Good day, ladies and gentlemen and welcome to the Q2 2019 Sonoco Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr. Roger Schrum, Vice-President of Investor Relations. Sir, you may begin..

Thank you, Crystal. And good morning everyone and welcome to our Investor Relations Call to discuss our second quarter 2019 financial results. Joining me today are Rob Tiede, President and Chief Executive Officer; and Julie Albrecht, 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 website at sonoco.com. In addition, we will reference a presentation of our second quarter results, which was also posted on our website this morning.

Before we go further, let me remind you that today's call and presentation contains a number of forward looking statements based on current expectations, estimates and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties, therefore, actual results may differ materially.

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

Further information about the Company's use of non-GAAP financial measures including definitions, as well as reconciliations of those measures to the most closely related GAAP measure is also available on the Investor Relations website today. Now with that beginning, let me turn it over to Julie..

Thank you Roger. I will begin on Slide three, where you see that earlier this morning, we reported second quarter earnings per share on a GAAP basis of $0.80. And base earnings of $0.95 per share which is within our guidance range of $0.93 to $0.99 per share and slightly above our base EPS of $0.93 in the same period of last year.

Overall, we had a challenging second quarter with increasing macroeconomic headwinds coupled with certain operational disruptions, but with our focus on managing controllable cost, our earnings results were solid.

Related to the $0.15 difference between base and GAAP EPS $0.10 is due to restructuring activities and $0.04 relates to non-operating pension costs. Looking briefly at our base, income statement on slide four and starting with the topline, you see that sales were $1360 million down almost $7 million from the prior year period.

And I’ll review more details about our key sales drivers on the sales bridge in just a moment. Gross profit was $275 million just $1 million below the prior year’s second quarter as gross profit as a percent of sales remained a strong 20.2%.

SG&A expenses of $131 million were favorable year-over-year by $7 million driven by cost reductions across the business, which more than offset the addition of SG&A from acquisitions. All thus resulting in operating profit of $144 million which was $6 million above last year.

Our second quarter operating profit as a percent of sales was 10.6%, a 50 basis point improvement over the prior year period, and I'll review the key drivers to operating profit on that bridge shortly. Net interest expense of $16 million was almost $1 million higher than last year primarily due to higher non U.S.

debt balances and reduced interest income on lower offshore cash balances. Income taxes of $33 million were effectively flat to last year, driven by a combination of higher pre-tax profits, but a lower effective tax rate.

Our second quarter 2019 effective base tax rate of 25.9% was lower than the prior year quarter primarily to a decreased impact of the guilty tax. And moving down to net income, our second quarter 2019 base earnings were $96 million or $0.95 per share.

And looking at the sales bridge, on slide five, you see volume was lower by $48 million or 3.5% for the company as a whole. Consumer Packaging volume was down $24 million or 3.9% driven mostly by lower demand in rigid paper containers, North America and in plastics, but also by some weakness in our flexible business.

Rob will be providing more color about these volume declines in his comments. Display and packaging had solid volume growth at almost $5 million or 3.2% driven by increased business activity primarily in our domestic displays business.

I'll note this does exclude the impact of exiting the Atlanta pack center, which is included in the exchange and other category. Volume in Paper and Industrial Converted Products was down almost $27 million or 5.7% due to weak tube and core volumes in all global regions and lower paperboard and corrugated medium demand in the U.S. and Canada.

And sales volume in Protective Solutions was down by $2 million or 1.6% with a continued trend of strong demand for our temperature-assured packaging, offset by weak volume in molded foam and consumer fiber packaging where we serve the automotive consumer electronics and appliance markets.

So moving over to price, you see that selling prices were higher year-over-year by $12 million, driven by price increases both to cover higher material and non-material costs, as well as, other efforts to better realize the value of the products and services we provide to our customers.

Continuing on to acquisitions, you see an impact on the top line of $67 million which was primarily driven by the Conitex acquisition in the fourth quarter of last year.

And finally exchange in other was negative by $37 million, driven by $27 million negative impact from foreign exchange translation and $16 million of lower sales from the Atlanta pack center exit in September of 2018.

Moving to the operating profit bridge on Slide six, and starting with volume mix, our lower sales volume offset somewhat by a positive mix of business had a negative impact on operating profit of $16 million. This impact was spread among our segments generally in line with the sales volume changes.

Shifting over to price cost, we had $2 million of positive price cost in the second quarter driven by our consumer packaging and paper and industrial converted products segment.

There is a slide in the appendix that shows recent OCC prices where you see that OCC prices averaged $42 per ton in the second quarter of this year compared to an $82 per ton average in last year's second quarter.

Although some of our third quarter customer contracts have reset at this lower level for OCC, we have been successful in implementing price adjustments on non-contract business, along with having a good mix of contracts with pricing that is based on market paper indices such as tan bending chip, which are actually higher year-over-year.

Next, you see that the impact of acquisitions added $7 million to earnings this quarter, which is primarily related to our Conitex acquisitions in the industrial segments. Continuing to total productivity, you see that our total productivity was positive year-over-year by $11 million and was spread across the segments.

The main contributors to this positive impact were procurement and fixed cost productivity. And finally, the change in exchange and other was favorable, driven primarily by the positive earnings impact from the exit of the Atlanta parks center last September. Now moving to slide seven, you'll find our segment summary.

