Sonoco Products Company (SON) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Sonoco First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Roger Schrum, Vice President of Investor Relations. Sir, you may begin.

Thank you, Shannon. Good morning and welcome to Sonoco's investor conference call to discuss our 2017 first quarter financial results and outlook. Joining me today are Jack Sanders, President and Chief Executive Officer; Rob Tiede, Executive Vice President and Chief Operating Officer; and Barry Saunders, Senior Vice President and Chief Financial Officer. A news release reporting our financial results was issued before the market opened today and is available on the Investor Relations section of our website at sonoco.com. In addition, we will reference a presentation on the first quarter results which was posted on our Investor Relations website also 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 section of our website. Now with that, let me turn it over to Barry.

Thank you, Roger. I'll begin on Slide 3 where you see this morning we reported first quarter earnings per share on a GAAP basis of $0.53 and base earnings of $0.59 which is within our guidance of $0.55 to $0.63 for the quarter all of which compares to base earnings of $0.65 for the same period last year. The differences between GAAP and base earnings are discussed in our press release, but as you see here are related restructuring charges and acquisition expenses. On Slide 4, you find our base income statement where you see sales were $1.172 billion, down $54 million or 4.4% from the prior year and you'll see the key drivers in the sales bridge in just a moment, but in summary this due to loss sales from the blowmolding divestiture and slightly lower volume only than partially offset by higher selling prices and the impact of acquisitions. Gross profit was $220.2 million, right at $25 million below the prior year due to the lower volume, the loss of earnings from the blowmolding divestiture and the negative price cost relationship all of them partially offset by lower fixed cost spending and you'll see more of the details of the drivers in the EBIT bridge in just a moment, with the gross profit margin percent at 18.8% versus a very strong 20% at this point last year. Selling, general and administrative and other income and expense items was $123.4 million which was down $10.3 million from last year, primarily due to the impact of the blowmolding divestiture, two fewer general ledger days, lower accruals for management incentive plans and year-over-year cost reductions all of which more than offset normal wage and other selling and administrative type inflation. All then resulting in base EBIT of $96.8 million, down $14.7 million from the prior year and again, you'll see all the drivers that change in the EBIT bridge in just a moment. Below EBIT, interest of $12.1 million was $1.7 million favorable to last year due to lower average debt levels. Income taxes of $26.2 million were lower than last year due to lower pretax earnings and a more favorable effective tax rate of 30.9% for the quarter. Equity and affiliates, when combined with minority interest, was $1.9 million, not notably different from last year, thus ending up with base earnings of $59.9 million or $0.59 per share. Turning to the sales bridge on Slide 5, you see volume when combined with mix was negative by $29 million or 2.4% for the Company as a whole. I will mention that this year's first quarter had two fewer calendar days representing a 2% change while the number of business days was unchanged year-over-year. The impact of the day difference varies by business unit. For those businesses that run 24/7, two less calendar days could have had an unfavorable 2% impact on the quarter. While for many of our converting businesses, the billing days were unchanged. Thus for the Company as a whole, our volume was somewhere between being flat to down 2% when the day impact is considered. All of my volume numbers that I mentioned today are not day adjusted. So again, you could add something between 0% and 2% to get two a day adjusted comparative number. To provide a little bit more detail by segment, consumer volume was down 2.8% driven by global composite cans being off 5.8% or within that business composites in North America or down about 4%, but off a 11% in Europe do most notably to much lower tobacco can sales this year versus last year when we had a particularly strong quarter associated with the changing tobacco packaging loss. Flexible Packaging was essentially flat for the quarter while we experienced about a 2% growth in our rigid plastics business driven by a very solid growth in food related thermoforming. Display and Packaging volume was down 4.3% due to lower volume in retail, displays and security packaging in the U.S. and lower component sales internationally. Volume in the Paper and Industrial converted product segment was down only about 1.3%, so probably close to flat on a day adjusted basis. Volume was off 2% in the U.S. and Canada, but in contrast actually saw a slight uptick in cores sold in Europe with that being up 2% due to continued growth in Eastern Europe and some economically driven pickup in Western Europe across most served end use markets. Protective Solutions volume was down 2.1% as an 8% decline and owned components sold into the automotive transportation sector was only partially offset by improved volume in molded foam packaging for consumer electronics and an improvement in paper-based Protective Packaging including some non-appliance related growth. To moving on down the bridge suite price, you see that prices are higher year-over-year by $33 million driven by the Paper and Industrial Converted Product segment associated with higher OCC prices, where based on prices in the Southeast, averaged $152 per ton versus $80 in the same quarter last year. And I'll speak more to OCC prices when discussing price cost in just a few minutes. Selling prices were also higher in Consumer Packaging, but to a much lower extent due to higher material cost in that business. Moving down to acquisitions divestitures, the net impact was a negative $34 million with most of them packed in the Consumer Packaging segment related to the divestiture of the blowmolding operation last year, partially offset by last year's flexibles acquisition of plastics packaging in a few weeks of the Peninsula plastics business with the acquisition completed very late in the first quarter of this year. And, finally, exchange and other was negative to the topline by right at $24 million, but it is driven most notably by exiting the Irapuato pack center in Mexico as foreign exchange rate variances were not that significant year-over-year. Turning to the EBIT Bridge on Slide 6, the lower volume when combined with mix was negative, but right at $10 million with the negative mix impacted by the mix within and between some of the business. Price cost, including the benefit of procurement productivity was negative, but only by $4 million even though the negative