Sonoco Products Co (SON) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Sonoco Earnings Conference Call.

(Operator Instructions) As a reminder, today's program is being recorded.

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

Please go ahead.

Thank you, Jonathan.

Good morning, and welcome to Sonoco's investor conference call to discuss our 2018 fourth quarter and full year financial results.

Joining me today are Rob Tiede, President and Chief Executive Officer; Barry Saunders, Senior Vice President and Chief Financial Officer; and Julie Albrecht, Vice President, Treasurer and CFO-elect.

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

In addition, we will reference a presentation on our fourth quarter results, which was also posted on our website this morning.

Before we go further, let me remind you that today's call and presentation contains a number of forward-looking statements based on current expectations, estimates and projections.

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

Therefore, actual results may differ materially.

Furthermore, today's presentation includes the use of non-GAAP financial measures, which management believes provides useful information to investors about the company's financial condition and results of operations.

Further information about the company's use of non-GAAP financial measures, including definitions as well as reconciliations of those numbers to the most closely related GAAP measure, is also available on the Investor Relations section of our website.

Now let me turn it over to Barry.

Thank you, Roger.

I will begin on Slide 3, where you see that earlier this morning, we reported fourth quarter earnings per share on a GAAP basis of $0.77 per share and base earnings of $0.84, which is near the high end of our guidance as provided at our Analyst Day in New York of $0.79 to $0.85 per share, all of which compares to base earnings of $0.72 for the same period last year.

As you will see in just a moment, we had a lower-than-expected effective tax rate for the quarter, which more than offset some unexpected weakness in December in a few of our businesses.

There are several reconciling items between GAAP and base earnings, including restructuring charges of $0.08 per share, acquisition-related cost of $0.10 per share and some tax adjustments with a net favorable impact of $0.11 per share, mostly from further interpretation of last year's U.S. Tax Cuts and Jobs Act, most notably, a $16 million release of valuation allowances on foreign tax credits.

Looking briefly at our base income statement on the next slide starting with the top line.

You see sales were $1,356,000,000, up $56.6 million over the prior year due to many moving pieces that you'll see in the sales bridge, but the net increase is really driven by the Highland and Conitex acquisitions.

Gross profit was $254.3 million, $9.9 million above the prior year due to several factors, including positive price/cost, the impact of acquisitions and the business interruption insurance recovery from the flood in the third quarter.

Selling, general and administrative and other income and expense items of $138 million were unfavorable year-over-year by $11.3 million, driven largely by the acquisitions and normal inflation.

All thus resulting in operating profit of $116.2 million, down slightly from the prior year.

And you'll see all the drivers of the change in the operating profit bridge in just a moment.

Below operating profit, you see the impact of nonservice pension expense of only $744,000, which compares to nonservice expense of $2.7 million in the fourth quarter of 2017.

Interest of $15.2 million was $1 million higher than the prior year due primarily to higher interest rates.

Income taxes on base earnings were only $17.9 million for the quarter, notably lower than the prior year even though pretax profits were essentially unchanged due to the lower effective tax rate on base earnings, which was 17.8% for the quarter as compared to 29.4% in the same quarter of 2017.

In addition to the expected benefit year-over-year of the Tax Act, there was further guidance issued in the quarter that notably reduced the impact of the infamous GILTI component of the Tax Act, where the year-to-date benefit recognized in the quarter was $5.5 million, thus bringing our year-to-date effective tax rate on base earnings to 23.7%.

Equity in affiliates when combined with minority interest was $2.4 million, thus ending up with base earnings of $84.8 million or $0.84 per share.

In looking at the sales bridge on Slide 5, you see volume for the company was lower year-over-year by $13 million or right at 1%.

To provide some more details about volume, we had a 7.9% increase in Display and Packaging, excluding the impact of exiting the Atlanta pack center, but such was more than offset by just over a 1% reduction in the Consumer Packaging segment volume and just over a 2% reduction in volume in the Paper and Industrial Converted Products segment.

The decline in the Consumer Packaging segment was driven by a 4.8% decrease in plastics and a 1.7% decrease in flexibles as global composite can volume was essentially flat.

In the Paper and Industrial Converted Products segment, tube and core volume was off in most regions of the world, being down right at 2% in the U.S. and Canada, but down 7% in Europe, associated with overall economic market softness, really across all served market segments in Western Europe.

And volume in Protective Solutions was essentially flat for the quarter.

So moving over to price.

You see that prices were higher year-over-year by $22 million, driven by price increases, both to cover higher material cost as well as our commercial excellence activities to push through noncontract increases, with much of the higher prices in the Consumer Packaging segment.

Prices were up only slightly in the Paper and Industrial Converted Products segment due to lower OCC prices, mostly offsetting the favorable impact on the price increases on the business not tied to OCC prices.

And you'll hear more related to OCC trends when we discuss price/cost in just a moment.

Moving over to acquisitions.

You see an impact on the top line of $88 million from the Highland acquisition completed in April and the Conitex acquisition completed October 1.

And finally, exchange and other was negative by $41 million, driven mostly by exchange related to the dollar being slightly stronger this year and to a lesser extent, the impact of exiting the Atlanta pack center.

Moving on to the operating profit bridge on Slide 6. You see the lower volume, when combined with the impact of mix, reduced earnings year-over-year by $2 million.

Price/cost, including the benefit of procurement productivity, was once again very favorable this quarter, up $18 million, most of which was in the Paper and Industrial Converted Products segment.

There is a slide in the Appendix with recent OCC prices where you see an average OCC price of $122 for the fourth quarter of 2017 versus $88 in the fourth quarter of 2018.

Although some of our contracts also reset at a lower level driven by the lower OCC prices, those that are based on market paper indices, such as tan bending chip, are actually higher year-over-year, and we have been successful in implementing price increases on noncontract business.