We see that consumer packaging sales were down 2.2% due most notably to softer demand which also drove operating profits down by 1.1%. The consumer segment margin was 10.4% slightly above the second quarter of last year.

Display and packaging sales were down 5.9% due to the Atlanta park center exit last September, but partially offset by strong volumes in the remaining business. Operating profit increased well over 100% to $5.9 million and operating margin which was negative last year largely due to the Atlanta park center improved to 4.4%.

Earnings also benefited from the volume gains in display and retail security packaging. Paper and industrial converted products sales were up 3.6% driven by the Conitex acquisition and partially reduced by lower demand. Operating profit was relatively flat due to these sales drivers as well as positive price cost and total productivity.

The industrial segments operating profit was a solid 12.5% for the second quarter of this year. And finally, Protective Solutions sales were down 1.6% but operating profit improved by almost 5% due to strong productivity results.

This segment margin of 10.9% improved by approximately 70 basis points from the prior year quarter.\ For the total company, sales were down one half of 1% while base operating profit was higher by 4.4% resulting in a company-wide operating margin of 10.6%.

On Slide eight, you'll find our outlook for the third quarter, where we are forecasting base earnings to be in the range of $0.88 to $0.94 per share. Our full year guidance range is unchanged at $3.52 to $3.62 per share.

Our guidance does assume no significant change in underlying economic activity, but does reflect approximately $0.03 of higher interest costs, associated with the short term debt funding of our recent pension contributions. Turning to cash flow.

On slide nine you see that our operating cash flow for the first six months of 2019 was $40 million compared with $251 million in the same period of 2018. This $211 million decrease was driven by the year-to-date $175 million after tax cash impact of the voluntary U.S. pension contributions that we made in May.

This pension contribution was for $190 million and we had a related second quarter cash tax benefit of $15 million. Midway down the slide, you see that our working capital balances increased during the first six months of this year by $66 million, which was a $21 million increase in cash usage by working capital versus the prior year period.

The primary driver to this increase was timing of accounts payable activity. So after net capital spending of $101 million and after paying dividends of $84 million our free cash flow in the first six months of 2019 was a use of $145 million.

Excluding the impact of the voluntary pension contribution, our 2019 year-to-date free cash flow would have been a positive $30 million. Due specifically to the full year after tax cash flow impact of $165 million from our voluntary U.S. pension contributions, our outlook for this year's operating cash flow is now $435 million to $455 million.

And our updated outlook for free cash flow is $60 million to $80 million. I'll note that this $165 million full year adjustment to our cash flow guidance reflects our total voluntary pension contributions of $200 million, partially offset by an expected $35 million positive cash tax impact. On Slide 10.

You see that our balance sheet and our liquidity position remains strong. Our second quarter 2019 consolidated cash balance of $96 million reflects a $24 million decrease from our year end cash balance of $120 million. This decrease was mostly driven by the repatriation of offshore cash balances that were used to repay short term debt in the U.S.

and in Canada. Next, looking at our debt balances, our consolidated debt totaled $1.5 billion at the end of the second quarter, an increase of $160 million from year end 2018. The main driver to this higher debt balance was a new short term bank term loan used to fund the recent voluntary U.S. pension contributions.

I'll also highlight that related to this pension contribution, our liability for pension and other postretirement benefit decreased by $196 million since year end 2018. This concludes my review of our second quarter financial results. So I'll now turn it over to Rob..

Thanks Julie. Let me speak briefly about our performance in the second quarter as well as the first half of 2019 and then I will speak to what we see as we enter the second half of the year, including addressing some of the measures we are and have been taking to help us meet our financial and operational goals.

Sunoco produced extremely strong results in the first half of 2019. This was despite the clear slowing in the global macro-economic activity which impacted demand in many of our served markets, along with the impact of several unforeseen fires, a flood and other events which damaged four of our operations in the second quarter.

Reflecting on the second quarter, I was really proud of how our team responded to these challenges, while producing record base earnings which are well within our guidance.

As most of you know on the numbers guy, so I'll point out that the base operating profit of $144 million was an all-time record and our operating margin of 10.6% was up approximately 50 basis points compared to last year's quarter and up 110 basis points from the first quarter.

In fact, we did a little digging and you'd have to go back to the third quarter of 2001 to find a higher base operating margin performance by the company. Regarding the unforeseen events that impacted four of our core operations during the quarter, let me start by saying thankfully none of our associates were injured.

Several of the events occurred in the month of June, including a fire at our Waco Texas flexible packaging operation which damaged a rotor previewer [ph] press, no customer orders were lost as a result of the press being down for repairs for approximately a month, as our team did a terrific job in moving business to our other flexible operations to ensure uninterrupted service.

Also in June, a spillway malfunctioned along the Trent River in Ontario Canada, which flooded our Trent Valley paper mill, shutting down operations for six days. Again, our team did a great job in drying out the mill, obtaining and installing new motors, and electrical switches, and getting the mill back in production.

Also in our Industrial segment, a tube and core operation in Perth, Australia was completely destroyed due to a fire at a neighboring customer's operations.

