously when these companies come together they want to use the new leverage of volume to reduce their cost.

So it creates an opportunity and it creates a threat.

It's how creative you are in dealing with both of those that ultimately will decide success or failure.

Okay, great.

Just one last one for me.

As you target acquisitions given your healthy balance sheet, what's your appetite to lever up to do a bigger-sized deal?

Is it 3 times, 4 times, 5 times?

What kind of a limit maybe do you guys have?

Well, we don't think actually in those terms.

Let me go state again that we're fairly fiscally conservative; we like being investment-grade.

And no matter what we did, we'd work to return to investment-grade as soon as we possibly could.

Now saying that, we've been 2 times levered.

We've been above 2 times levered before.

And if the right acquisition comes on, I could see us stretching that even further.

But we also have said publicly that we do have some businesses in the portfolio that, if we get the right opportunity, that we would consider selling those to help fund and acquisition into an area that we consider to be more core to us today.

So we have a lot of different ways to go about and fund a fairly large acquisition and still keep a pretty healthy balance sheet in the final analysis.

So that's what you would see us doing.

Makes sense.

Thank you so much.

Debbie Jones, Deutsche Bank.

Hi, good morning.

You mentioned, talking about M&A here again, I think at the Investor Day you said there was a focus on your flexibles business.

Obviously this has been a good business for you.

Is there any sense of urgency here, just with increasing your scale potentially for resin buying and things like that?

Yes.

Certainly flexibles is one of those target markets for us.

We have a pretty extensive list of potential candidates.

Many of them international; we think a dollar-denominated purchase internationally right now would be a fairly reasonable thing to do.

And we are actively pursuing opportunities in flexibles.

Okay.

Then if I could ask you to comment about some of the growth you're seeing in international markets right now, do you expect those trends to continue in 2016?

It just seems to be a little bit more than I was anticipating.

I just -- maybe some broad comments about that.

Debbie, I'm sorry.

You faded out right when you said international growth.

International growth in the Industrial business or in --?

Well actually, I thought your comments seem pretty broad-based on what you were seeing in some international markets right now.

I was just wondering if you'd comment on specifically what's driving them and if you expect those trends to improve.

Yes, well, certainly our international growth on the Consumer side is being fueled by the growth of composite can in Eastern Europe and Southeast Asia.

That's primarily our footprint, and that's where were focused, so we're certainly seeing that growth across those markets.

From an Industrial perspective, I think Europe's underlying economy appears to be improving, to us, because we had a very strong quarter in the tube and core business.

Up over 5%, I believe, in tubes and cores in the fourth quarter -- and being up year-over-year as well.

So I think that we're going to continue to see some solid performance in Europe.

I think that -- I think what I said earlier is that the rate of decline in Brazil or in China I don't expect to be equal to the rate of decline in 2015.

I think it's going to flatten out; maybe even see some positive quarter-over-quarter movement as the year goes on.

We'll have to see how that unfolds, but I think that there seems to be some stability at least in the fourth quarter in these developing parts of the world, particularly in Brazil and some other areas for us in the tube and core business.

If I could ask one more: domestic markets.

You've outpaced the industry on your Consumer side.

Is there reason to believe that that should continue for the foreseeable future?

Well, again, Debbie I don't want to sound like a broken record here, but I believe this i6 process, our innovation process, is driving opportunities to interact with customers.

And these interactions are bringing us the opportunity to win new business.

We have, as I said, about 30 of these going on right now and feel good about them.

So it has driven the growth.

It continues to drive the growth, so feel very good about that.

Okay, thanks.

I'll turn it over.

Philip Ng, Jefferies.

Good morning, Jack, Barry, and Roger.

This is Alex Hutter on for Phil.

It sounded like you saw a big step down in volumes in the fourth quarter in the medium business.

Can you talk about whether that was just seasonality, coupled with the lack of the offtake partner, or if you saw an outsized impact from the new capacity coming online in Illinois or Indiana?

Or do you think your performance is just reflective of the broader containerboard market?

Well, I certainly think our performance is reflective of the broader containerboard market.

Again, we were a producer for a takeout partner, so we're a very small player in this and we're just reacting to it.

I think we're just mirroring the industry.

That's exactly what we're seeing: the strong dollar impacting exports, a slower market domestically, seasonality, all that played into it.

But it probably played to us just like it played to the broader market.

Okay, great.

Thanks.

Then have you seen any change in the medium market following the capacity reductions that have been announced?

No.

We're operating at the same levels that we saw.

Got it.

Then switching to the Irapuato business, can you talk about what, if any, cost savings you might see as you walk away from that business?

