Sonoco Products Company (SON) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 Sonoco earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to turn the conference over to your speaker today, Roger Schrum, Vice President of Investor Relations. Please go ahead.

Thank you Josh and good morning everyone and welcome to Sonoco's investor conference call to discuss our first quarter financial results. Joining me today are Howard Coker, President and Chief Executive Officer, Rodger Fuller, Executive Vice President 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 be referencing a presentation that's focused on our first quarter results, which was also was 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 in the Investor Relations section of our website. Now let me turn it over to Howard for some brief comments.

Thanks Roger and good morning everyone. Let me start by simply saying, thank you to our entire Sonoco team. I can't really come close to expressing how much we appreciate the great work all of our associates are doing during these unprecedented times. The stories we are hearing from around the world about the extraordinary efforts our people are executing to meet the critical needs of our customers are truly humbling. Out team's efforts on controlling what is vitally important, including the health and safety of our people, the quality of our products, productivity improvements and cost management led to an outstanding first quarter. I would also point out that our balanced mix of consumer and industrial businesses performed extremely well during the quarter as we had strong results across many of our businesses, particularly in the month of March which we believe was largely attributable to consumer spending more time at home. That said, the pandemic's impact is clearly starting to weigh on some of our served markets as we enter the second quarter. Also the unprecedented increases in recycled fiber costs will have a significant negative impact on our second quarter results which, of course, we will eventually recover. July will go through all of these results and our guidance in a minute. Because Sonoco is a global company with more than 320 operations in 36 countries, we have been experiencing the realities of the virus outbreak since it was first reported in China in January. As the virus spread throughout Asia into Europe, the Americas and now across the globe, we have been working with our team to protect and help our associates meet the critical needs of our customers and where we can, contribute to our communities to help drive increased testing and assist healthcare workers. On slide three, you will see that throughout the globe Sonoco is an essential service provider of consumer, industrial and medical packaging. 80% of our consumer packaging sales are linked to food products where we are being called on to meet an increased demand from consumers who are having to stay at home. Our paper operations in the U.S. and Canada produced over 200,000 tons of uncoated recycled paperboard which is used to wind toilet paper and other tissue and towel hygiene products. Out global tubes and cores operations play a key role in servicing the food, hygienic, medical and textile industries. We also produce flexible and thermoformed medical packaging and our ThermoSafe division provides temperature-assured packaging for critically needed virus testing and transportation of life-saving vaccines and other drugs. On slide four, you will see examples of how our associates have rallied to our customers' calls for help during the crisis to aid in fighting this deadly virus. Recently, our Alloyd division received an urgent call from a medical customer to see if we could use our unique digital printing and laser scoring capabilities to produce plastic face shields to be used by medical providers and first responders. Alloyd has been experimenting with a unique digital process where we take a file straight from an engineer's computer, convert it to a machine code and able to make products in an hour with no tooling or lead time. Our customer originally asked for 100,000 face shields and we were able to deliver them in a couple of days. That same customer increased its orders 20-fold and I am pleased to say our Alloyd team is filling the order and preparing to produce much more. Our ThermoSafe division has geared up operations and is working with one of the nation's largest logistics companies and a large medical products company to ship virus test kits to hospitals and medical research labs across the country using our unique temperature-assured coolers. TEQ, our medical packaging business, is currently gearing up to produce large quantities of Thermoscan thermometer covers, which are essential for safe use by healthcare providers. And our tube and core operations in Spain worked overtime to deliver tubes to be used by an automotive supplier who has retooled their operations to produce cloth facemasks for local hospitals. In addition, we are trying to help out where we can in our local communities. As shown on slide five, we donated hundreds of safety glasses and other protective gear to our local medical center here in Hartsville to keep nurses and medical staff safe as they treat patients. Our Perimeter of the Store division donated thousands of pounds of clear PET sheet to Georgia Tech in Atlanta to assist in making 50,000 disposable face shields for medical personnel. These are just a few of the efforts which illustrate how our team is impacting lives around the world and we couldn't be more proud of their efforts. With that, Julie, why don't you take us through the first quarter numbers and I will come back to discuss our recently announced project horizon machine conversion and conclude with some color on what we are seeing entering the second quarter.