And finally, we are continuing to deal with the near roof collapse at our Hayward California thermal safe protective packaging plant, where we've had to evacuate a significant portion of the facility. Again our team has done a great job in securing the structure and making sure none of our customers are negatively impacted.

Combined, these unforeseen events cost us about $0.02 per share in the quarter to cover insurance deductibles and other business losses. Looking more closely at our first half performance, you'll see sales were up a modest one 1.5% due primarily to acquisitions while base earnings were up a solid 8.7% to $182.7 million or a $1.81 per share.

Results in the first half benefited from earnings from acquisition, productivity improvements, and a positive price cost relationship which more than offset lower volume mix and the negative impact of foreign exchange.

Our operating profit for the first half of 2019 was up 8.2% to $272.3 million and operating margin was a solid 10%, an increase of 60 basis points from last year. In Consumer Packaging, based operating profit in the first half was up just slightly from last year at $125.1 million and base operating margin was essentially flat at 10.5%.

The consumer segments operating profit benefited from productivity improvements, earnings from acquisitions and a positive price cost relationship, which again offset the impact of lower volume mix and negative impact of foreign exchange. I would say, volume in our consumer business has been disappointing, particularly in the second quarter.

Rigid paper containers which had a solid start to the year saw slow some slowing in the second quarter particularly towards the end of the quarter, which may have been a combination of slowing demand and destocking. Our flexible converting business continues to do well in our primary confectionery hard baked goods segments.

We did see some softness in other served markets and as we mentioned previously, we were closing the forming films operation in Our Elk Grove facility at the end of the second quarter, which will drive operational improvement in the second half of the year.

However, closing the forming films department did reduce sales slightly in the second quarter and it will lead to reduced sales for the balance of the year. But as I said, it will drive operational improvement going forward.

Rigid plastics volume continues to lag due primarily to poor perimeter of the store performance partially due to the weather and then quite frankly partially due to some of our operations, where we continue to deal with the consolidation of a facility and relocation of four thermoforming lines into three operating facilities.

The plastics business also experienced a slowdown in some of our industrial served markets. Switching to our paper and industrial converted products segment, results for the first half of the year were up 8.2% to $109.6 million, while operating margin was 11.1% up about 30 basis points from last year.

Earnings from the Conitex acquisition, a positive price cost relationship and productivity improvements again more than offset -- a lower volume mix and negative impact of foreign exchange. As Julie mentioned, clearly volume struggled in the second quarter in global tubes and cores as well as paper.

Both in uncoated recycled paperboard and corrugating medium. We are continuing to run some recycled pulp in our corrugated medium operations in Hartsfield to offset lower orders for medium. Also in the quarter we signed a definitive agreement to acquire Corenso Holdings America, for $110 million.

Corenso produced sales of approximately $75 million in 2018 and operates a 108,000-ton per year URB mill in Wisconsin Rapids, as well as two core converting facilities.

Corenso has attractive assets and customer mix and 100% of its products are made from recycled paper, which further enhances our commitment to increase the amount of material we recycle or caused to be recycled relative to the volume of products we put into the marketplace. We expect the transaction to close by the end of the third quarter.

Our display in packaging segment in the first half showed a strong turnaround with operating profit at $12.3 million compared to $1.2 million last year. You'll recall we struggled with the Atlanta Tax Center last year and has since exited that contract.

And finally, our protective solutions segment had a good first half with operating profit up 4% to $25.3 million and operating margin at 9.8% up about 60 basis points.

We continue to experience strong productivity improvements in this segment and volume growth in our thermal safe temperature assured protective business is more than offsetting weaker volume in our automotive molding and fiber based consumer protective packaging businesses. Let me conclude by addressing what we see entering the second half of 2019.

At the end of 2018, we became concerned that global macroeconomic conditions would deteriorate in 2019 which we clearly felt in the second quarter.

That is why starting in the first quarter, we have been quietly implementing several fixed cost restructuring actions and have set in place further efforts, which are targeted to lower costs between $15 million to $20 million this year.

As a result of these efforts and others, we are maintaining our earnings guidance for 2019 and we expect to be able to absorb an additional $0.03 per share in higher interest expense coming from the term loan, which we took out in May to substantially fund the transition in our U.S. defined pension plans.

As Julie mentioned, the voluntary contribution to the plan is the sole reason why we have lowered our operating cash flow and free cash flow projections. In conclusion, we are pleased with how we manage our business in the first half of 2019 in the face of headwinds, which were mostly unexpected and beyond our control.

Our ability to adapt and adjust when faced with unforeseen events, whether driven by nature or other factors continues to be a strength of our organization. The rigor and discipline we apply to focusing on what we can control while being flexible when needed, has, and will serve us well as we move through the remainder of the year.

However, no matter the environment, we remain intensely focused on doing what we need to do to drive profitable growth, margin expansion, and solid free cash flow. Now with that Crystal, would you please review the question and answer procedures..

Thank you.[Operator Instructions] And our first question comes from Edlain Rodriguez from UBS. Your line is now open..

Good morning guys..

Good morning, Edlain..

Well I have a couple of questions on volume. Like what was the impact of all those natural disasters on the [Indiscernible] and fire one volume? And when you look at consumer packaging, I mean it's supposed to be a little more defensive, but we've seen weakness all across the board.