Then on the flip side, does it limit some of the potential growth that you might have seen from a recovery with that customer in 2016?

Well, certainly it would impact potential growth opportunities that we may have had in Irapuato.

But where we are now, I think that we said it would impact revenues about $50 million in midyear; but from an ongoing EBIT standpoint it's not really going to have an impact.

As far as further reducing costs in that business, all those costs are really contained in Irapuato.

There was very little cost here to dealing with that particular issue, so I don't think we're going to see anything significant from that vantage point as far as further cost reductions because of that closure.

Great.

Then just switching gears, have you had any early wins with the TruVue product?

Have there been any limiting factors?

Have you had any advancements on throughput?

Or anything like that would be useful.

Well, I will tell you since the project began we've had numerous wins, just to get to a point where you can successfully produce a plastic base container.

I think right now the win that we're pointing to is the launch that we expect to occur sometime early second quarter with a customer.

So we're anxious to get it on the shelves.

In the test markets that we do the consumers are reacting very positively to this product, and that's what we were hoping for.

And we're getting much more interest in the container.

As I said earlier, coming out of the announcement in New York we had three or four new companies contact us and are engaging with us right now about the container.

Great.

Then just one last one for me.

Have you seen more reasonable multiples for the potential acquisitions you've been looking at, with market selloff?

Well, not yet.

I'm not sure we've gotten to those conversations that deep yet.

We're kind of in and around some of those.

I think that what we see, though, is the opportunity internationally for dollar-denominated transactions to have an advantaged situation.

So that's certainly something that we're looking at.

Great.

Thanks very much and good luck in the quarter.

Scott Gaffner, Barclays.

Thanks.

Just following up on the share buyback for a minute, Jack.

I haven't followed the Company more than three or four years, so I don't think you've done buyback during the time that I've covered the Company.

Can you talk about how you normally cadence the buyback, whether you do open market purchases or accelerated share repurchase, or how you're thinking about it here?

Yes, we did a buyback in what, 2013?

Over the course of 2013, and we tend to do just open market purchases.

We're not trying to beat the market per se; we're trying to just be consistent across the buyback.

That's not to say that if an opportunity doesn't arise that we wouldn't take advantage of it.

But that's just not been the way we've done it.

Okay.

Then, Jack, going back to the question on the supply chain management business that you have and the customer intimacy, I would think that having the Innovation Center now might allow you to -- that could be your customer intimacy point.

Are you seeing that change, or is that a possibility over time?

I think that's a definite possibility over time.

The innovation and being recognized for innovation could definitely be the customer intimacy leg that we see.

Okay.

Then just lastly, you mentioned no winter weather impacts in 2016, or least to this point.

Can you remind us of the impact that you had either in 1Q or 2Q of last year?

I think that there was a significant winter event in Q1 that impacted our Industrial businesses during Q1 and small on the Consumer side.

It's still February, so it's a little bit early to say, but we haven't seen those significant impacts yet.

I can't remember exactly the situation, but I know it did occur in 2015.

Okay.

Congrats on a strong quarter.

George Staphos, Bank of America Merrill Lynch.

Hi, guys.

I just wanted to do one housekeeping question.

The impact of the extra days in 1Q, which I guess presumably gets reversed out 4Q, should we think about that being more or less around $0.05 a share for the quarters in question?

It might be a penny or two lighter than that, just depending on exactly how you averaged and look at it.

But it would be roughly an additional 6% in terms of days, if everything worked out on a pure day basis for the calendar.

Okay.

All right; thanks for that, Barry.

Second question I had -- I think during the discussion you had mentioned that North American composites was not growing as quickly as the global composite business.

Obviously you've got the capacity launches helping on the global side.

If I heard that correctly, could you give us a bit more color in terms of what was happening in North American composites in the quarter and what the outlook is for 2016 in North America in that business?

Yes.

North America has been fighting erosion for some time in some of its key markets.

Frozen concentrated orange juice is one of those markets; as of late it's been powdered beverage being another one.

Those have been consistently going down over the past several years.

That business always fights erosion domestically, and that's really why we're looking for new markets with the new technology out of Weidenhammer, both the EvoCan as well as some other non-round applications that we could potentially look at as well.

But that's a consistent, George, that they face every year.

So they have to convert just to stay flat.

That's right, that's right.

No, I appreciate that.

One question I had just on the non-round, and I think the answer is it gets to some of the technology that Weidenhammer brought you.

But you've had non-round containers for a number of years.

Why will non-round all of a sudden begin to work more effectively than perhaps what it's been doing over the last whatever, 10, 20 years?