impact of rising material costs was notably greater than the impact of selling price changes as such change was partially offset by procurement productivity initiatives. As you would expect, the negative impact is greatest in the Paper and Industrial Converted Products segment associated with the rapidly increasing OCC prices. You can find a chart in the appendix to this presentation that shows the evolution of OCC pricing based on prices in the Southeast or you might recall, we saw at $10 uptick in December to end the year at $120 per ton then saw a significant run up in the first quarter with March prices at $185 per ton, thus prices averaging $152 per ton, while many contracts had reset at the December price of $120 per ton. Thus causing the negative price cost impact for the quarter. As you all note on the chart, prices had moved down $10 in April and we are expecting another $10 to $20 drop in May, then holding firm in June. Thus price cost were once again term positive in the second quarter. On the next line down on the bridge, you see the impact of the divestitures, net of smaller acquisitions, lowered EBIT by $6 million. Moving down to manufacturing productivity, you see, it was actually negative year-over-year by $1 million certainly well below our target. Before getting into the specifics, it is fair to say that notable productivity is much harder to drive in a no growth environment, but it should have been better than it was. Consumer packaging productivity was weak due to continued operating issues in rigid paper Europe, again much of which was volume related and the startup of the new line. We also experienced some quality in startup related issues in both plastics and flexibles, but combined negatively impacted our results by roughly $2 million, and in the Paper and Industrial Converted Products segment, productivity was weak, but most notably do the corrugating medium machine, which experienced some unscheduled downtown and did not run as well for much of the quarter, but seem to be back on track in the last few weeks. The change in the all other category on a year-over-year basis was favorable by $9 million. This is the line where the benefit on fixed cost of fewer day shows up, which was approximately $6 million and fixed cost productivity was once again favorable by about $5 million in the quarter, which along with reduced a call for management incentives more than offset the normal non-material inflation of roughly $12 million for the quarter. Translation of earnings in foreign currencies which would also show up in this line at essentially no year-over-year impact on earnings. And finally as expected, pension costs were higher year-over-year by $2 million. Results by segment are found on Slide 7, where you see that Consumer Packaging sales were down 8.6% due to the lower volume and the net impact of the divestiture of blowmolding with EBIT dropping a similar amount, thus the EBIT margin percent remaining very strong at 12%. Display and Packaging sales were off 20.5% due most notably to exiting the pack center in Mexico, but profits only off 3% due to the lack of earnings at that location. With the EBIT margin improving modestly to 2.8%. As we mentioned before, given some of the activity in the segment is service related as well as the resell of purchase goods, we would not expect the margin to be equal to our other businesses, but it is fair to say there is certainly still some opportunity for improvement. Paper and Industrial Converted Products sales were up 4.6% on lower volume due to the higher and also due to the higher pricing associated with higher OCC prices, but EBIT was off 26% due most notably to the negative price cost as price increase have not yet caught up with the cost changes, resulting in a 5.6% EBIT margin, down 7.9% from the same quarter last year. And Protective Solutions sales were up 1%, but EBIT was off 9.7% due to the negative price cost and the overall mix of the business with resulting EBIT margin of 8.2% versus 9.1% for the same quarter last year, all thus ending with total company margins of 8.3% as compared to 9.1% last year. Turning to our outlook on Slide 8, you see we are targeting to drive base earnings of $0.67 to $0.73 per share for the second quarter, which compares to $0.73 in the same period last year. The outlook for the quarter assumes no significant step change in volume other than normal seasonality, but as previously mentioned doesn't assume an improvement in price cost. Our outlook for the full-year is $2.73 to $2.83 per share, which is essentially unchanged from the guidance provided in February with the guidance now including $0.07 for the impact of acquisitions, about half of which will come from the Peninsula acquisition with the other half projected to come from other potential acquisitions. Our outlook for the full-year assumes an effective tax rate of 31.5% for the year. Moving from earnings to cash flow on Slide 9, you see cash from operations for the quarter with $67 million, which was essentially unchanged from the prior year, although there were several moving pieces. Although you don't see the details here, working capital was much more favorable this year than last year in both accounts receivable and accounts payable were in accounts receivable in particular we had notable improvement from year-end associated with collecting some past due invoices associated with a few key customers. As expected, we did experience higher cash tax payments and higher pension contributions along with some other miscellaneous changes, which essentially offset the benefit of the reduced working capital requirement. During the quarter, we stepped right at $49 million on property, plant and equipment and paid out $37 million in dividends resulting in free cash flow of the negative $18 million year-to-date. For the full-year, our target to deliver $125 million in free cash flow remains unchanged. While speaking dividends, we hope you saw the release yesterday that our Board of Directors approved an increase of $0.02 in the quarterly dividend raising it by 5.4% per quarter to $0.39, which annualized to right at 3% yield based on the current stock price. Dividends are an important component of our total return to our shareholders and this extends the history we have of increasing dividends as earnings grow. And finally on this chart, you see we spent $221 million on the Peninsula acquisition in the quarter, which was funded with debt and cash, which you see on the balance sheet on Slide 10. I won't go through each and every line, but simply point out that you see notable changes in many accounts, most notably associated with the Peninsula acquisition and to a lesser extent the impact of translation associated with the dollar weakening some from the end of the previous quarter. With the reduction in cash and increase in debt, you can see our net debt to total capital increase to 39.3% from the 33.8% at year-end. That completes my financial review for the quarter, and I'll now turn it over to Jack for some additional comments.