Absolutely. Thanks Howard. I will begin on slide six we issued earlier this morning. We recorded first quarter earnings per share on a GAAP basis of $0.80 and base earnings of $0.94 per share which is above our guidance range of $0.83 to $0.89 per share. This $0.94 of base earnings per share is above the $0.85 of base EPS that we delivered in the first quarter of last year. At a high level, our first quarter 2020 earnings were impacted by overall lower demand which was more than offset by strong productivity, spread among various categories of fixed and variable costs. In terms of the $0.14 difference between base and GAAP earnings per share, the primary drivers were $0.09 due to restructuring activities and $0.06 related to non-operating pension costs. Now looking briefly at our base income statement on slide seven and starting with the topline, you will see that sales were $1,303 million, down $48 million from the prior year period. And I will review more details about our key sales drivers on the sales bridge in just a moment. Gross profit was $267 million, $4 million below the prior year quarter as our gross profit as a percent of sales was a very strong 20.5%. SG&A expenses of $123 million were favorable year-over-year by $19 million, driven primarily by cost reductions across the business which more than offset the addition of SG&A from acquisitions. All of this resulting in operating profit of $144 million which is $16 million above last year. Our first quarter operating profit as a percent of sales was 11%, a solid 150 basis point improvement over the first quarter of 2019. I will review the key drivers to operating profit on the bridge in a few minutes. Net interest expense of $16 million was $1 million higher than last year due to higher average debt balances but mostly offset by lower interest rate on our floating rate debt. Income tax expense of $33 million was 46 million more than last year driven by a combination of higher pretax profit and a higher effective tax rate. Our first quarter 2020 effective tax rate of 26% was 190 basis points higher than the prior year quarter due primarily to various discrete items. So moving down to net income, our first quarter 2020 base earnings were $95 million or $0.94 per share. I will add that first quarter OPBDA margins improved by 200 basis points to 15.8%, versus the 13.8% in the first quarter of last year. Now looking at the sales bridge on slide eight, you see that volume was lower by $36 million or 2.6% for the company as a whole. We did have one less business day this quarter than in the first quarter of last year which likely represents 1% to 1.5% of this volume change. But my following comments about segment volume do not adjust to the same number of days basis. Consumer packaging volume was down by $7 million or approximately 1%. This segment saw volume growth in rigid paper containers in Asia and South America as well as in certain of our plastics food markets. But these were more than offset by lower volume in rigid paper containers in North America and Europe as well as in the plastics industrial business. Display and packaging volume was below last year, down $12 million or almost 9% driven primarily by domestic displays and retail security packaging which were indirectly related to the exit of our pack center contract in 2018. Volume in paper and industrial converted products was down $9 million or almost 2% due to weak tube and core volumes in the U.S. and Europe as well as much weaker demand across our Conitex operations. And specific to Conitex, they were negatively impacted primarily due to the Coronavirus impact in Asia during much of the first quarter. These decreases were somewhat offset by favorable tube and core volume in Brazil and in North America paper where we continue to maintain high utilization of our machines through the pulp end use market. And finally, sales volume in protective solutions was down by 48 million or 6% driven by the continued trend of weak volume in automotive and consumer fiber packaging especially related to the appliance markets. Now moving over to price, you see that selling prices were lower year-over-year by $25 million driven primarily by our industrial segment, due to significantly lower OCC prices and lower market pricing in our corrugating business. You will see on the OCC slide in the appendix that Southeast OCC official board market pricing averaged $42 per ton in the first quarter of this year compared to a 475 average in last year's first quarter. Moving on to acquisitions. You see an impact on the topline of $36 million from the TEQ acquisition in consumer and the Corenso acquisition in the industrial segment. Both operations delivered sales and earnings in line with our expectations. And finally, foreign exchange and other was negative by $24 million with the largest driver being a $17 million negative impact from foreign exchange translation due to the stronger U.S. dollar. So moving to the operating profit bridge on slide nine and starting with volume mix. Our lower sales volume of $36 million combined with the impact of mix had a negative impact on operating profit of $14 million. This impacted spread among the segments but with a heavier negative drop through in both the consumer and industrial segments due to sales mix. Shifting over to price/costs. I will remind you that this category includes the earnings benefit from higher selling prices and the impact of all inflation and deflation including material cost as well as all variable and fixed costs. In the first quarter, we had $11 million of unfavorable price/costs, driven by not recovering sufficient price to offset our wage and benefit inflation. Absent this, sales prices less raw materials, energy and freight inflation or deflation was favorable by $4 million. Next, you see that the Corenso and TEQ acquisitions added $5 million to our first quarter operating profit. Now continuing to total productivity. You see that our total productivity was positive year-over-year by $26 million with a favorable impact across all four segments. The main contributors to this positive impact were procurement and fixed cost productivity. And finally the change in other was favorable by $10 million with various moving pieces, but mostly related to lower SG&A expense. Moving to slide 10, you will find our segment analysis, where you see that consumer packaging sales were essentially flat with the addition of TEQ being offset by lower volume, exiting the forming films operation in flexibles and the negative FX translation impact from the stronger U.S. dollar. Operating profit in the consumer segment were higher by 9.2% on strong productivity as well as a one-time $3 million gain on the sale of certain fixed assets. Our consumer segment margin was a strong 11.5%, 100 basis point improvement over the first quarter of last year. Display and packaging sales were down 11.8% due primarily to lower volumes and a negative FX translation impact. Operating profit however increased by 25% and margins improved by 200 basis points to 6.7%. As with the consumer segment, this earnings increase was driven by strong productivity. Our industrial segment sales were down just over 4% mostly from lower pricing due to the decline in OCC market pricing as well as lower demand and negative FX translation, but all partially offset by the added sales from last year's Corenso acquisition. Operating profit in the industrial segment was higher by almost 12%. This strong earnings growth is attributable to the Corenso acquisition and improved productivity. The industrial segment's operating profit was a solid 11.4%, up 160 basis points from the first quarter of last year. And finally protective solutions sales were down 7.7% due to weakness in certain markets but operating profit improved by 27% due to strong productivity results. This segment's margins improved to 11.8% or a 320 basis point improvement over last year's first quarter. For the total company, sales were down 3.6%, while operating profit was higher by 12.5% resulting in companywide operating margins of 11%, 160 basis point improvement over last year's first quarter. So moving to cash flow on slide 11. Our first quarter 2020 operating cash flow was $88 million, compared with $92 million in the first quarter of 2019, a decrease of $4 million. This decrease was driven by an increased consumption of cash by working capital and by various changes in other assets and liabilities which was largely offset by an increase in cash provided by accrued expenses. Midway down this slide, you see that our working capital balances increased during the first quarter by $68 million which was $22 million increase in cash usage by working capital compared to the prior year quarter. The primary diver to this higher working capital change was accounts receivable which consumed $24 million more cash in current quarter compared to last year. The primary driver to this AR increase was sales mix and its related impact on average customer payment terms. So moving on to free cash flow which we define as cash flow less net CapEx and dividends. Our first quarter 2020 free cash flow was $14 million, a $4 million increase over the prior year period. This slight year-over-year improvement was driven by lower net CapEx spending of $11 million. Our growth CapEx spending in the quarter was $34 million, which was $8 million below last year. In addition, we had a $3 million increase in the fixed asset sale proceeds in this year's first quarter. And finally, you see that our cash dividends paid in the first quarter of this year were $43 million, compared to $41 million in the prior year period. Moving to slide eight [ph], I will first note that we are withdrawing our full year base earnings per share guidance as well as our cash flow guidance for 2020. This is specifically due to the unknown severity and duration of the COVID-19 pandemic and the related lack of visibility to the impact on the company's served markets. However, we are providing second quarter base EPS guidance of $0.73 to $0.83, compared to $0.95 of base earnings per share in the second quarter of 2019. This wide guidance range reflects uncertainties regarding the challenging macroeconomic conditions stemming from the pandemic including the negative impact of higher recycled fiber costs and a stronger U.S. dollar. Turning to slide 13, I will now provide some additional comments about the key assumptions for our second quarter base earnings guidance. Related to COVID-19, we expect to have a mixed impact on demand for our products with the net impact being slightly negative to earnings compared to the second quarter of last year. Howard will provide more color about the expected impact on our businesses in a few minutes. Also, to prepare for expect and unknown challenges that lie ahead, we are taking various actions to reduce our operating costs and our SG&A expenses above what we have been doing in the prior quarters. Moving to our price/cost expectations for the second quarter, driven by our outlook for OCC prices to continue increasing due mostly to supply demand dynamics related to COVID-19, we are expecting a significant negative impact to our industrial segment's earnings compared to the second quarter of last year. While we are proactively increasing our industrial segment's pricing related to higher input and other costs, we expect the timing of price/cost changes to work against us in the near-term. In addition and also generally related to Coronavirus and the broad global economic impact, we expect a second quarter earnings headwind from a continued U.S. strong dollar and some slightly higher interest expense due to increased borrowings we are undertaking to increase our cash balances and enhance our short term liquidity position. Finally, I will note that we have assumed a second quarter tax rate of 25.5% in our guidance range. Now shifting to our cash flow this year, we are also taking important actions to protect our cash flow generation this year. Among other things, these include reducing our expected CapEx spend and deferring our voluntary U.S. pension contributions related to the termination process to 2021. Specific to our updated CapEx forecast, which is $170 million, we have worked with our businesses to reduce our original CapEx budget of $195 million by $5 million but we have added $15 million to $20 million of CapEx for the very strategic Project Horizon. Moving to slide 14. You see the recent actions we have taken to improve our liquidity position by entering into new term loans and accessing our revolver while also increasing the short term cash investments that we hold at Sonoco Products, the parent company. Our current liquidity position is approximately $650 million, which includes approximately $400 million of cash. In addition to focusing on generating solid free cash flow, we will continue to review our options to potentially access the bank and debt capital markets. Our key objective is to maintain a strong liquidity position as well as a solid investment-grade balance sheet. So this concludes my review of our first quarter financial results and our guidance and liquidity. So with that, I will turn it over to Howard.