Well, let me just say that the capability out of Weidenhammer is for a faster production of the product.

Also they are putting a paper bottom on the product, which is a bit unique.

And we're actually introducing a new non-round container in Germany this month -- or have already put it out into the marketplace.

So they are bringing some technology that basically we didn't have relative to speed, paper bottom, and some other things that really create a pretty interesting container.

Okay.

Thanks for that, Jack.

Last one and I will turn it over.

Can you comment at all to the degree to which -- perhaps not at all -- that the business was affected last year by any distractions within the organization, probably more on the Industrial side than the Consumer side?

Do you think, more or less, that whatever might've occurred in 2015 is behind you and you'll be in a better position in terms of operations for 2016?

Thanks and good luck this quarter.

Yes, thank you, George.

Obviously, we talked about the changes to the organization because of the unfortunate situation with John.

Did that have an impact?

Without a doubt.

You can't lose someone of John's caliber and not have it have an impact.

So dealing with that has been an issue.

And I would tell you that during the course of 2015, we started 2015 going through an organization -- a reorg anyway.

We were in the process of some work we did with a consultant; we were completing up that reorganization.

It was leaning out the organization and moving resources around.

We've had to adapt to that with the new org structure.

So you had an org change that started; you had to stop it halfway through and go to a hybrid version of it to overcome this change.

So yes, and I think that that's one of the reasons why you're going to see an improved level of manufacturing productivity in 2016, as we're going to have a strong focus on that.

The organization is set.

So I expect to drive that through diligently during the course of the year.

Okay.

Thanks for that, Jack.

We were trying to be oblique with our question, but --

I understand.

-- give John our best.

Take care; good luck in the quarter.

Thank you.

Chip Dillon, Vertical Research.

Yes, hi, Jack; good morning.

I might have missed any commentary on this, but I just had a couple of questions.

One is, have you seen any change in either your customers' forecast or plans for ordering in the last, say, four to six weeks since the year's start?

And also in terms of the M&A environment, both in terms of availability, asking prices, and financing.

Chip, as far as order patterns, I would say no; we've not really seen any significant change relative to the way orders are flowing into the Company.

Right now in M&A, we really haven't seen any change there either.

I have said a couple of times I think one thing that is somewhat interesting, of course, is that if you have an opportunity to make an international acquisition, given the strength of the dollar that may present some opportunities.

So certainly on our list.

Got you.

Again, you might have mentioned something about this; but any update on the plans or the progression of the clear can concept that you all talked about at the December Investor Day?

Absolutely.

We expect to continue to roll that product out onto shelves sometime in the beginning of the second quarter, in that second-quarter time frame.

Have made tremendous progress with the customer.

We've done some further test marketing, and are just getting outstanding responses from consumers for this particular product.

They're looking at the product that they bought before.

They had a metal can.

Now they're looking at it in this see-through container, and their reaction has been -- let me just quantify it as highly positive.

If you go to the website you'll be able to see some the things that are actually occurring around the can.

I think it will give you an idea.

But continue to be very excited about it.

Also, since that meeting in New York we've had three or four new contact from potential customers that currently use metal cans -- canned fruits -- about the container.

So we'll be engaging with them as well.

Awesome.

Thank you.

Adam Josephson, KeyBanc.

Thanks, Jack; just one follow-up from me.

I think Chip just asked you about this.

You haven't really seen notable changes in your order patterns over the last month or two.

But you commented on your corrugated medium business obviously slowing, and seeing an impact from the strong dollar as well as some slowing domestic demand.

So can you just compare and contrast your overarching statements about order patterns with what you are experiencing in your medium business?

Just so I can better understand the seeming discrepancy.

Yes, Adam, I would say that that's -- I was kind of discounting the order pattern for the Industrial business -- or for the corrugated business.

I think that that has been impacted.

That has been impacted for -- probably starting in November time frame relative to just not have -- we have go into a slow back mode in order to keep the mill running, but also meet what demand we did have.

So we did have slower order patterns in corrugated.

Is that related to the market or to your situation specifically?

I would say purely to the market.

We haven't seen any lost share.

But as I said earlier, we're following the whole pattern of the market.

Got it.

Thanks very much.

Thank you.

I'm showing no further questions at this time.

I would like to turn the conference back over to Roger Schrum for any closing remarks.

Thank you again, Michelle, and thank everyone for joining us today.

We certainly appreciate your interest in the Company.

As always if you have any further questions don't hesitate to give us a call.

Thank you.

Ladies and gentlemen, this does conclude today's program.

Thank you for participating.

You may all disconnect.

Everyone have a great day.