Thanks, Barry. I won't spend much time talking about the first quarter, but instead update you on initiatives to grow and optimize our portfolio and talk more about what we see going into the second quarter. As Barry mentioned, we faced some significant headwinds in the first quarter, particularly from an historic spike in OCC prices and other raw material inflation. In addition, we're facing a tough comparison from a record first quarter in 2016. Particularly as we transition from the sale of our blowmolding operations, which had their best first quarter ever last year. While I was pleased, we are able to meet the midpoint of our guidance, our performance in the past quarter could have been better. Overall volume was not what we expected, but we - and we did a solid job in driving savings from fixed cost and supply management productivity and in controlling overall costs. Manufacturing productivity however was weaker than we expected. Particularly impacted, but we could volume however we should operate better across our businesses. For example we had several self-inflicted issues during the quarter ranging from product quality mistakes to problems in ramping up new growth projects and new equipment. As Barry mentioned, we're starting the second quarter somewhat behind the price cost curve. However, we've announced necessary price increases and along with contractual resets we should be able to recover raw material inflation and all of our businesses as the year progresses. As we manage these headwinds, we continue to be pleased with the performance of our consumer-related businesses, which accounted for nearly two-thirds of our operating profit in the first quarter and where our Consumer Packaging operations remain margins - operating margins remain to the solid 12%. We continue to see consumer demand for processed foods sold in the center of the store struggle, while fresh foods sold on the perimeter continues to show solid growth. Our recognition of this changing consumer behavior is exactly what led us to our recent acquisition of Peninsula Packaging. But those who - of you who are unfamiliar with Peninsula Packaging, they are a leading manufacturer of thermoformed plastic packaging for fresh food and vegetables with five strategically located plants in the heart of the largest produce farms in the U.S. and now Mexico. We're expecting annualize sales of approximately $190 million and fortunately we acquired the business right at the height of the produce harvesting season. We believe this acquisition should achieve about half of the base earnings accretion expected to come from acquisitions in 2017. But more importantly our expansion to capture share at the perimeter of the store is another example of how we are executing our strategy to change our business mix and capture growth. In addition to Peninsula Packaging the integration of our late 2016 acquisitions including Plastic Packaging Inc and North Carolina based Flexible Packaging business and Laminar Medica. Our UK based temperature-assured packaging producer continues to go well and both were accretive to earnings in the first quarter. In closing, we remain optimistic about 2017 and firmly believe our growing optimized strategy is a winning formula to deliver more consistent earnings improve returns and create greater value for our shareholders. We have three critical focus areas for the year, driving growth, both organic and two acquisitions, recovering raw material inflation and finally, we must do a better job of reducing our unit cost to produce to manufacturing productivity. As our total shareholders at our Annual Meeting yesterday, we are focused on launching new initiatives such as our pack center for the Duracell batteries in Atlanta and the continued commercial expansion of our TruVue Clear Can where this fall a West Coast customer is introducing two varieties of premium fruit in this new container for selected store brands. We are also actively exploring further growth opportunities through rational strategic acquisitions in Flexible Packaging, thermoforming and Protective Packaging. Additionally, we'll continue to look at ways to further optimize our portfolio by aggressively pursuing new and different alternatives to improve performance in our industrial businesses and continue to optimize our cost structure throughout the Company. Finally, I've asked Rob Tiede, our Chief Operating Officer to join us this morning as we take your questions. So with that operator, I'd asked as you please review the Q&A procedure.

Thank you. [Operator Instructions] Our first question comes from George Staphos with Bank of America Merrill Lynch. You may begin.

Hi, everyone, good morning. Thanks for taking my questions. Thanks for the details and congratulations on the quarter. I guess the first question I had is it possible to get at a little bit more detail in terms of the volume trends and what the early 2Q outlook is especially for the areas that were a little bit weak for you Jack that be helpful? And then my second question it's a broader question. When I look at your performance in the quarter, you are in line with the midpoint of your guidance you did in a period where certainly costs were much more inflated than you expected in your February guidance and with volumes being a little bit weak. It does that suggest that maybe you had built in more cushion cost reduction, conservatism in your guidance and if that's the case why should we not see sort of a better outlook for you. Since it seems like you're past that hump in terms of cost for 2017 and I add one more follow-on and I'll turn it over.

Okay. George, let me start with the volume trends. I would think on consumer as we started out. We were originally projecting about a little over 2% growth in the business for the year as we see it now, it's probably closer to 1% and then we sort of said that as well because a lot of the growth was coming in Display and Packaging and so it would feel more like a one, but we're actually a little bit down from that and I think that it really has to do probably less with the industrial businesses we see them being flat maybe do up slightly on a year-over-year basis, but certainly on the consumer side, while we do expect to see growth in our plastics business. We do expect to see some modest growth in flexibles. There is weakness in composite cans particularly in Europe relative tobacco. So I think that something that we're going to have to kind of face. Now I will tell you there's a year progresses that weakness is going to be offset by growth in emerging markets, new volume and new capability coming on, so that'll help as we go through the year. Protective Packaging, Automotive was down in Protective Packaging. If you read the journals it says Automotive is flat, but there's a shift going on from cars to trucks and most of our products are in cars so that's where we saw it. The rest of that business I'm less concerned about the plans is actually other consumer electronics were up and that as a year goes on our temperature-assured packaging will be up as well. So volume trends we're going to see those businesses we've continued to point out protective should be up, consumer plastics, flexibles should be up, flat in industrial and then and probably composite cans will be down a bit on a year-over-year basis, but improving as we go through the year.