All right. Thank you Julie. If you turn to slide 15, I want to spend a few minutes talking about Project Horizon which is what we are calling a new $83 million capital investment over the next several years that will significantly lower our uncoated recycled paperboard mill operating costs in the U.S. and Canada. The majority of this investment will go towards transforming our Hartsville corrugated medium machine, which you also recognizes as our number 10 machine, into a state-of-the-art URB operation with annual production capacity of approximately 180,000 tons. This new machine is being designed with the goal of being the largest and lowest cost producer of URB in the world. We are calling this investment Project Horizon as we will be creating a much brighter future for our North America URB system while resolving the volatility we have experienced over the past several years as an independent producer of corrugated medium. Project Horizon will start with the development of a new recycled fiber stock prep system in Hartsville, which will allow us to use lower cost mix paper and old corrugated containers as a raw material. Our existing number 10 machine is a high-speed Fourdrinier machine that will be upgraded with new forming, pressing and roll finishing capabilities as well as new electronics and controls. When completed, this new machine will be able to produce a wide range of URB paper which will allow us to meet many of our internal and trade customer needs. Design work and stock prep development will begin later this year and the machine conversion should be completed and online in early 2022. As part of the mill system optimization program, we will also increase capacity of our Corenso mill in Wisconsin. As shown on slide 16, after full ramp up of production, we are project this investment will provide approximately $24 million in annual cost savings, while delivering returns well above the cost of capital. As a result of the number 10 conversion, we will be exiting the volatile corrugated medium market by the end of 2021 and the expected efficiency of the converted machine will give the company the opportunity to rationalize some of the higher cost assets in our mill system. In a related announcement, we have made the difficult decision to permanently close our number three URB machine in Hartsville and our Trent Valley, Ontario, Canada, paper mill due to slowing market conditions. We are working with the affected employees in Hartsville to transition them into other roles in the mill complex or provide retirement or other benefits. In Trent, we are working with the local union to develop a closure agreement. After this investment is completed, Sonoco's mill system will be in the top quartile of performance and I have illustrated on slide 17, we will have nearly a 20% cost advantage over the nearest supplier based on a third party analysis of the project. And this investment will also ensure the long term viability of our Hartsville paper mill complex. Finally, Project Horizon will also generate important environmental benefits including electricity consumption in our U.S. mill systems by 16% which will drive a 16% percent reduction in greenhouse gas emissions while total water used by our mills in the region will decline by 25%. As I mentioned already, we are starting to see the pandemic's impact weighing on certain of our served markets as we enter the second quarter. On slide 18, we have put together a graphic which attempts to illustrate the impact of the pandemic entering the second quarter on our diverse platforms with green meaning it's generating a positive impact, yellow meaning it's neutral and red meaning, well, I guess you can get the picture. Specific to our business, we expect our consumer-related businesses to continue performing well in the second quarter as food consumption trends should continue to be driven by stay at home consumers. In addition, we expect our paperboard operations in North America to be relatively steady as increased demand for paperboard, serving the tissue and towel market should help offset declines with some of our industrial converted products businesses. Unfortunately, tube, cores and cones volume are expected to be negatively impacted around the world although there are pockets of strength in certain markets such as plastic film. As we mentioned, we expect recycled fiber prices to continue to increase during the second quarter, likely reaching above $100 a ton by June, which should benefit our recycling operations but provide a significant price/cost headwind to our paper-based business during the quarter until we ultimately achieve recovery of those higher costs in the second half of the year. As a reminder, most of our paper tube and core contracts have quarterly material cost recovery mechanisms. In addition, we have announced a $50 a ton price increase for paperboard and a minimum of 8% increase for tubes and cores in North America to help us recover this higher inflation. Finally, our ThermoSafe temperature assured packaging business should continue to produce strong results as it is supplying coolers critical for virus testing and pharmaceutical transport. However, we expect second quarter earnings in our protective solutions segment will be negatively impacted by lower demand in our molded foam and consumer fiber businesses, which serve the automotive and appliance markets. In closing, one of the strongest aspects of our company, culture and people is our ability to rally ourselves through a crisis of our more than 120 year history. We have successfully navigated through floods, fires, hurricane, financial market distortions and now one of the worst pandemics in generations. Sonoco is a financially strong company. We believe our diverse business mix will remain resilient during the expected pandemic drive recession and we will come out of this crisis as a much stronger company. Now, with that, operator, would you please review the Q&A procedures?