I mean, what exactly is going on in that?.

Sure. So let me start with the volume of the unforeseen events. For the most part, I would tell you that the volume in our flexible business where we had the fire we were able to move the business around albeit it was run a little less efficiently in other operations.

So I don't think from a volume perspective, we had a significant event there when I think about the flooding that occurred in our operation in Trent Valley, we were down six days. Edlain, I would say directionally it was about a loss of 2000 tons or so as a result of that activity before we got back up and running.

When I look at the consumer side, let me try to break it down a little bit for you. When I think about our can business, where we had a drop off and I sort of reflected on this the other day and took a look at where we were last year. Last year in the first quarter, we had a very slow first quarter with a rebound in the second quarter.

When I take a look at this year, I saw a very strong first quarter with a slowdown in the second quarter. And I don't know if we saw some destocking associated with that towards the end of the second quarter.

Adding a little more color to it, when I think about how everything performed on the consumer side in the second quarter, we had a very strong April. We had a good May and in June, especially the second half in June, things really slowed down. So I don't know if that was an anticipation for holidays or not.

And that's why I said, I'm not sure if we're seeing a destocking in the business. When I take a look at our flexible business, the bookings continue to be buoyant. We talked about this being a segment that we expect to grow 3% to 4% a year. And clearly the bookings support that as we look out and move forward.

Now one of the things we did in the flexible business that we talked about shuttering the forming films department in our Elk Grove facility, that bit, that really started towards the middle of the first quarter and then sort of tailed off through the end of the second quarter and it is now closed.

So that had a slight impact in terms of volume and sales dollars. And then let me talk about the plastics, and hopefully this is giving you some granularity.

When I think about our plastics business, clearly if I -- if I take the perimeter of the store, we know weather did have an impact on the first quarter and we had an exceptionally strong April as the weather broke, and product flowed out. I think we saw some volume especially in certain of the berries really flood the retail market.

We did see a diversion in May of some of that volume into processed product, as opposed to fresh product. And then the other thing that I that I mentioned if you go back to the fourth quarter, we talked about closing a plant specifically the Hollister plant in California and reallocating equipment to a number of our facilities.

We moved it to three different facilities, four different machines, and an extruder. And if that the turn on of those machines has not gone as well as we had expected. We have worked through some of those issues.

We still have a little bit of lingering on that, but I would tell you that that had a negative impact on volume, because we couldn't service our customers to the level that we wanted. And directionally, that was north of $7 million that we simply were not able to provide the service to the customer in the near term.

So that that's the consumer if you will impact. If I then take and maybe answer a question before you ask it.

If I then take and look ahead to the balance of the year as it relates to consumer, my expectation is that we will be flat to down 1% holistically across the board on the consumer side for the balance of the year based on everything that we see. Hopefully that helps Edlain..

Yes, that definitely does. So just to pull -- this to get us sort of back in the Investor Day you've talked about lack of volume expectation of 1% for the year for the whole portfolio. What does that look like now, given that the first half is already down almost like 2.5%..

Yes. If I -- if I think about the second half of the year, I would tell – the way I'm looking at the balance of the year based on what we know today and this is coupling the consumer and the industrial side. So maybe to give you some color on the on the industrial side. I do expect the industrial side to be down about 4%.

So basically what we're seeing as we move through the first half of the year and then flat to down 1% in terms of volume for the consumer side. In sales dollars, I expect it to be directionally flattish for the second half of the year in comparison to the second half of last year..

Okay, thank you very much..

Welcome..

Thank you. Our next question comes from Ghansham Panjabi from Baird. Your line is open..

Hi. Good morning everyone..

Good morning, Ghansham..

Good morning, Rob. I guess, Rob, picking up on your final prepared comments on -- when you open it to Q&A, you're talking about the outlook. Obviously, you have a very sluggish industrial economy not just here in the U.S. but Europe as well. Consumer came at below your expectations.

Your interest expense is higher than you initially thought given the bond offering. What are the positive offsets to sort of give you the confidence of maintaining your guidance on – you mentioned cost-cutting maybe you can kind of scale that t for us in terms of size et cetera? thank you..

Sure. I think it’s a couple things. As you recall we've talked about a number of different things over the past 18 months or so in terms of actions that we've taken. We've talked about looking at our business holistically and making some tough decisions around some business that we have.

And are we being paid for the value that we bring? And as I think about what transpired clearly we have put some business at risk because we made some hard decisions around some business. The other thing that we have done is going again on that holistic business approach if you recall.

We took a very focused look at starting with our tube and core business here in North America which is really the operation that tested out our thesis or hypothesis if you will where we took a look at our business and said, can we do more drive more, drive more utilization of fewer machines if we have fewer rooftops.

That the journey is well underway here in the U.S. where we have taken a number of costs out. We have also made some investments in lines what I'll call new state-of-the-art lines, which had a significant impact on the operations where it makes sense. We have taken that same level of activity to Europe and the team there is starting to do exactly that.

And I spent the time with the team members last two weeks and I am very impressed with the plan that they've laid out in terms of taking on exactly the same actions we've done here in North America.