Yes, as far as the $0.59 you're right we didn't get there the way we thought we would, but I'd have to tell you we do that and more times than not, you have to pull every lever you can quarter-to-quarter and I think this - the management did a very good job of controlling costs, controlling fixed cost as well. We did obviously look at incentives and so they based upon his performance that was an adjustment as well. But it really all occurred around managing the fixed costs in the business to the volume that we were dealing with.

Okay. Appreciate the color. I guess my I want to be respectful everyone's time. My follow-on and I will turn it over. So we have the focus on costs and it certainly more fruit in the last quarter given the volume outlook and given the earnings that you put up and given the incremental earnings now from acquisition that you're building in free cash flow guidance and change much? So again, not trying to be too granular why with - what seems to be good operating performance. And now the inclusion of earnings from M&A why not a pickup in your free cash flow guidance for the year? Thanks Jack. I will turn it over.

Great. George, it just a little bit too early to have a really good outlook on how much that should change because of acquisition related activity, so we basically just stuck with our original guidance on free cash flow.

Okay, but you would agree that if time more upward and downward tension at this juncture would that be fair Barry?

Yes, it certainly fair to say that we would expect acquisitions to add from a cash flow perspective.

Okay. Thank you, I'll turn it over.

Thank you. Our next question comes from Scott Gaffner with Barclays. You may begin.

Thanks. Good morning.

Good morning, Scott.

Just a couple more on this - on the cost savings in the quarter, it sounded like the incentive comp drawdown or lowering of incentive comp was incremental to the guidance before. Can you talk about how much that was in the first quarter and do you expect that to continue in the rest for the year?

It would have been on couple million dollars in the quarter and we've certainly built in our estimate of what the impact will be for the longer year into the guidance for the full-year.

But I don't think it'll continue quarter-to-quarter.

Correct.

Because that we were expecting to get back on a plan hear.

Right. I guess I'm confused by that, because when you say get back on the plan you did and I know you didn't seem pleased Jack with the underlying operating performance that some of the businesses in the quarter. We still did hit above your midpoint of guidance, so I guess I'm trying to reconcile the change in incentive comp versus what at least from the bottom line it's was a pretty good performance.

Scott, let me clarify. Obviously, there are multiple components to our incentive plan and certainly one of the significant elements this year is growth which is about 30% of our annual plan, on that plan we certainly have don't expect it payout and target and so that is one of the reasons that you don't - we do expect to still have positive benefit from lower incentives that we've built in through the balance of the year. We also periodical have to look at our long-term plans and just close to the outlook, so there was some pick up from that in the quarter as well that wouldn't repeat because that's just whenever you're updating your outlook on all open plan.

Let me add to that as well, when we put the plan together we were showing a growth rate of about 2.5%, so as we look at it now we're kind of looking it's going to be more in that 1%-ish range if you look at it today, so you've got to overcome that as well in the go forward, so I mean that lower growth rate is in that go forward look.

Okay. And then on price cost, I mean you're only down $4 million on total price cost on the EBIT bridge in 1Q. Do you think you can get positive on that into the second quarter?

Certainly expect to be positive in Q2, that's another area where we performed extremely well in the first quarter was in procurement. We did a good job in that area as well, so I suspect Q2 to have a solid positive price cost simply because of the contractual resets in OCC and just the way the mechanism works.

Sure. And what about your price assumptions on URB, I mean which price increases are you actually including in the forward guidance?

Yes, I think as we looked forward, we had a solid yield from the price increase in the latter part of last year. I'm very pleased with it. The price increase is currently - the latest one is in process right now just now beginning to start. I don't know what we're actually going to get from that, depends upon how far and how fast the OCC falls. I will tell you that the price increase we put at the end of last year was designed to get recovery on other costs not just OCC, so we still need the second round of price increases I think to get the kind of recovery we need. We're going to continue to push for it. I just I'm not in a position yet to kind of see how effective we will be from that yield. So not a lot within yet.

Great. Thanks Jack. Thanks Barry.

Thank you. Our next question comes from Chris Manuel with Wells Fargo. You may begin.

Good morning, gentleman.

Good morning, Chris.

A couple questions. I do want to - let me start with the price question first. And I did hear your response you just had, but kind of along those lines I mean you've got increases out across a number of different product grades whether it's tubes and cores, whether it's URB, whether it's I guess even your giant operation for recycle medium there. If I understand, I'm joking, but if I think about whether you are in that process, what have you realized thus far. Do you have most of your increases for tubes and cores in or does it make it very difficult given what you outlined with falling OCC right now. How would we think about that a little bit better?

I would tell you, from the price increases that we put in during - beginning in late last year into the first quarter, they are in. They are in and done. The price increase there was now, it's with an April beginning, it is just starting. So I don't know how much we've actually yielded from that. I just don't have that.

So this is URB specifically you're talking about?

Well, again prices across all of our businesses. We had a price increases in protective packaging. So we covered resin prices and plastics to recover resin prices as well. We had some composite can. Those went in during the first quarter.

Okay, all right. So I mean candidly price cost was unanticipated it would be probably a lot worse in 1Q than what it was. Could there still be some tailwind to 2Q for that?

Well, I think Q1 was better than - did you say Q1 was - you thought to be worse?