[Operator Instructions]. Our first question comes from George Staphos with Bank of America. You may proceed with your question.

Hi everyone. Good morning. Howard, thanks to everyone at Sonoco for the efforts with the pandemic. I had a question really on the cost controls. When did they go into place? And what do you expect to be able to generate from these cost reductions and productivity on an ongoing basis? And relatedly, how volume dependent are they? And then I had a couple of follow-ons.

Yes. I will let Julie cover more detail. But as we look at Q1, really the cost controls, this was what we do. We have been looking at our overall cost for really, we are always challenging ourselves. So a lot of what we are seeing in Q1 were activities that we put in place through second half of last year. As it relates to the go forward, we have got quite a bit of activity going on and I will just pass on to Julie and let her put a little more color on that.

Yes. Absolutely and thanks Howard, thanks George. Yes, I mean I guess I would echo pat of what Howard said. I mean, you think about our path over the past kind of year-plus towards improving OPBDA margins are focused on simplification. The business, really management down through literally the operations have been really focused on taking cost out of our organization in many ways. So we definitely see some of that pay off in the first quarter. But clearly in March and really the second half of March when we really moved into a lot from an overhead perspective. By that, I mean, office workers working remotely. Obviously a dramatic decrease in travel. That did accelerate some of that cost savings, albeit that was not the largest driver in the first quarter. So when we look at the second quarter, you obviously have several pieces of this. You have got the continued benefit from permanent cost take out in our organization. And then you have got things that we, I guess, started doing at the end of the second quarter, less travel, obviously people working remotely. So you think about less costs around meetings that are even in-house and type of thing. And then we do have various other cost reduction actions that we are starting to tee up that are really more specific to Coronavirus and our expected, the challenges we are facing in the second quarter and then obviously TBD after that. So I guess, it's kind of a long way of saying, I think we feel good about sustaining cost reduction that we have put in place and then we are, obviously some of the things that are trending down now, like travel and that type of thing, obviously will tick back up at appropriate times with business activity.

Julie, so I appreciate how tough it is perhaps to quantify and I appreciate the qualitative commentary, but is there any way to quantify on a run rate basis as you sit here today what benefit you get from productivity, from incremental costs, anything that would help us, as analysts and investors figure out what kind of shock absorber you have in the next few quarters. And if the answer is you can't really do that now, that's fine. But I just wanted to try again on that first question.

Yes. Absolutely. I think when we look at the second quarter and we have talked as a leadership team about actions that we will be expecting to take that are, call it, different from what we have done in the first quarter, it's a math, probably $20 million, $25 million expectations coming out of our overhead structure that are unique to the situation. And that is part of again what we have considered in this guidance, despite a net negative impact from volumes and the drop through to gross profit and obviously the price/cost headwind specific to OCC, these additional cost reductions are part of our mitigating action.

Thank you for that. Two quickies I will put in one question and turn it over, just to be fair. Can you comment and maybe you did, my phone line had dropped for a portion of the call at the end, what kind of volume trends you are seeing early in 2Q and ex-pricing what kind of price/cost headwind or cost headwind are you seeing from OCC? Or maybe a better question is, what kind of price/cost are you banking on in 2Q with your pricing actions? Thank you guys. I will turn it over.

Yes. From a volume perspective, just from a macro, the way we are looking at this, there is obviously, as you saw in the red, yellow, green chart, we have got some very favorable conditions in select markets but also we have got negatives as it relates in the commentary around automotive, light goods, et cetera and a bit of a mix in the middle. Effectively, we are saying that it's pretty close to a wash as it relates, possibly single digit type volume related impact in the quarter and it really turns into a conversation around your second half of your question, which is the price/costs. So we are seeing a very negative situation with the OCC spike that we saw and the timing of that spike being the very first week of the quarter. As you know, our recovery is typically in the beginning of each quarter. So we are going to have carry a bulk of that through the second quarter. And that is one of the largest impact that we see as we go into this quarter.