Through the fourth quarter, there was also a year-over-year improvement on pricing in corrugating medium as well.

As mentioned last quarter, we've seen margin expansion from price/cost in our industrial businesses in all regions of the world driven by tight core board capacity.

The impact of acquisitions added $5 million to earnings, mostly on the Conitex acquisition, as Q4 is a seasonally slow period for Highland.

Moving over to manufacturing productivity.

You can see it was negative by $13 million, a very disappointing quarter from the shop floor perspective, particularly in plastics, which alone was off $9 million year-over-year.

This was driven by deleveraging of the lower volume and some significant operational challenges at the perimeter of the store-related plants, including the impact of the consolidation of 2 plants in California.

But it is fair to say many businesses were struggling to deliver year-over-year improvement in unit cost to produce, particularly with overall soft volume levels.

And finally, the change in the all other category on a year-over-year basis was unfavorable by $9 million.

Normal inflation would have accounted for roughly $14 million, but this was partially offset by the benefit of the business interruption recovery in the Paper and Industrial Converted Products segment and exiting the Atlanta pack center.

Moving on to Slide 7, you find our segment analysis where you can see Consumer Packaging sales were up 3.6% due most notably to the impact of the Highland acquisition, but operating profits were down almost 35%, driven most notably by the negative manufacturing productivity with the operating profit margin percent dropping to 7.6%.

Display and Packaging sales were essentially flat, but operating profits improving more than $12 million and the margin improving to 6% due to price/cost, productivity and exiting the Atlanta pack center.

Paper and Industrial Converted Products sales were up almost 9% due mostly to the Conitex acquisition, and operating profit improving by 22.6% due primarily to favorable price/cost, the Conitex acquisition and the business interruption proceeds, which led to the operating profit margin moving up to 10.9% of sales.

And finally, Protective Solutions sales were down 2.4%, but the operating profit fell off by 10% due to higher operating costs not covered by manufacturing productivity.

All thus ending with total company sales up 4.4%, but operating profit down slightly and the company-wide operating profit margin dropping to 8.6% as compared to 9.1% in 2017.

So in summary, not a great final quarter itself due to the soft performance in a few businesses, but when added to the rest of the year represents another record year in GAAP and base earnings for our company.

Julie will now cover our guidance for 2019 and an update on cash flow.

Thanks, Barry.

Moving to Slide 8. You see our guidance for the first quarter and full year of 2019 for base earnings where we are projecting to earn between $0.77 and $0.83 per share for the first quarter compared to $0.74 per share in the same period of 2018.

Our earnings growth in the first quarter and full year is expected to be driven by a combination of positive price/cost, slightly higher volumes and the benefit of the Conitex and Highland acquisitions.

Consistent with what we shared at our Investor Day in December, we are projecting full year 2019 earnings to be in the range of $3.47 to $3.57 per share with a midpoint of $3.52 per share.

Overall, our assumptions for volume/mix, price/cost, total productivity and our effective tax rate have not significantly changed from what we shared in December.

Now turning from earnings to cash flow on Slide 9. You see that for the full year of 2018 operating cash flow was $590 million compared to $348 million in the prior year.

In addition to increased operating profit, the main drivers to our strong cash flows in 2018 were solid working capital management and lower U.S. defined benefit pension contributions.

So after capital spending, net of asset sale proceeds, of $168 million and after paying dividends of $161 million, free cash flow was $260 million for 2018.

Our outlook for 2019 operating cash flow is a range of $600 million to $620 million.

And we expect this year's free cash flow to be in a range of $225 million to $245 million.

This outlook is unchanged from what we provided at our December Analyst Meeting.

I'll note that after removing $50 million of unique positive cash flow items in 2018, our guidance for 2019 free cash flow is about a 12% increase over the prior year.

On Slide 10, you see that our balance sheet and our liquidity position remain very strong.

Our year-end 2018 cash balance of $120 million reflects a decrease of $135 million from our 2017 year-end cash balance.

At a high level, during 2018, we used our free cash flow generation and certain of our cash balances to fund around $275 million of acquisitions and repay approximately $60 million of debt.

That completes our financial review in the quarter so I'll now turn it over to Rob for additional comments.

Thank you, Julie.

Let me talk about our 2018 performance in a bit more detail and then I'll comment on what we see entering 2019 and specifically the actions we're taking to meet our financial and operational targets.

Sonoco produced extremely strong results in 2018, including record top line, bottom line and cash flow results while further strengthening our balance sheet.

Clearly, we believe the performance further demonstrates how our strong, diversified business mix has allowed us to produce consistent earnings improvement over the past several years.

However, this performance was not without its challenges, including the impact of hurricanes, accelerating inflation, tariffs and a choppy performance in our Consumer Packaging segment in quarter 4.

As you know, I'm a numbers guy, so let me highlight a few of our numbers in 2018.

Net sales were up 7% to a record $5.4 billion due to acquisitions, higher selling prices implemented to recover rising material, freight and other operating costs and modest volume/mix growth.

GAAP earnings per share increased 78% to a record $3.10 per diluted share while base earnings were up 21% to $3.37 per diluted share.

Base earnings grew as a result of a positive price/cost relationship, fixed cost savings and income from acquisitions, which were partially offset by negative manufacturing productivity and a negative volume/mix.

And of course, like most companies, we benefited from a lower effective tax rate as a result of the U.S. Jobs and Tax Cut Act (sic) [Tax Cuts and Jobs Act].

Looking more closely at our segment results.

Let me start with our Paper and Industrial Converted Products segment, which had a record year, achieving a 31% improvement in operating profit while operating margin improved 230 basis points to 10.9%.

Our global industrial business benefited from a positive price/cost relationship, lower fixed cost and acquisitions, partially offset by negative manufacturing productivity and modestly negative volume/mix.

Our Consumer Packaging segment clearly disappointed in 2018 with segment operating income down 12% while margins decreased 250 basis points.