I thought it would be worse. It was better than what I thought. I thought given the big run in OCC and resins, and other piece, you will be much further behind to be honest.

Yes and two things offset that. I think our procurement group did a very good job reducing costs on other things that we buy across the Company. The second is that we do have a natural offset in our recycling business, which performed very well during its run up in OCC, which help offset.

Okay, that's helpful. One last question on Peninsula if I may, help us with - what did you see here the alike, I know that kind of I can see it from both perspectives, on one hand it checks off the box for, it's clear, it's fresh, it puts you in a faster growing segment. So perhaps maybe you can talk to us a little bit about what growth rates and other pieces are like here. But that the flipside of that is and maybe I'm wrong about this, but it seems like a relatively simple thermal form of clear piece of plastic. It doesn't seem like there would be maybe a lot of technology or barrier or other components here. So what struck you that you like? Why you think it's a good fit et cetera?

Well, certainly I think there's a lot more technology to it and let me let Rob answer that question.

Yes. Chris, clearly the movement to the perimeter of the store, which we've been talking about was the traction number one, number two their leadership position in that space and three the customers that they deal with and the technological change that we anticipate in that market in terms of just the growing season where the products grown, how it gets delivered to market. We think that the combination of not only thermoforming, but the flexibles material as well is going to help revolutionize that side of the space. So it's a combination of those things. The marketplace, I think your question was what's the rate of growth expectation? We are looking at 4% to 5% growth in that segment today. And the real question is that what rate will we see that shift accelerate as more and more people start their eating patterns a lot differently than what you and I grew up with.

Okay. And that the platform that you got in place there, can you accommodate two, three years of that growth or would you need to expand it to accommodate that?

The answer is, do we have available capacity. The answer is yes. Will we add some additional equipment into that business? Yes, because we clearly see the growth in that segment. So we're going to put some capital into that business to allow it to grow. But it has available capacity today.

Okay. Thank you that's very helpful.

Chris, I'll tell you one other thing to Rob's point is that today there's some clamshells with tops, there's a migration to film as the closure on top and that really kind of plays into our flexibles business, so there's a strong match to what we're trying to do, what we've publicly said we want to do.

Okay. That's helpful. Thank you, guys.

Thank you. Our next question comes from Adam Josephson with KeyBanc. You may begin.

Thanks. Good morning, everyone.

Good morning, Adam.

Barry, just a quick one on the incentive comp issue, just to be clear, are you saying that you're going to spend whatever you didn't spend in 1Q later in the year or is it now permanently lower than it would have been otherwise?

It is permanently lower then what it would have been otherwise. The adjustments and future quarters wouldn't necessarily reflect the improvement that the reduction in accrual related to the long-term plans, because that's really more of a step change based on outlook earnings and asset utilization et cetera. But the short - that the annual plan we factored in what we expect to say out based on our forecast and earning levels and our forecast to growth.

And that was about a $0.02 benefit in the quarter, if I heard correctly?

It could have been that overall, but more.

Okay. Thanks Barry. Jack just couple on OCC, you mentioned you think it will be down 10 to 20 in May and then stabilized thereafter. Can you just talk about why you expect the stabilization thereafter and if in fact the OCC goes down by 10 to 20 in May after having gone down by 20 in April, why that wouldn't have an impact on the price increases that you've announced for April?

Well, I think it's going to stabilize. I'm really just kind of looking at it, now it falls into a more standard pattern, which is the summer tends to be fairly high generation. So you have supply, but it also was high demand, so it kind of become stable and then we kind of expect it to fall off in the fourth quarter like as traditional pattern. So that's really what we're just projecting forward from where it is and we don't expect any noticeable change in U.S. demand. Right now we kind of think it's going to be fairly stable for the balance of the year. That's obviously what we're projecting in our forward guidance, so that's why we see - that's what we're saying about the price of OCC.

I'm sorry, yes, so if you - OCC is down $15 in May following a $20 decline in April, you're talking $35 decline over the last two months, so why would that not have an impact on the pricing. I mean to the extent you've been raising prices because of higher OCC and now it's coming down $35. Would it not adversely affect the price increases that you're trying to implement?

It certainly could have a potential impact on the price increase we're trying to push now. On the price increases that are in those are done, the ones that are done by contractor reset automatically, so that's done. Yes, it could potentially have an impact on that, but as I said earlier the increase we started with at the latter part of last year really wasn't driven by changing in OCC prices so much as it was changes another cost increases, so we still need to recover those because OCC is kind of enough the price increase that we put in at the end of last year, so that would be what we would continue to go for. What the yield is, again I don't know yet.

Okay. And just one on - just related to OCC which is that topic of e-commerce that people are talking about quite a bit, obviously box demand has been on fire lately assumingly because of e-commerce, but we're also seeing elevated OCC costs that are presumably related to fewer boxes ending up getting recycled. Do you have any thoughts on e-commerce as it relates both demand and costs in your medium business and otherwise?

Well, I certainly - I do believe e-commerce and the way I look at it, e-commerce is adding one box, one corrugated box to every product purchase, every products kind of an extreme, but it's basically an extra box because I bought two pairs of shoes this week. If I had to gone to a shoe store, I would walked out with two shoe boxes, but I got them delivered to my house, so the two shoe boxes came in a corrugated box. So that's happening every day, everywhere not only in the U.S., but also in Asia, China specifically. So I believe that is having an impact. The negative side of that is that if that box - if the master box that carried shoes went to the shoe store it would then be collected, putting that back of the store, we would have picked it up from our recycling business. Today, I don't have the box, so I don't have curbside recycling here in Florence, some of though in garbage can and it will wind up in the landfill. So it's a dual impact that in those areas where you don't have recycling, it's winding up in the landfill, which is taking it out of the recycling stream. And then of course the extra box that is created by e-commerce, the extra shipping container.