If you recall we made a pretty significant investment into our paper assets here putting money into our best machines and had certain expectations related to the return associated with those machines. And we are four-sixth of the way, I guess two-thirds way through that activity. We will finish off midpoint next year.

And then we also said, when we made that investment as and when things are appropriate we were going to take some high cost equipment out of line if that made sense and so we're looking at that and will act on that appropriately if the market conditions warrant it.

And then lastly, in terms of the cost out, I'd reference to my comments taking up $15 million to $20 million of costs that work really commenced in the beginning of the first quarter and has started to roll out in the second quarter and we know what we've got targeted.

So, we're confident that we can take those costs out, the vast majority of which have already been acted on; so we will see that play out over the balance of the year.

So its those things that so we see and then ultimately it's about driving the margin and that's what gives us the confidence based on what we see today what we believe to be true today. Gone from, if we see a wild swing in volume then obviously, all bets are off. But that we do not see that at this point in time other then what we see in front..

Sure. And then I guess just my second question as it relates paperboard fundamentals in the U.S. especially URB, I mean, clearly OCC prices are quite low, industrial markets are quite challenged.

How are you thinking about URB pricing for the balance of the year?.

I think from a volume standpoint we're down I think in the second quarter directionally 4%. It's clearly there are some softness in the market place. But as I think about it from our perspective I think we're going to take some appropriate actions as required in the market.

Is there some price challenges that are creeping into the space? The answer is yes. But we've also had prices hold. So, it's sort of a mixed bag for us. And when I think about the input costs going forward, I don't see much movement in OCC going into the balance of the year.

So I think we sort of plateaued over the course for the last couple of months or bottomed out, I'm hoping..

Got it. Thanks so much, Rob..

You bet..

Thank you. Our next question comes from Adam Josephson from KeyBanc. Your line is open..

Rob, Roger, Julie, good morning and Kudos to a really solid quarter given the circumstances..

Thank you..

Rob, I think in response to Edlain's question you talked about the cadence of some of the consumer businesses volume wise that in some parts of that business, April was strongest. The last couple of weeks of June where the weakest.

Can you talk about that on the industrial side if it was a similar trend in your industrial business that April was best and June was the worst and in to July for that matter?.

Yes. I would tell you, Adam, it wasn't that pronounced on the industrial side the same way we saw on the consumer. I would tell you that we saw the softness going into tail end of the first quarter and it pretty much continued on April and May and June.

If there was a fluctuation it wouldn't have been what I'll call a needle moving fluctuation in any one month over the other. So we saw that drop off and then sort its hanging in at that 4% reduction level here in the U.S. as it relates to the paper side..

Which is why, correct me if I misheard you that. You're expecting 4% industrial line declines in the second half similar to what you experienced in the first half.

Is that right?.

That is correct. On a blended basis with our converting operation, yes..

And any differences in terms of medium versus tubes and cores et cetera all down at roughly comparable rate you thinking?.

Yes. I will tell you on the medium side, as you know we're really not a factor in the medium space given our one machine. And if you recall, we had talked about supplementing some ton in our medium machine with the pulp that we are shipping to our operation in China. And so just offhand, Adam, I don't know the exact split.

But I do think that our medium volume was down more than the 4%, but it was offset by some of this pulp activity and maybe its 2% or 3% or 4% more on the medium side, but again it's such a small component for us..

And just on the tubes and cores, I wanted to ask question about that, Rob, that particularly the paper volume have seems to have fallen off a cliff in the last couple of months quoted, unquoted.

I know that your biggest served market within tubes and cores what do make -- what's happening there?.

Well, I would tell you that what we saw – what we've seen is a drop off across all the market segments. So if I think about it in terms of here in the U.S. we're down about 4% in our tube and core space and its every segment with the exception of a slight uptick in our films business or film core business.

But if I think about our specialty and our tape business, when I think about our textile, when I think about our paper, clearly the paper we all know what's going on with paper. So we see that. We've seen the mill down time as it relates to fine writing paper and newsprint. And that didn't come as a surprise.

Obviously, the tubes and cores that we make for the container board industry, we saw decline there. Again, no shock or surprise there. I am pleased that the film side is up slightly but that that again one quarter does not a trend make, so we just need to monitor that closely.

But the interesting thing if I go around the system now that we were – our URB is about 2 million tons a year and half of little over half of it is here. What we did see was paper was actually up in Europe for us even though our tube and core volume was down.

And then if I take a look at the converting side in other regions of the world, clearly down in Asia, but it was interesting. It is a tale of countries. And what I think about.

What we saw in Asia, China and Taiwan definitely down pretty dramatically and I think I attribute that to some of the tariffs that the conversations between our President and the Prime Minister or the President of China and the dialogue is going on there.

If I go to South America, what's interesting is we're seeing actually a bit of a bounce in Brazil and that seems to be the only country in the world right now that's looking positive and has for the last couple quarters. And then the balance of South America including Mexico is very much along the lines of what we're seeing here in North America..

Thank you for that.

And just one on sustainability, Rob, in which specific areas are you hearing from customers either regarding concerns about your existing plastic packaging, the thermoform packaging or otherwise, or desire to buy more composite cans, say in Europe in lieu of plastic?.