Our global composite can business turned in another solid performance in 2018, and we have aggressive growth plans for 2019 with new operations starting up in South Africa and Brazil in the second quarter along with other growth projects in the U.S., Europe and Asia.

However, our rigid plastic and flexible packaging businesses struggled, particularly in the fourth quarter as volume was much weaker than we expected, which resulted in shop floor inefficiencies.

As we told you at our Analyst Meeting in New York in early December, Rodger Fuller has taken over responsibility for all of our consumer package businesses.

Rodger has made leadership changes, and his team is quickly refocusing our plastics and flexible packaging operations to improve operational execution and better optimize equipment capacity.

More specifically, we have consolidated a thermoforming facility in California, relocated equipment closer to customers and we'll be closing several production lines by mid-next year -- or mid this year.

And finally, we are working with customer and supplier contracts to improve price change mechanisms, and we're being aggressive to recover all forms of material and other inflation.

We do not believe the volume declines experienced at the end of 2018 represent ongoing demand in our plastics and flexibles business, as early 2019 shipments have improved and we have won new business which will be commercialized during the year.

Overall, we expect our efforts to improve Consumer Packaging operating margins to be in the range of 10% to 11% in 2019.

Let me remind you, through Q3 of 2018, our consumer margin was in excess of 10%.

We are extremely pleased with the turnaround in our Display and Packaging segment as fourth quarter operating profit was the best in a decade.

We have made significant changes to the business, including exiting the Atlanta pack center at the end of the third quarter.

And we have won new domestic display business, and we expect continued improvement in our international operations in 2019.

Protective Solution results improved some in 2018 but were still short of our target.

Our temperature-assured packaging business continues to perform very well due to new volume growth.

However, our consumer and automotive molded foam business continues to struggle with sluggish volume, which is impacting manufacturing efficiency.

Julie already mentioned our record operating cash flow and free cash flow results for 2018, but I wanted to recognize our team for making a step change improvement in working capital management during the year.

Driving organic free cash flow growth remains one of our top priorities for 2019, and we will keep working capital improvement in our management incentives.

Entering 2019, we believe we have been realistic about global economic conditions, which slowed some at the end of 2018.

As a result, we are projecting only modest volume growth across our businesses.

To reiterate, one of our top priorities in 2019 is improving the operating performance and margins in our Consumer Packaging segment, particularly rigid plastics and flexible packaging.

And we must do a better job in fully recovering raw material and other inflation in these businesses.

Our Paper and Industrial Converted Products segment, which is led by Howard Coker and an experienced leadership team, will continue to focus on implementing operating and commercial excellence initiatives while integrating the recent Conitex acquisition.

The turnaround in our Display and Packaging segment is expected to continue into 2019, and we must aggressively pursue targeted growth opportunities and cost reduction actions in Protective Solutions.

Finally, we must continue to simplify our structure, processes and portfolio to drive consistent earnings and cash flow growth as well as strong returns to our shareholders.

Sonoco is celebrating its 120th anniversary this year, and we remain confident that our products and portfolio have us positioned well to compete in an environment that is being driven by shifts in consumer demographics, behaviors related to increased focus on health and wellness, a changing digital economy and social consciousness, particularly around recycling and recyclability of our packaging.

In closing, as this will be Barry's last conference call, let me express my sincere gratitude to Barry for all he has brought to Sonoco during his 30-year career, particularly the last 7 years as Sonoco's Chief Financial Officer.

As Sonoco's CFO, Barry has worked with 3 different CEOs, providing financial expertise, but more importantly, he is a trusted leader in our company.

Most of you don't know this, but for the past 6 months, Barry has not only handled his CFO duties, but he also has taken on the interim leadership of our business technology group as we have been recruiting a new chief information officer.

In fact, I've asked Barry to stay until April to assist in the transition of that important function in the company.

Barry, on behalf of all of us at Sonoco, we thank you, and we wish you well in retirement, albeit it's still months away.

Now with that, operator, would you please review the question-and-answer procedures?

(Operator Instructions) Our first question comes from the line of Ghansham Panjabi from Baird.

I guess, first off, on consumer.

Did that business see any sort of delay from a customer ordering standpoint just sort of late in the quarter just given the free fall in resin prices?

You mentioned, Rob, that there's been a bit of an improvement in 1Q so far.

So can you also just kind of quantify that aspect as well?

I'm just trying to get a sense as to what changed in December versus your initial expectations.

Yes.

Let me try to break it down because it was predominantly on the flexibles and the plastics side, Ghansham.

So if I take a look.

If I look at our flexibles business, in fact, I was doing this over the last couple of weeks.

I was looking at our bookings.

Our bookings in November and December were very bullish.

What we did see was a couple of things.

One, we did see some customers push orders out.

But the other thing that we did have happen was we did rebuild one of our rotogravure presses in the fourth quarter.

As a result, we have to move business to other facilities.

And that did create a bit of a backlog for us.

If I take a look at the order book, again, in flexibles in January, it met our expectations in terms of what we're looking for.

So give you some context, we expect our flexible business to grow in the range of 4% this year.

If I take a look at our plastics business, a couple of things that occurred in terms of the fourth quarter.

I think that we clearly saw an impact as it related to our chilled and frozen food segment.

And if you recall, we talked about a substitution where we had a customer testing out some business in the molded fiber construct.

And they had launched a product in that.

So we saw the impact of that.

But we also saw a significant impact in 3 other areas.

One was in the construction side and specifically in our cop tubing business, both on the fiber side as well as on the plastic side.

And if you recall, there was a recall of romaine lettuce in the fourth quarter.

That had an impact on us and we're starting to see that business rebound.

And then lastly, as I think about our plastics business, we did have a weather issue up in the Northeast, specifically as it impact -- or Northwest, sorry, Northwest, specifically as it related to the apple crop and the size of the apples were slightly smaller than expected.