Okay. I will turn it over. Thank you.

Thank you. Our next question comes from Mark Wilde with Bank of Montreal. You may proceed with your question.

Good morning Roger. Good morning Howard and Julie.

Good morning

Good morning

Hi Mark.

Howard, I wondered, just to start off, if you can give us any sense of the type of volume we might expect in the industrial business in the second quarter? I think that's typically the most cyclical piece. And maybe just any reference to kind of what you saw in 2008 and 2009?

Yes. I will tell you what, Mark, I have got, as you know, Rodger Fuller here. And I think he can give you some pretty detailed color on that. What I will say is if we look at where we were in 2008 and 2009, the mix of businesses has changed. So from a macro perspective and again, I will let Rodger get into more detail. We are not looking at a similar type trough as we saw back in 2008 and 2009. Bud Rodger, if you don't mind, just kind of --

Yes. Thank you Howard. Mark, I will just give a few examples here. You go back to 2008, 2009, our industrial drop was about 17% from a volume standpoint in the depth of the recession. So if you look at the U.S. in the second quarter, what we are modeling are low double digit type declines driven primarily by you know, we see the global textile market off 30% to 40% in the quarter. Mark, as you know, printing and writing, all communications papers, we are saying are down 25% to 30%. There's 20 machines that we know of that are already down in the second quarter or planned to take downtime in the second quarter. So that's a significant drop off in the U.S. On the other hand, we are saying film will continue to be strong in the second quarter, up about 3%. Brown papers, containerboard, we are saying up slightly quarter-over-quarter. So you take the mix of all of that in the U.S. and Canada, again down low double digits. Europe's better. Europe's probably dropping and we are saying in the 5% to 7% range. You would see similar drops in the mature markets in Western Europe but we are seeing offset and positive in Russia and Turkey and some of the other emerging markets. So that gives you a feel for the tube and core business in Europe. Our paper system is full, as Howard said from the beginning. And that's pretty much across Europe and the U.S. We see softness in Asia but it is primarily China-related and is just demand. We are simply just meeting the demand of our customer base. So we are running our mill in China when we need it. Indonesia is fairly solid. So I think hopefully that gives you a feel for what you are looking for, Mark.

That's perfect, Rodger. I wondered, could you also give us a sense of what the bounce back has been to-date in China?

Yes. I would say, we were down to, we are probably now at like to sell on average of 60% capacity across our and this is the industrial. If you look at consumer, we have been fine. But in industrial, I think we are running at something like 60% capacity. At the lows, it was probably in the 30% range, Mark. So again, we are not missing shipments. We are just running to the demand level that we have. So probably lows of 30%, today about 60%.

Okay. And then finally, Julie, just any thoughts on those year-end 2020 targets that you laid out there? I mean, I think in this environment, we all understand that getting pushed back. But can you talk with us about kind of a timeline or whether you have backed away from those targets that you laid out a few years ago?

Mark, are you talking about the 16%?

Exactly.

Yes. I think we have mentioned that, I guess we don't have those as our explicit targets really publicly anymore, although we continue to focus on absolutely driving our profitability. And obviously, Coronavirus provides a unique challenge to the business as our immediate focus is keeping people safe, running our businesses, needing our customers' needs, managing our liquidity. But I think and Howard can echo this, not as much maybe the end of 2020, but definitely moving beyond that, we remain committed to 16% or higher OPBDA margins. So we won't take our eye off the ball when it comes to increasing our profitability. Again, the sales target that was out there for $6 billion, again I think putting a timeline on that is not appropriate, especially now. It clearly depends on our activity and M&A part of our world. And so I think, again, it's just a matter of over time, well, definitely outside of 2020, how are we tracking towards growing the topline as well.

Thank you. I will turn it over.

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

Thanks. Good morning everyone. I hope you are all well and healthy.

Thank you Adam. We are.

Good. Rodger, just one clarification on what Mark was asking about. So I think you said, you are expecting to be down low double in industrial in the U.S. in 2Q but that your paper system is full. So can you just help me just square those two comments?

Yes. Low double digits on the tube and core side of the business. Adam, if you look at our paper system, our trade sales were holding up fairly well. Howard mentioned earlier tissue and towel still strong from the first quarter. If you look at flooring, so home improvement type products seem to be strong. Edgeboard market seems to be strong. We are topping it off with pulp. So we are balancing out any downturn in tube and core with trade sales. And so far, we think that will hold up to the quarter, Adam.

Yes. Thanks for clarifying it. And just one more for you on OCC. So I think Howard mentioned you expect it to be higher than $100 by June. This is all driven by COVID or so it seems, both the demand and the falling generation. Do you expect, how are you thinking about conditions returning to normal, whatever normal might be at this point? Do you think that after June the economy is going to start to get back to something resembling normal? Collections will improve and then paper demand will fall off a bit after the panic buying? How are you thinking about the progression of OCC later in the year?

Really, just back to that old crystal ball, isn't it Adam. So as we really don't know what to think about Q3 and Q4. That's why our focus has been really trying to give you guys as best color as we can on Q2 and the rest remains to be seen at this point in time. But we do think that the conditions are such that we will see the inflation that we noted or I noted in the opening comments and we will just have to see how that plays out as this whole pandemic issue plays out.

Yes. Sure Howard. And then just on the consumer business. Can you just talk about what you saw in March from the panic buying? What you are seeing in April? Presumably your customers are trying to replenish their inventory. Just give us a feel for what you saw in March? If you are able to fulfill all those orders? What about April? And then how you see it trending into May and June?