Well, we've clearly got a lot of activity going on in Europe with the interest in the all paper can and to me if you will the recycling requirements of Germany which then sets the trend for the rest of Europe.

And if I think about the only place that I can say definitively where we did see a switch with that paper bowl for a frozen meal construct and we talked about that I think, last year.

And I would tell you that the conversations we're having with our customers today are much more collaborative and really trying to understand the whole notion of sustainability and recycling, and making sure that we really understand what is possible and what isn't.

And then the other conversation that we are having that is much more again I'd say on the collaborative side is if you have something in plastic that is recyclable and we can make sure that it could be recycled what do I trade – what's the trade-off? What do I give up in terms of shelf life? And am I willing to give up some of those attributes if you will on the package.

So I find those very constructive conversations which are leading to meaningful projects between us and the customer base that we have..

Thanks so much, Rob..

You bet..

Thank you. Our next question comes from Gabe Hajde from Wells Fargo Securities. Your line is open..

Good morning, Gabe..

Good morning. I had a question about the destocking or I guess the cadence trajectory of the volume environment for composite cans.

And I was curious if you could, Rob, maybe reflect back as other times in the past that you've seen destocking efforts from customers and I know part of is somewhat conjecture, but might be in anticipation of lower OCC cost flowing to the system or something like that? Or could there be some other factor, management balance sheet or something that you can give us some inside into?.

Yes. And I can give you bunch of anecdotal kind of stuff. But if I think about for example, some of the destocking we've had, we've had it in the snack, chips, specially cans business in the past from time to time as a result of either promotional thing -- promotional product coming in or about to end and they want to flush product out.

We've seen the same thing on the flexible side from time to time. I think part of that is our customers really seeing a buildup of inventory. But it's typically around situations dependent on specific events in the market and/or there being a strong belief that there's could be a significant movement in some of the input costs.

But I would tell you that when I take a look at forecasting from our customers and enhance us doing it same thing to our suppliers, we're probably 45% to 50% accurate at best. So some of these destocking events that do occur from time to time don't last very long.

I clearly think that as we headed into the end of the fourth quarter there was clearly a destocking activity that took place.

I think the other event and I don't know this for certain was the whole issue around Brexit, the impact on Brexit and was there a run-up in the first quarter as a result of some of that, but with the benefit of hindsight I think absolutely that was the case. So more to come.

I don't know that I'm answering your question Gabe, but that's sort of directionally what we've seen in the past..

No. It's helpful. And then on the flexible side, I am curious if you can comment at all relative to how the overall industry is performing.

And if this is some sort of a little bit of share shift or sustainability issues starting to creep in outside of the one time or sort of isolated issues that you guys encountered?.

Sure. I would tell you, it’s a great question, because I happened to be talking to the CEO of the FPA last week on a couple of other issues and I talked about this -- that specific question what you are saying. Overall the industry continues to grow at a good clip -- at that 3% clip.

And so I don't think it's a sustainability-related issues that we're seeing. Our people creating new constructs and flexibles based on what I'll call some trade-off so that customers can live with, so that you can create a uniform construct of one material.

Those are conversations that are going on and you take something from for example an 18 months shelf life to a nine-month shelf life, given the distribution channels in place is that sufficient. And I think customers have better data today and that allows them to start looking at things like that little bit differently..

Excellent. Thank you..

You bet..

Thank you. Our next question comes from George Staphos from Bank of America Merrill Lynch. Your line is open..

Good morning, George..

Hey, Rob, how are you? Thanks for taking my question. Piggybacking on the sustainability discussion, obviously we've done a fair amount on this topic over time.

What are you seeing from the consumer from your research in terms of whether they care about recyclability or actually recycling rates, because given our analyses you get different answers depending on which metric you look at.

So what do you think will be important for the consumer and therefore ultimately your customers in terms of which packages they chose down the road?.

Yes. George, this is going to sound like I'm politician to deflect this, but its not meant to be that. I think part of it is really we got to work hard at educating the consumer. I think the consumer wants to do the right thing and I think the consumer needs to have the dots connect.

And you and I had the opportunity to talk about this off-line from time to time around – the whole issue around food waste and allowing them to understand it. I think that we need to help connect those dots.

And as a result we're having a summit in September 17th and 18th and I hardly invite all of you will join us for that because it's going to be a number of people from different industries talking about how and what we collectively can do.

And quite frankly it was a impetus of the conversation you and I have had about how do we bring everybody together. So we got consumer products companies there. We got ourselves there. We've got the government there and we have education there. Our academia there.

So I think it will be a good platform for us to have a conversation around exactly that issue. As I said, I really do believe the consumer really wants to do the right thing, but they need to understand what the right thing is. They don't want recyclability if the unintended consequence hasn't more detrimental impact to the environment.

And I think that's really the conversation that we're trying to have with these folks. And I think ultimately that what's going to be most meaningful to the consumer once they understand all that. But it's incumbent upon us to help connect those dots..

Okay. I appreciate as always the discussion on that Rob. A quick one related to flexible packaging. You mentioned that the FPA is seeing 3% growth. From my recollection they tend to evaluate their growth in nominal terms including pricing.