So they have moved some of those smaller products or smaller apples into a bag versus -- a plastic bag versus the trays that we've got in place.

So that, if you will, sort of gives you some color and the background.

But if I take a look at our plastics performance in the first 6 weeks, and 6 weeks does not a quarter make and a quarter does not a year make, as we all know.

I am pleased with what I see because it's right on track with our growth expectations as we head into 2019 in the plastic side, again, being north of 4%.

Okay.

That's super helpful.

And then just switching to Paper and Industrial, obviously, a record level of operating profit or very close to it for 2018.

Are there any pockets of end market weakness that sort of give you pause for that business as it relates to volumes and margins and particularly so with Conitex and the related exposure to China?

Sure.

Let me start with Conitex and then maybe the best way to answer your question is do a walk around the globe because it's probably what's on a number of people's minds.

Conitex is performing as expected.

You got to remember, Conitex is a significant player in the Southeast Asia market.

China is just one element of it.

So have we seen a slowdown in the market in China?

The answer is yes.

However, I would tell you that the rest of Southeast Asia is buoyant.

And our plants are very busy with respect to the work that they've got in their portfolio.

Again, Conitex also has operations in Europe as well as here in the U.S. So that's the Conitex piece.

If I think about the second or first part of your question as it relates to softness in the market.

If I talk about the industrial side, did we see some softness in the converting and paper side?

I would tell you, let's start with Europe.

I think Barry mentioned that we saw about a 7% softness on the converting side, but our paper business was strong.

And if I think about North America, are we seeing some mild softness?

The answer is yes in comparison to the robustness that we had a year ago.

Containerboard is something that we're watching closely where our mill is still full.

But it's something that we're going to monitor closely.

And will it cause some potential challenges on pricing as we move forward?

The answer is yes.

The good news is OCC has dropped.

So in the puts and takes of things, I think those should offset each other.

And then we have seen some softness on the industrial side as well in South America, specifically Brazil.

Our next question comes from the line of Edlain Rodriguez from UBS.

Rob, can you talk about the performance of the recent plastic acquisitions?

And also in terms of like the outlook for M&A, like what are you seeing out there?

Sure.

So I mean, yes, the plastic acquisitions would be the perimeter of the store acquisitions.

So let me start with Highland, which is the most recent one.

It is exceeding our expectations as we finish the year.

And let me talk about Highland for a moment and how it fits into the context of the perimeter of the store.

What we liked about Highland was not just the fact that they had a good business on the East Coast, but they had a very solid management team.

That team now runs the entire perimeter of the store focus for us on the rigid plastic side.

And that was part of the reason we did the acquisition.

When we did the Peninsula deal, we had contemplated closing a facility, which we have now done.

But we had contemplated doing that a little earlier, and so that had an impact on the productivity that Barry referenced earlier.

We do see growth continuing, and we're still very excited with respect to the projects that we've got going on with our customers.

And not only with respect to it being a rigid plastic construct, but also a combination of bringing flexibles and the thermoform constructs together.

So we're seeing a lot of opportunity with respect to that.

So we expect that, that side of the business will continue to grow at the levels that we've talked about in the past.

Okay.

One quick one on tubes and cores.

You're definitely seeing some volume weakness in there.

I mean, are you losing volume at the expense of prices?

And how much is there left to do in terms of balancing pricing with volume?

Yes.

I would tell you that, again, it depends on the region of the world.

The only loss of any consequence that we experienced would have been in Europe.

And we expect the volume to come back moderately with respect to that.

Here in North America, which is the biggest market for us in the tube and core side, it is right in line with what our expectations are as it relates to the focus that we've put into that business.

And that same focus in terms of operational excellence is being applied to our operations in Europe.

And that body of work has already begun with our leaders in Europe along with Howard Coker.

Okay.

Good luck, Barry.

Thank you.

Thank you.

Our next question comes from the line of George Staphos from Bank of America Merrill Lynch.

Barry, thanks, again, for all the support of all of us in our research and congratulations.

And congratulations to you, Julie, as well.

I just want to come back to the consumer performance and talk a little about it, Rob, in terms of -- it seemed like you're saying this is largely a short-term issue in terms of customers pushing out orders and some other factors.

Yet the actions you're taking are fairly comprehensive, which would suggest that maybe there was some building issues beneath the surface that were there all along but it was just the fourth quarter kind of brought them to bear.

So would you agree or disagree with that premise?

I know you said your volumes have come back as you expect in the first quarter.

But are there any other structural issues that are starting to worry you about, either in terms of volume or pricing?

Kind of relatedly, and I'll stop here, a lot of times when we hear about and see businesses struggle for a while, it's not so much the short-term issue.

It's business might have been mispriced, i.e., like Atlanta.

So some thoughts around those questions would be great and I had one follow-on after that.

Sure, George.

Yes, so let me talk about those businesses.

Structural issues, I don't think so.

I think -- let me just get granular.

In the flexibles business, where we rebuilt a press, that was something that had been contemplated because we needed to do that.

And we anticipated being able to do that by relocating some business and making that happen over a 6-week time frame.

It actually ran longer than the 6 weeks because of some engineering issues.

But that press is now back up and running and we're migrating the business back onto that machine.

And that was happening in the tail end of January.

We also put in a new press and a new laminator into one of our facilities to be able to retire 3 old presses and a laminator.

So that should drive some productivity improvement.

So that's what's driving that.

As I said on the booking side, I was pleased with what I was seeing in November and December -- and I look at it on a monthly basis, as well as January.

On the plastic side, the issue around, specifically, the consolidation of the facility there.

I think we may have talked about this in a previous call, where we had made a decision upon acquisition that we were going to shutter this facility and we engaged in a conversation with a prospective customer about taking on a big piece of business.

Unfortunately, that customer, while we were in the midst of negotiations, was sold.