Yes. Is there an echo going on here? Really, it started for us, obviously here in the U.S. and for the most part in Europe too, towards the mid part of March. But yes, we saw relatively strong demand, particularly on the food side of the business. Have we been able to fulfill the orders? Yes, not an issue for us. It really boils down frankly to a lot of our customers not having the capacity to fill the demand that they are seeing. So it really started mid-March. It has continued to tick up and we expect it to maintain itself through the quarter. And frankly and then this is just my philosophy on things, as we do hopefully start coming out of this, say in the third quarter or so, we feel like it's going to take some time before the at home consumption is going to really drop back to norm. It's going to take time for people to get back comfortable to go en masse to the restaurants, et cetera. So in a way, we are looking at it or I am looking at it that we will see the same peak at some point and then a relatively, hopefully soft decline back to normal. And at the same time, hopefully the industrial side will be picking up on a relative scale to that as well. The other thing I would say is, if you look at the mix of consumer products, we do participate more in the snack type categories, the frozen sectors, frozen bean, the trays and meals where limited capacity plus very delicious frozen lasagna and things like that. We don't feel like that the products that we are participating in on the consumer side are necessarily will be once where folks will wake up and say, Oh my God, look, we have got so many stacked chips in our cupboard because we just didn't consume them during stay at home. So we feel like, long way of saying, it's going to be strong through the quarter and I am optimistic that it will carry on at some scale for some time to come.

Howard, last question just on the Perimeter of the Store. Obviously it was a push for the company to get to the Perimeter of the Store as people were gravitating toward fresh food and away from center of the store package food and now we have seen assumingly a reversal of that. How is this crisis affecting the Perimeter of the Store business for you, both in California and Florida?

Adam, this is Rodger. It held up fine in the first quarter. Some of our customers are struggling, the farmers are struggling to get workers to pick the crops. But our ag business was very strong in the first quarter. We are seeing high single digit growth as we head into the second quarter in the ag business. The berry season was a little bit, the strawberry season on both the East Coast and the West Coast. But we are seeing that pick up now. So all-in-all, it was, from a demand standpoint, fine in the first quarter. We talked last time about the new leadership team we have in place from an execution standpoint. Our execution is improving on the West Coast, which is the former Peninsula company where we had the issues. I remind you, we spent almost $5 million on manufacturing improvements, capital improvements. We saw those kick in month to month throughout the quarter. We saw improvement in our manufacturing productivity in that business. So we are pretty optimistic going to the second quarter it will hold up and let's call it, mid single digit growth. So all-in-all, not bad.

Thanks so much Rodger. I appreciate it.

Thank you. Our next question comes from Ghansham Panjabi with Baird. You may proceed with your question.

Thank you. Good morning everybody. I mean you have covered some of these, Howard, but just specific to the second quarter, I mean understanding you don't have a lot of visibility beyond that. But for 2Q specifically, relative to the guidance you have given, let's say $0.78 at the midpoint, what are you embedding in terms of the aggregate segment volumes across each of the quarters? And then second, can you just give us a breakdown, Julie, in terms of how you get from $0.95 from a year ago to the $0.78 at the midpoint? How much of a headwind is from OCC? Thanks.

Yes. Howard, you want to talk about the volume and then I will talk about --

Sure. If I am looking at this correctly, on the consumer side, looking at roughly 4% or so.

It was single digits.

Yes. Now actually I am looking at it. Yes. So in total, on consumer, low single digits. On the industrial, again negative side low single. D&P on the low double digit side on the negative side. And protective, where I spoke to the automotive and the light good sector, we are seeing the biggest hit and that's in high single digits negative.

Great. And then --

Yes. I guess, just to add a little more color, Ghansham, to your question about $0.95 to the midpoint this year of our guidance of $0.78. I guess maybe first to start with some non-operational items that I mentioned, the stronger dollar headwind we are estimating. Of course, we don't know where rates are going to go in the second quarter, but if you assume the continued U.S. dollar strength like we had in March, that's roughly $0.04 to $0.05 of a headwind to EPS versus where rates were last second quarter. I mentioned interest expense. It's very minor, maybe $0.01 or so of that. So all-in, call it, $0.05-ish of non-operational negative items 2019 to 2020 in the second quarter. And then, to all this impact in our portfolio, as Howard and Rodger have been commenting on and I sad in my comments, from an EPS perspective, we are expecting that net net to be slightly negative year-over-year, maybe another just $0.05 or so based on what we are estimating. Again, it's hard to have the perfect crystal ball about what's coming our way in the second quarter but we have put our best foot forward here. Form a price/cost perspective, Howard, we have again teed up, this is fairly significant. I think best guess at this point is kind of $0.10 to $0.15 headwind to EPS. Again, we do expect OCC to trend up but we are working on the topline, having the topline offset there. But again, we are, I guess from a price/cost perspective on earnings, we are in one of those quarters where we are battling the up-trend, right, of cost. And so we are going to be on the, call it, negative side of that like we are in certain other quarters. On the positive side, again, year-over-year we have got a few cents coming in from Corenso and TEQ year-over-year. So we can't forget about that positive impact. And then really, productivity, cost reductions, other inflation, we are kind of just netting that all, quite frankly, to zero because it's hard to know exactly how all that's really going to play out. So that should, if you add all that up, hopefully, get you to $0.78.

Yes. I think it's back to the opening comments that if you look at the mix of the businesses, we feel really good about how the portfolio balances itself out. This thing really is, the quarter is really shaping up to be a price/cost conversation around recover of the OCC, which we will and really is the bottomline, the big picture of what we are seeing.