Right. So there's clearly some positive impact on volume and some negative impact on costs and it's a matter of figuring out which more than offsets the other right?

Correct. What's the new average cost, I mean we've seen OCC rise from $75 a ton 10 years ago averaged to 110, what's the new number. We'll figure it out. I don't know what it is with - it'll settle out.

And there's also the issue of recycling companies having gotten out of the business because of low commodity costs that compounding the issue, right?

Somewhat yes, but that's usually picked up somehow.

Okay, okay. And just on industrial, forgive me if I missed this. But what was your overarching comments just obviously the survey data has been on fire and the actual hard data has been less than on fire. So what are your thoughts about the industrial economy here?

Yes, well our hard data has been less than on fire since we're saying flat on it - flat to down slightly on a year-over-year basis. I'm kind of an optimist, so I do expect the hard data to become more in line with what you're reading as the year progresses. I think that it will get a little bit stronger, but I'm usually an optimist on those things and I think that will be reflected in our industrial businesses, but we'll see.

Right and just one last one on consumer Jack. Do you have any reason I think emerging markets aside that consumer volumes well pick up later in the year excluding Peninsula, and if so why?

Well, I see or read nothing that would tell me that you're going to see a substantial change in consumer volumes, now I think as I've said many times, for each company specific to what you tend to package. So we see some of the products we package had a down quarter, I don't think that those will necessarily stay down all year long and I think it will change, but as far as just general trends in food, I don't see anything that's going to change it and part of the reason why we moved to the parameter - we can get from fruits and vegetables to meat and cheese, salads, pre-cut salads those are the things that seem to be really increasing in demand. There are up that 4% to 5% that's what we're trying to do. So we've been espousing.

Thanks so much Jack, best of luck.

Thank you.

Thank you. Our next question comes from Ghansham Panjabi with Robert W. Baird. You may begin.

Hi, this actually Matt Krieger, sitting in for Ghansham. How are you guys doing today?

Hey Matt. How are you?

Good, good. So first touching on the Industrial segment, can you provide some additional detail on volume performance in the quarter by product type and then also by region versus your internal expectations heading into the quarter? And then what are your volume expectations with that same sort of granularity kind of moving throughout 2017?

Well, I think if you looked around the world domestically we were down slightly in tubes and cores. I think was really you saw paper up and some decline in textiles, film, what was down slightly. But overall when you look at domestic, it's more or less flattish. Europe was actually up, about 2% I think and that was really some solid - well let me say just some more normalized growth in Western Europe. But then that frontier region we operate in the Poland's, the Turkey's et cetera had a pretty strong quarter. I would tell you that Mexico and Northern South America is on fire, a very strong numbers solid growth, Brazil kind of down to flat and then getting a little bit better in Asia. So that's the way we would see it around the world and there's - that will be a lot of variance as far as end use market around the world.

Okay. That's helpful. And then moving over to the Protective Packaging segment, can you expand on the volume performance by product type during the quarter and then was the slowdown in the segment in terms of volume solely due to the auto production weakness in North America and then thirdly can you remind us of the auto exposure for that segment?

But yes, I would tell you that our molding business there's two remote components and that was really the business that was down that's the one primarily serving the automotive market. The molding business that services consumer durables was actually up stronger the paper based piece was up stronger. The ThermoSafe piece was down slightly to flat and that was more - thus not getting things done properly with the new launch will fix that that will be up for the year for certain. So it was really in the automotive segment and the exposure that percentage of the business, 150 of 500.

Okay. That's helpful and then as a quick follow-up, did that ThermoSafe business being down impact margin during the quarter for that segment?

Yes, yes. From what we run the businesses together so it's more of deleveraging effect.

Gotcha. That's it for me. Thanks.

Okay.

Thank you. Our next question comes from Brian Maguire with Goldman Sachs. You may begin.

Hi, guys, good morning.

Hi, Brian.

Just to get back to the massive corrugating machine business you got just as what appears there is I know it's - it will that big, but I wondered if there's any update on I think last quarter you said that the I look at improved a little bit and his contracted some order through mid-year here is, as you order book extended out a little bit since that and just kind of any thoughts on strategy change there?

Well, certainly I would tell you that the order book remains fairly full and continues to expand which is a despot. Pricing is up and we do expect the increase to be effective what tomorrow. So but that will all be positive for the machine for 2017 as long as that continues as far as our strategy know we continue to look for a more permanent solution for that machine that would remove the volatility from us - so remove us from really dealing and selling corrugated medium.

Okay thanks and just on the comments about the $0.07 a contribution EPS from acquisitions, you said Peninsula is half of that fact that these acquisitions will of course come later in the year that implied that you know in aggregate you think it will be a bigger number a bigger contributor than Peninsula would be by itself.

Well, I think Peninsula gets as half the way there. We said [$0.06 to $0.08] so somewhere in that range. I think Peninsula gets is halfway there quite honestly I think we're going to have some of our performance in those acquisitions we made at the end of last year that will help. And then as always we're actively engaged in conversations and are hopeful, but we can continue to make solid accretive acquisitions as the year progresses.