And as a result, it delayed our closure of that facility.

And as we were going through the closing process, we were also hiring up people in the new plants that are going to be upscaled and starting training.

And so we had duplicate headcount in the system as a result of that.

And so I think a lot of that is behind us.

We do, having said that, I do expect there still be a learning curve as some of these people learn to run these machines and run the new product in the first quarter.

But I think from a structural standpoint, that's solid.

That said, we also, as I made a comment in my opening comments, we do expect to drive price in a number of these areas where we were not as effective in recovering the rising material cost specifically.

And then lastly, as we were moving things around, we also incurred some significant freight charges of shuttling things from facilities farther away from the customer than we want.

So it's a number of things that played out, George.

Hopefully, that gives you some perspective.

But from an order standpoint, from what we've seen thus far, it's in line with what we expected.

Okay.

That's very clear.

I appreciate that, Rob.

One quick one for me, and I'll turn it over.

Display and Packaging did very well, certainly versus our model.

It's neither here nor there.

But I think you said a record performance relative to the last 10 years.

For the analysts sitting on this phone -- on this conference call, should we more or less extrapolate that year-on-year margin trend over the rest of the quarters in 2019?

And what effect -- this comes up periodically.

What effect are you seeing on Display and Packaging volumes, you said it was real strong, from the continued progression of direct-to-consumer, e-commerce and the like?

Yes.

I would not project the 6% that we achieved in the fourth quarter throughout the year.

I think, historically, we've run in that 4%, 4.5% range directionally, somewhere in that range.

But what we're seeing is we've picked up some new volume, both here in North America as well as in internationally.

And I think I said, we expect to see continued improvement throughout the course of the year.

Part of that is the fact that we had the Atlanta pack center clearly, if you will, in our comparatives through Q3 of this year.

And this was a wonderful business.

I would tell you, with the long-term prognosis of displays, I think that we do a lot more pack out certainly on the international side.

That really isn't as display-centric as, if you will, the traditional business that we have here.

That said, we still see people buying displays and getting product in front of customers and interrupting their shopping experience or at least positioning product in multiple sites so that their product gets displayed and gets noticed.

Our next question comes from the line of Adam Josephson from KeyBanc Capital Markets.

One commodity question and then one back to consumer for a moment.

Just on OCC and resin, correct me if I'm wrong, but OCC has already been weaker so far in 2019 than you were expecting as recently as early December.

It went down by $10, $15 in February.

We know what's happened to resin prices, at least what happened in November-December.

Can you just update us on what you're expecting in 1Q in terms of the OCC benefit?

And if you're expecting these low OCC prices to persist and then if your resin expectations for the year have changed?

Sure.

So let me start with resin.

I knew you were going to ask me that question.

With respect to OCC, I think we look forward.

What we've done is we've done our forward-look based around $75 for the balance of the year.

So there may be some ebbs and flows, but sort of looking at it from that perspective.

With respect to your question, do we expect to see some benefit or what's the magnitude of the benefit.

I think one of the things that we are keeping a close eye on is what's happening in the containerboard market and some of the pricing that may take place in there, which we don't yet know where that ultimately plays out.

I would tell you that my expectation certainly as we go through this quarter is that any benefit would be offset by the puts and takes that we otherwise would have in the quarter.

So I don't anticipate there being a benefit on what we see, that $10 drop that we experienced in February.

I hope I'm wrong, but that's where my head is with respect to that.

On the resin side, nothing's really changed.

I think we built our forward-look based on an overall decline about 2%.

There's always going to be some movement here and there, but we're pretty much standing behind that expectation.

And just on consumer.

I know you talked about the first 6 weeks of the year being better volume-wise after what happened in 4Q.

But if I go back to 2011, I think your volume is essentially flat over the past 8 years or so in that segment.

So there have been recurring volume difficulties for a number of years.

So do you have any reason to -- and obviously, you're not expecting company-wide volume growth of any consequence in '19 either.

So was there anything particularly anomalous about the weakness in 4Q?

And it seems that volume weakness has gone back a lot further than just 4Q '18.

And then with respect to -- you talked at your Analyst Day about 2% organic sales growth for the foreseeable future and you're already talking about volume weakness in 4Q.

Do you still think that 2% organic growth is reasonable in light of what you're expecting at least for this year?

Yes.

Over the long term, we've talked -- or over a planning horizon, I do think that 2% organic growth is achievable.

So let me answer the question that I think you're sort of getting at.

If you recall, one of the things that we've talked about is that the composite can in the developed world over a number of years had been declining.

And part of that was offset by the fact that we were growing in the plastics and the flexible space.

As I look at expectations in volume, I think we will continue to see some of that in the developed world.

With that said, we did see growth in Europe.

So I take that back in terms of the entire developed world.

We did see some nice growth in Europe.

And clearly, we continue to see double-digit growth in Asia.

So they sort of balance each other.

It's sort of a mathematical calculation but there's no reason for us not to believe that these other, if you will, the plastics piece and the flexibles piece can't grow at the rate that we've set out.

Our next question comes from the line of Scott Gaffner from Barclays.

Thanks, Barry, for all the help over the years.

It's been a pleasure working with you.

So good luck on retirement.

Thanks.

My pleasure as well.

Rob, just a quick question on consumer, talking about the perimeter of the store.

I just wanted to clarify, I mean, I know you are closing down, removing some of that plastics business.

And there were some operational inefficiencies just as the one customer I think you mentioned got sold while you were negotiating.

But was there anything from a volume perspective with the perimeter of the store that gave you cause for concern in the fourth quarter?

Not really.

Obviously, there is a weather impact to this business.

The crop keeps growing so the product still gets picked.

It may be pushed out a little bit.

If I think about, for example, let's use January as an example.

We had cold weather here on the East Coast and a lot of rain in California.

Has it delayed some things?

Yes.