Okay. Thanks for all the detail. And then for a second question, on the consumer side, just given the acceleration in volumes you are seeing, should we expect any sort of growing pains as you ramp up production? Higher cost to serve customers, et cetera, especially with this period of employee absenteeism or whatever you might be seeing from a logistic standpoint? How should we think about that particular dynamic?

I will let Rodger comment in more detail. But at this point, no. It seems to more of an issue on our customer side. We do have pockets, particularly and not necessarily on the pharma side of it with TEQ. We are making what, Rodger, $1 billion-plus annually of covers for thermometers. We could make $2 billion. So yes, we are rushing hard to increase that type of capacity. But in total, no, we are not really seeing an issue with us being able to supply the market and the market demand.

Yes. I agree. I don't think you will see any of that, Ghansham. We have got strong protocols in place across the global platform. The operations team has done an excellent job of keeping people safe and keeping our customer supplied. So manufacturing productivity in the first quarter was as strong as has been in some time. So we have got some good momentum there. So I don't think you will see any significant cost escalation due to the virus.

Okay. Thanks so much. Stay safe.

Thanks.

Thank you.

Thank you. Our next question comes from Gabe Hajde with Wells Fargo. You may proceed with your question.

Good morning everyone. Thanks for all the details.

Good morning.

Good morning.

I was hoping to kind of revisit slide nine and I apologize if you covered this, Julie. My phone was cut off as well. But your EBIT bridge, I am seeing the unfavorable variances of about $11 million. You talked about the price/costs. And I appreciate some of that was coming from a labor inflation. But I would have thought that given some of the rise in OCC that happened in February and March, would have hit paper and industrial converted. But yet, profit was better than last year and certainly better than what our model was looking for. So I am curious if there was anything unique to that segment on the SG&A side that happened?

Yes. And I think you had maybe a couple of questions there. So definitely in industrial, they were maybe not quite half of that $11 million negative price/costs. And you are right. That was just all these moving pieces that, OCC going up, inflation, catching up on sales price, although energy and freight are deflation in the quarter slightly. So various moving pieces in this total price, total cost category. But definitely industrial was net negative again, call it, it could have been 40% or so of the total. But yes, productivity, as I have mentioned throughout my comments, was very strong and this is driven, this is procurement, this is manufacturing and this is fixed cost productivity. So the industrial segment did have very, very strong results in this area. And so you take some negative price/costs, a little bit of negative volume, very strong productivity, all this kind of probably netted to that zero in the segment. You add in strong results from Corenso and well, that kind of gets you pretty close to the segment improved performance year-over-year in the first quarter.

Yes. When we were coming in, into Q1 with the initial inflation we saw on OCC, we felt like were going to be able to balance that out, as we said at that time, with productivity, with the investments that we have made in our mill network really over the last three years. And as Julie said, Corenso has turned out to be a really, really good asset for us and the team has done an excellent job in balancing the supply chain, if you will, to take advantage of the low-cost machine.

Okay. And then maybe a little bit on Project Horizon. I am curious if there is historical precedent that you have seen for, I guess, in the marketplace for converting containerboard machine to URB. This is not something necessarily I have heard a lot about. So?

Yes. First off, yes, didn't necessarily stimulate why we did it. But once we acquired Corenso, it gave us, wow, that's exactly what they had done multiple years ago. They have taken a, I am not certain if it was containerboard, I think it may have been, but then converting it over to a world-class URB. So it certainly gave us the footprint and the model and the confidence. Now in North America, we are pretty much a cylinder-based network. However, if you go over to Europe, we are more Fourdrinier. The Corenso machine is Fourdrinier, as is number 10, which gave us the confidence as we very early on with the Corenso machine started integrating that board in our tube and core buildups finding exactly how good the performance could be. This gave us all the confidence that yes, number one, we can do this conversion and we can do it quite effectively. We have got a footprint for it. And once we do the conversion, the materials coming off of the machine are going to be very consistent with the performance of what we have been seeing off of our cylinder network for all these many, many years.

Okay. Thank you. Good luck guys.

Thank you.

Thank you.

Thank you. Our next question comes from Debbie Jones with Deutsche Bank. You may proceed with your question.

Hi. Thanks for taking my questions. I wanted to focus on display and packaging. I know it is a solid segment for you, but it would seem to me that there could be some risk there. If you stress test this business, what percentage of it do you think is more resilient? And what might kind of suffer in the current consumer environment that we are in, especially if they were to continue on?

Yes. This is Rodger. I think, Howard mentioned we are estimating a second quarter down low double digits. The promotionals, obviously promotional items obviously are down. So we are seeing that. Even some of the holiday promotional items we are already starting to get some word that those will be reduced for this year, I think for obvious reasons. This is one of the businesses that Julie referenced where we have been very aggressive and very early came out with strong cost control. We took out significant amount of S&A out of that business in the fourth quarter and the first quarter of this year. We saw that pay off in the first quarter to a small degree, but that will hit more for the balance of the year. Also in that segment is our Alloyd business, our blister card business. Also we are seeing some headwinds, as you would expect for those types of products. But same story, very aggressive in the first quarter taking cost out, substantial cost out. So we are preparing for the worst and hoping for the best. But as far as volumes for the second quarter is at low double digits and we are focusing on controlling cost and driving it as hard as we can. It all depends on how the virus plays out for the holiday promotionals. That could turn the other way, but again we are preparing for the worst.

Okay. If I could ask a bit more about OCC, I am not asking you to predict the price here. But could you just give us a more granular on the ebbs and flows of collection right now? Are we seeing an improvement? Obviously there is a big impact from COVID-19. So just kind of give us a bit more detail about what the problems are?