Okay. Just one housekeeping one, there's one more day in the second quarter than a year-ago? Is that right?

No there would be no difference in general ledger days in the quarter. Second or third quarter would always have the same number of general ledger day.

Okay. So the one to two days in the first quarter one was the leap day the other you'll make up in the fourth quarter?

Correct.

Okay. Got it thanks.

Thank you. Our next question comes from Chip Dillon with Vertical Research. You may begin.

Yes, good morning.

Hi, Chip.

First question has to do with I just sort of make sure I understand a little bit about the year-over-year I guess impact of the medium machine and what I'm thinking about is you look at this year and certainly you can make the case that you might be averaging up I don't know $75 a ton in price and I know what's like 175,000 tons and you didn't run that well last year it sounds to me that you're probably finding a more receptive market. And I know that's not your long-term strategy and you want to neutralized volatility as you mention, but it would seem to me that it could add I don't know $0.10 or something to this year just given the change in price and my guess that you would run more this year than you did last year? Can you help us with that?

Well, on a year-over-year basis in Q1 basically was flat, but certainly as the year progresses if what's happening today stays for the year they'll definitely be a solid pick up on a year-over-year basis nowhere near $0.10. But certainly they'll be a positive on a year-over-year basis.

Okay.

But still have been still unchanged the long-term strategy relative to that machine.

Gotcha, gotcha. And is there anything you can say, which way you're leaning toward in terms of what you do there, I know it absorbs a lot of fixed cost in Hartsville and I don't know if there's - if it's leading more toward some kind of repurposing or elimination?

Well, no, I certainly repurposing is on the schedule. I daily at one point we had to take out partner where we just were producing company and that would be the ideal scenario for us.

Okay, gotcha of course. And then second question is just looking at the working capital, I remember you last year called out that there were some - there was a lot of need I guess to invest in it for some various reasons and that this year the working capital looks like it was just a $5 million pull. Can you tell us where you see that relative to what you expect in the next few years? Do you think - and the rest of this year, so as your seasonal component and you see that coming down further or is that just difficult given perhaps interest rates going up might make it less attractive to factor receivables and that kind of thing?

Quite a few different questions there, so let me address several of them. First of all, we don't factor to any significant level, so most of our receivables are direct amounts due from the customers. There is seasonality. We always see an uptick in the use of working capital in the first quarter simply because of the significant fall off in receivables in December, so you'll see those rebuild back to a more normalized level kind of get to the end of the first quarter and then again it kind of unwinds as you move through the year. As I mentioned earlier, we did have a very favorable impact of working capital in the year-over-year comparison in the first quarter this year in both account receivables and accounts payable and then accounts receivable was directly related to year-end and 2016. We have several customers with notable invoices that we're outstanding simply over a year-end. So again, our normal use of working capital given any normal growth and sales on an annualized basis would probably be roughly $20 million or so as what we would generally build into a model for normal growth and working capital.

Okay. That's very helpful. $20 million a year. And then just last question real quickly. You mentioned obviously composite cans was challenged volume wise and you mentioned tobacco. I think I heard in the last day or so that at least in the UK, I think they're moving toward a more generic type plain packaging requirement and you see that is having any impact on your business there or elsewhere in Europe if that spreads?

Yes. Rob will answer that.

Yes, I mean the generic - I guess at the end of the day, it really comes down to cessation of smoking and whether there is graphics on it or not graphics on it, it's not going to impact the people who want the product and the carrying device of choice is the can for you roll your own. So do I expect that it will decline at the normal rate of the cessation? Yes, but I don't see that having a negative impact volume wise in terms of what we produce.

Okay, helpful. Thank you very much.

Thank you, Chip.

Thank you. [Operator Instructions] Our next question comes from Phillip Ng with Jefferies. You may begin.

Hey guys.

Hi, Phil.

Hey, Jack. If I heard you correctly, you now expect a more muted volume backdrop for this full-year and a lot of that was around consumer. Is that largely tied to that composite can business in Europe? Are you seeing that headwind in prices, too, have magnified a bit recently in North America?

No, I think it is kind of just mostly related to the composite can and what we see happening both in North America and in Europe. But being offset, not as dramatic as it was during the first quarter being offset as year goes on by a continued growth of the composite can in the emerging markets where we put in the new facilities. So that will be offsetting that is the year goes on, so it won't be as dramatic.

Okay, would you call any reason why there is weakness in North American in composite can just general trends or was there any specific North America?

Yes, it's Rob. Let me answer that. I would tell you that it's in the markets that we've been talking about where we've seen sort of a decline refrigerated though. Coffee, nuts in those segments have been in sort of a decline for a number of years and that's really what drove the decline.

Okay. That's helpful. And then from a resin standpoint, you've started seeing prices going to bounce along, trend down in fourth quarter and bounce back up in the first quarter. Can you comment on the outlook and what's baked in, in terms of the impact for 1Q or 2Q in terms of margins whether it's consumer or products and will you be able to offset that going forward?

We saw resins up in Q1 from Q4, the adjustment mechanisms kick in for the vast majority of the products that are on that side, on the consumer side of the business. I think for the balance of the year, I kind of see them flat in the second quarter and then slightly down third and fourth. So don't expect a lot of resin volatility for the rest of the year. I can't believe I'm saying that, but I just said it.