But somebody, they were sending me some videos of product being picked and shipped into some of our customers at record levels over the last couple of weeks.

So there's a mad scramble to get caught up on things.

And so at this point, I would tell you, no.

There's nothing that causes me to do that.

The one other thing that I would say and that we have talked about, and Howard is driving this, is really taking a look at our customers and saying, where do we make a reasonable margin?

And if we're not, are we best suited to serve some of these customers?

So we're also taking a look at our customer mix and the ability to generate a reasonable return for the effort and value that we expend on those customers.

So that's something that we started and we talked about initiating in the industrial side, specifically in tubes and cores in North America.

We said that, that is not going to be just an industrial-driven activity.

That's something we're going to roll out throughout the entire company.

So some of those principles are starting to be applied in all of our businesses.

Okay.

And just kind of a follow-up from that.

I mean, is there a learning curve in managing some of these more fresh and natural packaging options?

I mean, I'm specifically talking about, I guess, there's a lot more seasonality associated with these than maybe some of your base business products and therefore it takes a little bit different operational mentality when you're running the facilities there.

I mean, have you found that to be a little bit of a learning curve as you move through these acquisitions?

Yes.

I would tell you, there's a number of learnings that you get on any acquisition as you go through them.

Is there a learning curve specifically as it relates to the seasonality?

Yes.

I think the other one is the intimacy that you need to have with the customer.

Again, why we bought the Highland organization and their team and how they approach customers.

How our commercial organization is out in the field with the folks and getting a good read in terms of the forecast and expectations.

I think that was a huge benefit as we brought Highland into the equation.

And that same approach is being rolled out through all the operations on the old Peninsula side.

Okay.

Last one for me just on Paper and Industrial Converted.

When you look at it, right, you had the change in ownership of one of your competitors, so not necessarily consolidation.

I mean, the industry has consolidated a little bit over the last few years and yet you've still had some issues as competitors went in and out of different financial situations.

How are you feeling about the overall competitive landscape in that business today following the change in ownership and anything we should expect going forward on that?

Well, we welcome the unnamed party into the marketplace.

I think that they are a group that understands the industrial space and I have no reason to believe that they won't act appropriately in the marketplace.

Our next question comes from the line of Brian Maguire from Goldman Sachs.

Just add my congrats to Barry on the impending retirement.

Thank you.

Just a question on volumes.

Just to put a finer point on the outlook for '19.

I know you said sort of slightly higher.

Is that kind of a 1%-ish kind of a number?

And sort of related to that, the strength you're seeing in composite cans in Europe.

Do you think -- is that substrate substitution and do you think it's sort of tied into some of the broader environmental sustainability targets that some of your brand owners are having?

No, I don't think it's a substitute -- first of all, yes, it is the 1% that you're referencing.

And then secondly, I'm not sure that we are seeing a lot of substitution today in terms of product.

We're -- clearly around the world, we're definitely seeing different growth rates.

And I mentioned the can business.

While we saw growth in the can business in Europe last year, nice growth in Europe.

We saw double-digit growth in Asia, and we're expecting to have that and maybe a little bit better than last year in terms of overall growth expectations in Asia.

We're also starting up a facility in South Africa and another facility in Brazil.

So we expect some growth coming from both of those facilities as well.

Okay.

And just turning to M&A.

You have some explicit targets there for sales contribution in your 2020 targets.

Just wondering if you could comment on the overall environment.

Have multiples come down some after some of the macro choppiness of the last couple of months?

And as far as direction of where you're interested, I've thought of it being mostly in the perimeter of the store, but just wondering if that's shifted.

And I think there might be some closures, assets that are coming on the market.

I'm wondering if that's a part of your business that you'd be looking to expand.

Yes.

So what we always have talked about over the last number of years and still very consistent in terms of our focus around acquisitions.

We said we want to grow in flexibles.

We want to grow in rigid plastics, specifically in thermoforming.

And we said that we would do consolidation opportunities where it made good business sense for us on the paper side in the domestic markets -- or I'll call it the developed world.

But we're also very fixated on growing our position where we have infrastructure and support organization in the developed world as it relates to the tube and core business.

And that's how we look at the acquisition side.

So it's not just limited to the perimeter of the store.

We think about the perimeter of the store as one of the market segments that we're focused on.

There are other markets that are very attractive to us as we think about larger macro trends that we want to participate in.

Okay.

Last one for me.

The price cut in medium that was picked up by pulp and paper.

Just wondering, is that included in your guidance or was it significant enough to get picked up by your contract mechanisms?

Well, I think the way we're looking at it is, given where we think the OCC movement is going, that would probably offset at least what we believe to be true in terms of some of this price movement.

So they should offset each other.

Our next question comes from the line of Mark Wilde from Bank of Montreal.

Rob, I wanted to start off just over on protective packaging.

And I think for many years you've talked about kind of a 10% EBIT margin in that business.

And I just wondered how you're thinking about the sight line on that 10% margin right now.

Let me just grab a sheet that I've got here to find out where we're at.

So if I think about the business, I think about our protective business in 3 buckets, right: what we call the old traditional fiber post business; if I think about ThermoSafe; and then, allow me to bundle all these together as automotive.

There is no reason for me to believe that we could not achieve 10%.

The challenge we've got is the automotive sector.

And while we've been taking cost out, the biggest challenge you have in that business while you'd love to sit down and say, I'm just going to move this part from Plant A to Plant B, it's very costly to requalify it at another site.

So while you can take variable cost out, fixed costs still remain and you need to deal with that appropriately.

So it's the cost of the investment of moving it, will it pay back given the life span of that project?

So maybe said another way, Mark, if I didn't have automotive, 10% would be very much achievable.

Is it ultimately achievable with automotive?

You know what, if gas prices go up and you see a shift from SUVs back to cars, then yes, because we were there once before.