Was that a real volume expectation that they have for the industry? Because certainly not really seeing it across a lot of end markets. So was that more of a nominal or was that a real volume expectation of the FPA.

If you can comment that effect?.

Yes. No. George, it is nominal. It is measured in dollars. I don't think I'd have seen anything based on impressions or pounds or tons. And as you know in the flexible space you down-gauge things or you shrink the header of a bag.

Unfortunately its measured in dollars and that 3% growth is really driven dollar so it could be combination of volume as well as price..

Okay. Two last ones and I will turn it over. Margins that you're seeing, the detrimental margin on the volume loss so far this year its been running around 30% or so.

Is that what we should expect over the balance of the year? Is that what you would normally target in terms of a detrimental margin? I would eco, forget who asked, mentioned it earlier, maybe it was Adam and I think you've done a really good job operation this year, given all the volume and operational challenges not withstanding.

But that's a pretty large detrimental any way to improve on that in the second half of the year? And then my last question and I'll turn over. All this discussion about weakness in volume certainly the transports and rails box shipments, et cetera, are suggesting a sluggish if not weakening outlook for demand.

It was nice to see some improvement in display and packaging, I realized the comps there are easy. But are there any sort of sliver linings any positives we should take from the benefit you're seeing there in terms of the outlook second half and into 2020? Thank you, guys. Good luck in the quarter..

Thank you, George. The detrimental margin volume loss that's seem high. So I would tell you that I would not expect that going forward, that's the magnitude of that. With respect to weakness in volume, I think we probably look at the same thing. CSX went and announced yesterday and I think their CEO spoke to the perplexity of the economy that he seeing.

He clearly see that. We also look at the trucking index and take a look at here, the number of loads versus the number of tractors available last year versus this year have basically been cut in half.

So as I take a look at that obviously we -- I'm concerned about what we've seen and I don't see that changing dramatically in the business moving forward. If I take a look at the volume increase that we did see in the D&P business, we did win some new business after we got our people really focused on that.

I do think folks are trying to push their product through different venues, old bricks and mortars which is where the display goes. Then the other area that I would tell you that is interesting and it does tie into our fresh and natural approach, our ThermoSafe business had a very strong quarter in relation to the temperature-assured side.

And it was strong in two areas. One was in the fresh and natural food space which is an extension of some of the product lines that we have and we saw a significant growth there around an unpasteurized product. And then the other piece that we did see was very strong performance on the biologic side and the pharma side.

So there are segments of it that -- but if I take a broad brush I still got to wait to see attitude to see what's going on, because here's what I can correlate the retail data that came out to what we are seeing in across all the market segments..

All right. Thank you Rob..

You bet..

Thank you. Our next question comes from Steven Chercover from D.A. Davidson. Your line is open..

Thanks. Good morning..

Good morning, Steve..

First one just on Corenso, I mean, you indicated that the desire is to get towards 85% overall recycling content.

So what the current level please?.

We are just over 78% that we recycle or cause to be recycle around the system based on the weight of all the product we put into the marketplace..

Great. Thanks. And then secondly, and I would want you to try and predict OCC pricing. But at a high level do you get concerned that if prices persist at these current levels the entire collection system can down.

It seems like its hardly worth collecting $42 a ton?.

Well, first of all, I don't think you can collect it for $42 a ton. There is a lot of cost associated with picking up, handling, trucking it and delivering it and all that kind of stuff. So, stuff so we've got a system that collects 2.8 million tons. We consume about 1.3 1.4 of that ourselves, the rest we trade as a result of immersed that we.

The model and we're in that business because we want to have surety of supply of fiber for our system, our mill system here. And then the other piece that I would tell you that we're seeing, clearly we're acting on, but I would tell most recyclers if not all are already doing it.

The pendulum swung, if you go back in time the recyclers charge municipalities to bring up them the waste then that pendulum swung to where we bought the waste. The pendulum is now gone back to where we're charging to receive that material. And I think the alternative if you got municipalities that are going to say we don't want to do that.

How are you going to in good conscience, after educating all of us as consumers that recycling is an important aspect to keeping the earth pure, say, what we're going to start bearing all the stuff again. I don't think that's going to play. Ultimately you and I as consumer will pay for it.

So I think we'll find a way to make this system work out of necessity..

Great. Thank you..

Thank you. Our next question comes from Salvator Tiano from Vertical Research. Your line is open..

Yes, hi. So first little bit on….

How are you?.

I'm great.

How are you?.

Good..

Great. So first question little bit on M&A, the past couple of years you've been doing two three acquisitions, enhancing a little bit the position on the perimeter of the store, which seem to be the issue in the past two quarters actually in consumer packaging.

So can you let us know with regard to volume and operating profitability, how are the companies that you acquired performing versus their performance of the time of their acquisition?.

Sure. At a high level I would tell you that that its mix. We've had good success in portions of the perimeter store, but if you recall I said earlier part of the challenge that we had as we started the facility moved things around and have not executed as well as we should.

Those plants have been negatively impacted as we go through the growing season unfortunately this year. But that is a temporary situation.