All right. That's helpful. So it doesn't sound like you're expecting resin to be a big margin impact going into 2Q. That's helpful. Okay. And then the $0.03 to $0.04 you baked into your guidance for M&A. Can you provide any color and how close you are, any market that makes sense that you're targeting are any opportunities that are similar to Peninsula where targeted fresh food side of the things where growth is a little more robust? Thank.

Well, I can certainly be specific that we are targeting flexible packaging, thermoforming and Protective Solutions. We've been very consistent with that. I can't tell you how pleased I'm with this entire organization for a focus on the strategy and what we're trying to accomplish. And I will tell you that that's where our focus is and that's where our conversations are.

Okay. Thanks.

Thank you. Our next question comes from Mark Wilde with BMO Capital Markets. You may begin.

Good afternoon, Jack.

Hey, Mark. How are you?

I'm good. Listen, first question I have, you talked about picking up these procurement savings, can you just help us understand what exactly would be in those procurement savings?

Well, anything that we buy on the outset, for example we have janitorial services, so if we restructured a new deal that somehow results in a lowering of the price not because of a standard drop in our cost, but because of the deal is just restructured then we would consider that a procurement savings that was generated by the procurement activity. Those are the types of things that wind up in procurement savings. Not market adjustments based upon changes in raw material cost, but renegotiations that result in a lower price or a lower method of calculating the price.

Since you obviously - since you did well there in the first quarter, are there one or two things you might want to single out?

No.

Okay. All right. Next question for you. I'm just curious maybe Rob's got answer this, but is the display business being influenced one way or the other by a less turmoil we're seeing in the retail sector?

There's no question that that has an impact on it and then the other is the rate of new product launches that are coming into the market. I see customers really sort of retrench and take a look at the numbers, skew proliferations that they're putting into the market. They're trying to control their costs in a non-growth environment, so it's a combination of that.

Okay. The next thing I had Jack just in the release and then I think in your comments you talk about aggressively pursuing new and different alternatives to improve performance in our Industrial Packaging businesses. You throw that out there kind of basic question, what type of new or different alternatives might you be looking at?

So you took the bait, right?

Yes.

Thank you, Mark. Well, we continue to press our Sonoco Performance System or SPS which really is a management system of how you manage manufacturing and we're seeing very positive results from that in those facilities where it's been implemented. I think as we look at our all of our businesses now, but starting in our industrial business, we are taking really a holistic look at the business and try to determine what are our best - what are the best markets, what are the best products that we make et cetera and is there a better way to organize to serve those markets more efficiently. So really it's a real big holistic picture of the business we're in that I think will result in some changes that will have a positive impact to the bottom line and into our customers. But it's more about how we operate and who we service and the products we make.

And does it also does this imply some portfolio changes?

No. I think what it probably would affect the footprints of the businesses that we have, make them more focused, make them more cost competitive et cetera.

I'd just ask on that Jack, I mean here are your Company you're trying to be more of a consumer oriented packaging company and you're making these like great big wire reels and everything. I mean at some point doesn't it make sense to kind of look at this just from a portfolio standpoint and say if we're trying to be perceived and valued as a consumer products company maybe some of these other businesses don't fit as part of the portfolio?

Mark, I can't argue with the logic and I would tell you that as we have opportunities to make acquisitions of significance on the consumer side. If selling one of those businesses would makes sense to help fund that acquisition we will certainly do it, but I think revenue replacement is always important it's easy to go out and sell businesses, it's much harder to buy them affectively. So I want to make sure that we're matching what we sell with what we buy let me say offsetting what we buy by selling something so that's kind of the focus. Specifically to that reels business that's a pretty good business, selling it would be even in it's depressed state now, it's still a pretty good business. So I would only sell it obviously if I had that opportunity to make a substantial move into a consumer business that really impacted our strategy positively.

Okay. And last question I had is really for Barry. Any sense Barry on where you think the SG&A is going to come out for the full-year I think you've talked about trying to get this down to 10% or below?

It's unlikely would be much below 10%, so around 10% would be our best estimate at this point.

Because I think your by 10.5% this quarter so you think the full-year could still come in at 10%.

Yes, I would say probably a little bit higher, but 10% and 10.5%, so it when that range it's really difficult to estimate exactly where it will end up, but it's - we would expect in that range.

Okay. All right sounds good. Good luck in the second quarter through the balance of the year.

Thank you.

Thank you. Our next question comes from Steve Chercover with D.A. Davidson. You may begin.

Thank you and good morning.

Hi, Steve.

Quick question on Peninsula, just as consumers are migrating from the center of the grocery store to the perimeter. I would expect they're probably also looking for environmentally for nine packaging. So in Peninsula and perhaps your legacy business is migrate from polyethylene to some sort of biodegradable or bio plastic?

Yes, let me start off, I mean the vast majority of the inputs into our product line in Peninsula is recycled materials. And I think the biodegradable option is certainly something in the future once it becomes more cost effective and that's a material that we've looked that as well.

I see because I guess if you're really catering to fresh food and products all you've got to make sure is that the shelf life of the packaging is two or three times longer than the shelf life of the interior product.

In protection.

Protection is a big element of it you don't want those strawberry, brews when you pick them up at the store.

Oh heck now my daughters won't eat them. Okay, thank you.

Thank you.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over Roger Schrum for closing remarks.

Thank you, Shannon. Just in closing, let me again thank each of you for joining us today and we appreciate your interest in the Company and as always if you have any further questions please don't hesitate to give us a call. Thank you again.

Ladies and gentlemen this concludes today's conference. Thank you for participation and have a wonderful day.