But the reality though is given the magnitude of the drop in smaller cars, which is where the bulk of those products we make goes into, it's going to be a challenge with automotive.

Okay.

And then just staying on kind of margins and thinking about the consumer business, which has seen a fair amount of volatility.

Are there things that you can do -- and I think you've talked about a little bit of this already, but to try to deliver more stable and consistent margins across that consumer business?

Well, yes, growing some of the other platforms to help offset, if you will, some of the declines that historically we have seen.

And obviously, it's got to be priced appropriately, et cetera, et cetera.

But the answer is yes.

But with that said, I think that 10% to 11% range is a pretty healthy range and something that we have been talking about for a long time to try to stay within.

Obviously, sometimes you get a little bit better than that, but there's no reason for us to believe that we can't drive those types of margins.

Okay.

And last one for me.

I noticed that your acquisition and divestiture costs were up quite a bit in the fourth quarter relative to what we've seen for the first 9 months of the year.

Can you shed any light around that?

Mark, this is Barry, certainly.

Actually, acquisition accounting is pretty interesting when you go from a minority position to a fully owned position.

So there's some cost that we had to recognize related to what we previously had on our books as part of our investment in the Conitex Sonoco joint venture.

That drove about half of that change.

Our next question comes from the line of Debbie Jones from Deutsche Bank.

Also, congratulations to Barry.

My first question, I wanted to talk a little bit more about the 4% volume growth you called out for flexibles.

And you mentioned some of it was being driven by new business.

Could you just give us a sense of how much that is, how it flows through?

And then also just what's driving that, whether it be your technology or scale or other items that you're presenting?

Yes.

Specifically, I can't tell you who and what it all is.

But it's being driven by some share gain, but it's also being driven by some new products that are being launched into the marketplace.

I think that -- I'm going to go from memory, Debbie, so don't quote me on this.

But in terms of new product development, I think our flexibles business, of all the new products we developed, was the highest, probably somewhere in the $30-plus million range last year.

And we expect that we would see something in that range or slightly better as we move forward into next year.

Hopefully, that gives you some color.

Okay.

And then in Display and Packaging, you mentioned the 4% margin, but in your prepared comments, you also said that there were still some things to do in that business relating to volume improvement, some efficiency improvement in addition to what you just did with Atlanta.

So I'm just curious what the timing on all of it is.

What's kind of the near-term goal versus long term and where you think you can take the margin in that business?

Yes.

So the team has been refocused and we've done a couple of things in that business.

One, I think that if I'm being brutally candid, the pack center in Atlanta took a lot of energy and effort and got the people's eye off the opportunity to grow the business in some other areas.

And those folks are all now redeployed back into, what I'll call, their normal roles.

We did win some new business with a customer, executed against that new business in the fourth quarter.

Effectively, that creates opportunity for us to grow further with that customer.

And then we also have a number of other customers that our folks have been engaged with.

As to the specific timing of when all that business will come in, I don't have an answer for you other than to tell you that typically, the display business is somewhat seasonally driven.

So typically, Q3 would be when the new business starts rolling in and into the early part of Q4.

Okay.

If I can just ask one last one.

I missed it in the deck of the earnings if you had it there.

But what were the -- I know it's in your guidance, but the insurance proceeds that you recovered this quarter?

I'm sorry.

Can you say that one more time, Debbie?

You were just breaking up.

Sorry.

The insurance proceeds that you recovered in the quarter?

Yes.

Debbie, it was very much in line with what we shared in New York.

If you might remember, we expected it would be about $0.04.

And that was the reason for our increase in our guidance at that time.

Our next question comes from the line of Gabe Hajde from Wells Fargo Securities.

And echo the congratulations to Barry and Julie.

I don't want to read too much into it so I'll just ask you, Rob.

You mentioned some slowing economic conditions at year-end in your press release.

But at least from our vantage point or mind, the overhang of sort of a government shutdown seems to be averted at this point and optimism looks to be the tone on trade.

Is there something specific, I guess, to your product set or customer base that has given you pause?

No.

You know what, if I think about what we saw in the fourth quarter, and I would tell you, when I think about the fourth quarter, it was so heavily skewed towards the month of December.

And then I saw just recently some data that came out on the retail sector that said it was the worst December since 2009.

When I think about the government shutdown and you had 800,000 people not getting a paycheck, you've got a really wild and wacky stock market and consumer confidence declining.

I think it was a convergence of all kinds of different things.

So that's what drove me back into really taking a look at, well, let me understand our bookings, what are we doing, how are we doing against that, where's the disconnect.

I mean, I also think that customers were also focused on controlling inventory.

And so I think it was a whole bunch of different factors that came into play in how it impacted the outcome, if you will.

Okay.

One quick housekeeping, the CapEx figure of $205 million, does that still hold true as it sits today?

Yes.

Our next question comes from the line of Chip Dillon from VRP.

I had a question about the pension situation.

It looks like the $16 million charge for the nonoperating pension that was pretty immaterial up to now is about $0.12 after tax.

And my question is, I couldn't find on the slides the appendix that was referenced from that day.

And I just didn't know what you were assuming back then.

I would imagine it's worse than you thought then because I would imagine the stock market sell-off in December impacted the degree of what that charge is.

Could be wrong about that, but just wanted to get some clarity on that.

And again, if you could confirm that last year, in '18, that number was almost 0.

Yes.

This is Julie.

Yes, you're exactly right that, that line item, nonoperating pension expense, in 2018 was very immaterial.

And our updated estimate for that amount is about $19 million.

And that is slightly higher than we were expecting at the Analyst Day.

And you're again exactly right that it's really that weak stock market performance in December that drove that number up.

So just as a reminder, we are excluding the nonoperating pension expense from base earnings starting in 2019.

And so while something we obviously will continue to monitor very closely, it will not be a part of our base earnings.

Okay.

I know some include it, some don't, but if you had it, you would be guiding us, I guess, to $3.38.