If I break it down into the acquisitions that that we would have talked about publicly, very pleased with how Highland is performed and continues to perform along with portions of what we got on the West Coast, but we've got some work to do and this is a long-term play, still very very committed to that market because the trends that led us to make those acquisitions continue activity enhanced as just evidenced by what I said earlier around our ThermoSafe business where we are creating additional opportunities for using other packaging that we have to bolster our offering into that marketplace..

Thank you. Our next question comes from Mark Wilde from Bank of Montreal. Your line is open..

Good morning, Rob.

Rob, I wonder, can we just talk about how you feel about that $18 million worth of productivity improvement in the first half?.

Well, I feel good about it..

I'm just trying to think about the context of what you trying to generate each year? Are you ontrack for where you want to be for the full year?.

We are slightly behind as it relates to what we had laid out at the beginning of the year but some of the activities that we're taking on with respect to the cost-outs that I mentioned those were outside of the original plan. I think that will help us get to where we need to be as we finish off the balance of the year..

Okay.

Is it possible to put any kind of just give us a general sense that 15 million to 20 million that you talked about, what kinds of incremental things are in that?.

Its whole raft of things throughout the organization.

Some of it is in G&A, probably good portion of that would be in the G&A space, but – and that an area that we focus on as you know as we acquire businesses, we're bringing G&A in, one of things that we have talked about is, are there opportunities for us to simplify, standardize and automate activities so that we can bring things to more of a center of excellence activity in different regions around the world.

We had pockets of it. We're trying to expand that so that we deploy our people to more value-added activities. So that that's really the driver behind it Mark..

Okay.

And then I want to just turn into portfolio Rob, you've talked with us in investor day and other points about sort of things that you're interested in on the acquisition front and I wonder if it's possible for you to just talk with us about what you're seeing in terms of acquisitions right now? What valuation looks like? And at the same time you've also talked about some potential moves on non-core businesses.

And I wondered if we could do a little color on how that process is evolving?.

Sure. I would tell you that we are as active as we've ever been that looking at things getting engaged in a number of different things over time we'll talk about it when we're ready to talk about it. But still very active.

I honest and I think we probably talked about this before where I thought December was going to bring some reality to expectations, but that is not necessarily the case. The multiple environment still appears to be rather frothy and its an opportunity and it's also a frustration if you will.

So as relates to us taking a look first and foremost its got be strategic. Does it help us drive either scale or customer or capability or geographic reach that's critically important for what we've laid out. Those are things that we looked at and we will continue to do so.

On the – and I think you and I've talked about in the past in terms of simplify or talked about our strategic focus, it's about simplification, it's about focusing in three platforms, flexible, paper and the rigid plastics and we need it to fix a few things so that we could then assess strategic alternatives and those are the things that we're underway and when we can we will talk about where we are in that process..

Okay. And then the last one from me. I wonder if you could just talk a little bit about Corenso. I guess I'm just particularly curious about sort of what the regulatory issues might look like there. Because the tube and core market is pretty consolidated here in North America.

So I'm curious, how you got comfortable with your ability to pickup even more of that market?.

Yes. I mean, the market is pretty expensive and we're – as you know, we're one of – a couple of larger players. But if you look at it, I mean, there's really not a lot barriers to entry if you want to make tubes and cores.

And if I think about Corenso and it goes back to what we had laid out with respect to our thinking around our paper asset, we want to investment best-in-class assets. We're very pleased with the asset that presented itself in the Corenso mill. And it allows us to take a look at our footprint through different light.

And so I think from that perspective we thought it made good sense for us in terms of our network and we look forward to getting the deal closed in the next 60 or so days..

Okay. Sounds good. Good luck in the second half, Rob..

Thank you..

Thank you. And we do have a follow-up from Gabe Hajde from Wells Fargo Securities. Your line is open..

I will try to make this brief, Julie, I'm looking back at 10-year funding history for pension and average on the $55 million or so.

Is there a acceptation going forward, I'm coming up with $10 million to $15 million appreciating that pensions tend to be pretty volatile organisms?.

Yes. Well, to your point about pension being volatile, that's really at the core of the recent decisions we've made with our board on derisking our pension plan.

So that includes the $190 million contribution we made in May and then we do have about a $10 million additional kind of top-off voluntary contribution that we're going to make in the second half of this year. So beyond that at that point our plan is very very close to 100% funded and that's in the U.S.

which that's the largest part of our pension and liability as you imagine.

So really on a go forward basis we've got very limited pension requirements on a go forward, again we put the money in May, got a little more to go, we shifted most of those investment, pension investment in the fixed income and so that then immunizes for the most part of the funded status.

And so I would expect that next year we might have a 100 million or so of cash flow going into the pension plan as we kind of wrap up some derisking activities next year. And then beyond that its extremely limited of the impact of pension on our cash flows..

Thank you..

Thank you. And I'm showing no further questions from our phone lines. I now like to turn the conference back over to Roger Schrum for any closing remarks..

Thank you, Crystal. So again as Rob mentioned if you have any interest in attending our Food Waste and Sustainability Conference this September please just let us know and we'll be glad to accommodate you. Also I want to congratulate Rob, he became a grandfather during the conference call. So he already is a grandfather.

He became another -- had another grandchild. So congratulations, Rob..

Thank you..

Thank you again for joining us today. And if you have any further questions please don't hesitate to give me a call. Thanks..

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a wonderful day..