That's helpful to know.

And then the second question is on the -- I think earlier in the call, we talked a little bit about the 2 acquisitions for the sides of the store, where the fresh food is.

And I know, overall, you were saying, I think, that volume growth in flexibles should be around 4%.

How should we look at the subset of volume growth that we see for fresh fruits and vegetables that are part of those acquisitions you made in the last couple of years?

Yes.

So on the plastic side in total, we said we expect it to grow in the 4% range.

I don't know specifically because it's broken inside of the plastic side what they built in on a forward look.

But I would tell you that the growth on the perimeter of the store tends to be in the 6% to 9% range.

And I'm talking about just the products going out at retail.

And so we see that as a continued driver of growth and it may be a little higher inside the plastic space versus the 4% of the whole.

Our next question comes from the line of Steve Chercover from D.A. Davidson.

I was just wondering if you could elaborate on what is bundled into the $70 million Other bucket that hit you for the year?

I'm referring to Slide 6.

Yes.

Certainly, most of that would just be the normal nonmaterial inflation that we report each quarter, roughly $15 million a quarter accounts for most of that.

And do you believe that, that inflationary pressure will persist into 2019 or is it moderating a wee bit?

In certain areas, it might be moderating a little bit.

But for the nonmaterial component, we wouldn't expect that to be materially different.

Our next question is a follow-up from the line of Adam Josephson from KeyBanc Capital Markets.

Rob, just back to consumer for a couple of questions.

The volume kind of challenges you've had are no different than those that many other North American plastic packaging companies have had, both in 4Q and before that.

Is there an industry issue that you see such that most of the public companies that operate in that industry just cannot grow volume?

Or do you think that for whatever reason your volume challenges have been more company-specific?

And then relatedly, there's a great deal of discussion about sustainability and concerns about plastic packaging, both in the U.S. and Europe.

So I just would love you to address that issue just in the context of that question about just the volume weakness that many plastic packaging companies have been having of late.

Yes, Adam.

I would tell you, from our perspective, they typically tend to be a customer-specific issue as opposed to across the entire spectrum.

But as I said, in terms of plastics, we saw weakness where we did lose some share.

And we did see some weakness as a result of weather in the Northwest.

And I think we saw some weakness as a result of, what I'll call, the construction -- the time of year and the construction cycle.

So it's really a mixed bag.

I think from our perspective, especially as I look at our customer base, we talk about all large customers and serving all these large customers.

We also serve a lot of small customers.

Let me give you an example.

We will have a customer that represents -- and I'm getting really granular around the perimeter of the store.

A customer who represents 500 or 600 growers, and we're serving all of those folks with our product line.

So it's, I think, a slightly different model as it relates to maybe some of the other competitors that we have in the space.

We'd have to get specific around companies for me to do a real fair compare and contrast.

But maybe hopefully, that gives you some color.

Yes.

On the sustainability side, let me talk a little bit about that because it's interesting.

Two weeks ago, I was with one of our very large customers talking about, specifically, this issue along with some of the folks in the company that you've been exposed to and you know.

And they had 30 people at this meeting.

And it was a very robust discussion around perception and reality.

And what we ultimately said to the customer, you do know that 90% of your product is recycled material and you're not being vocal about that, and your concern might be is your customer feeling guilty about buying your product in a plastic construct.

It should be a very happy story because you're getting a very fresh product and you've also got a great recycling story.

So I think it's all about education.

It's about engagement and it's about innovation and really bringing all of that together.

And so that's something that we are putting together.

We're meeting with a number of our customers to a point where one of the thoughts we had is maybe us putting together a symposium on this.

And that's something that George had talked about a year plus ago saying, how do you do this by yourself or do you bring others into the conversation.

And so the narrative around plastics, paper and flexibles is something we've put together but we're bringing others together into that conversation and educating people.

There's no question there is a requirement for us to do, collectively, a better job in making sure we leave the earth in a better place than when we took it over.

And we will work on that.

But it really comes back down to, there's a reason why plastic is used or packaging is used and why certain materials are selected.

And you've got to look at it in its entirety as opposed to just, if you will, a small segment of that entire supply chain.

I appreciate that.

And just one last one along those lines, Rob.

And we're hearing from other purveyors of packaging, paper, aluminum, beverage cans that they are the sustainable alternative.

And given that you produce not only plastic packaging but also paper packaging and composite cans, how do you feel about those claims from some of your packaging competitors that they make the sustainable alternative, not a company like yourself that's making plastic packaging.

I think, Adam, you got to look at it.

It's not just the material.

It's the power.

It's the water.

It's all of the factors that go into making that product.

What's the cost of shipping?

So you got to look at all of that.

I mean, the good news is, when I think about Sonoco, and I get excited about our sustainability story because when I think about what we ship out and if I -- and I don't have 2018 data readily available yet.

But when I think about the fact that we ship out 4 point -- in 2017, we shipped out 4.7 million tons of packaged product to all our customers around the world.

3.8 million tons was either recycled or caused to be recycled by our business.

So I feel really good about what we're doing there.

We are in the recycling business.

So I think the other piece that is somewhat unique when we get involved in this is, we have a deep understanding of what can and cannot be done and what it would require to be able to recycle a lot of these materials and in an economic manner.

And so in that innovation side that we've got, we've got our head of recycling and our head of technology working together to start looking at alternatives, not just in the recycling system, but in terms of the materials.

So you and I need to have a beer and talk about this at length.

Thank you.

This does conclude the question-and-answer session of today's program.

I'd like to hand the program back to Roger Schrum for any further remarks.

Well, again, thank you to everyone for joining us today.

And certainly, if you have any further questions, don't hesitate to give us a call.

Thank you, again, for joining us.

Thank you, ladies and gentlemen, for your participation in today's conference.

This does conclude the program.

You may now disconnect.

Good day.