Yes. Debbie, no, I would say we are not seeing much improvement at this point in time. Generation is low to the point we have actually pulled back ourselves in terms of export to make sure we have got enough material to manage our own network here. So at this point in time, we do not see change. And therefore, as we opened up with, we expect to see further pressure on price as we head deeper in the quarter.

Okay. Thanks. I will turn it over.

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

Thanks everyone. So late in the call, but I am largely good. But this COVID crisis seems like the blackest of black swans. So compared to 2008, did you have time to even prepare? You had a long detonator fuse in 2008. And what lessons are you applying in the current environment?

You know, one of the things we did early is go back to 2008, 2009 as we talk about our liquidity, obviously our cash balance, the impact it had on various sectors. And as we modeled out into Q2, we try to look at what did we see in 2008 and 2009 by market and by segment and then carry that over to, we are a different company today from a mix perspective and what do we see during then carried it over to now using that as some type of gauge, if you will, to say how bad could this get. Could it get as bad as 2008, 2009? Could it get worse? So we really used it from that perspective to help us build our models, which in turn were probably more faced on the liquidity side of things and making sure that we are comfortable as we enter this situation. But I don't know if I am answering your question, but that is the one exercise that we certainly did.

Okay. So sounds good, like there were a few lessons learned. And then just a granular one on the display packaging. I know that your entire cost cutting initiatives have played into the better performance. But you also mentioned that the exit of the pack center was part of the reasons the performance for productivity was better. So was that just exiting a money-losing business?

Yes, this is Julie. This is just to clarify, the parts of the D&P business, Alloyd and I think to some degree the display business itself, they still had sales to certain customers kind of indirectly related to the pack center. And so ultimately, we ended up losing certain contracts, as we said indirectly related to exiting the pack center. So it's kind of like a follow-on indirect impact that's negatively been a part of that business' volume since kind of like early, really tied to mid last year.

Okay. So that's why 2018 event still resonates in 2020.

That's right.

Well, thanks and keep safe everyone.

Yes.

Thanks.

Thank you. [Operator Instructions]. Our next question comes from Brian Maguire with Goldman Sachs. You may proceed with your question.

Hi. Good afternoon. Thanks for taking my question. Just a follow-up on some earlier questions around the OCC move and recovering that. And Howard, I think you sounded very optimistic about being able to recover that over time. I guess the question really just comes back to, how you see pricing in the industry? I know your predecessor, maybe not you specifically, but your predecessor and others as OCC prices were going down sort of talked about this being a supply and demand driven market with pricing as opposed to a cost driven market. It seems to be now or implied a little bit more, this is going to be driven by cost. But just wondering how you see the supply demand part of it? And can that be tight enough to get the cost recovery through, even in the midst of what's going to be a pretty bad recession here?

Yes. I guess a couple of thoughts there. First off contractually, we will get the cost recovery at the end of the quarter. We have of course put out a general market. But our mills, as Rodgers indicated, are running relatively full. As you will know, we announced earlier in the week that we are shutting down two mills. And we say, hey, that's because of market conditions. It is because of market conditions. But let me remind you that, I guess, over three years ago, we announced the project of $64 million where we were going to invest into our best mills. So we actually increased the entire output by Sonoco through those investments. Now the plan all along had been to take out higher cost assets when we completed that project. 2018 proved to be a remarkable year related to demand. So we delayed taking those assets out and that really ran into 2019 first half. So the decision of taking out capacity at this point in time really relates to the fact that we are that much more efficient and creating that many more tons through this capital investment we announced three years ago and we are just pulling the trigger on it. It's somewhat coincidental to the fact that now we have seen an OCC surge and we need recovery. So again a long way of saying, we are full, we have got very efficient assets outstripping and we are taking out the higher cost assets and we will recover the OCC as we have said.

And just a couple of questions on the Project Horizon. I guess, one just from a timing point of view. It seems like you are taking a lot of other actions to shore up the balance sheet, halvening the liquidity, cutting back on CapEx, deferring the pension contribution. So why is now the right time to be, well, I know it's not huge dollar amounts, but it's an extra $20 million of CapEx and $80 million or so, all-in. Just why not maybe wait until we are at the other end of all this to make that kind of an investment? And I don't know if you said or you can say, but about how many thousand tons of URB capacity do you think is coming out between the number three machine in Trent Valley?

Well, let me start with your last question. Effectively 35,000 tons, because if you recall, dating back multiple quarters, we have said that we have taken out, I think what 50,000 tons or 60,000 tons. That was Trent Valley selling pulp into China. So this move really is only taken about incremental quarter-to-quarter type 35,000. Why are we doing Project Horizon? Because we wish we have done it three years ago. Frankly, that's the way I feel about it. But I think it's a reflection on the fact that again, we have a very strong balance sheet. We can afford to do this. It's a three phase type investment, somewhere around between $15 million and $20 million this year with some benefit implications mid next year from a stock prep perspective. But as I think we opened up with in the opening commentary is, this is a time when you have strength in your balance sheet that you can take advantage of some opportunities that when this thing comes and it will come to an end, we are going to be a much stronger company, because of that. So it's not only, are we going to be making the appropriate strategic capital investments as long as things stay as we see them. From a market perspective, we will be looking at any potential tuck-ons, bolt-ons, et cetera that makes really, really great strategic sense once we come out of this crisis. So that's what we are doing. We are hoping that in two years from now, well, of course, I will say, of course, but we hope we will be out of this and we will be that much stronger.

Okay. Just last one for me, I know coming into the year there were a lot of new product introductions to capitalize on the sustainability trend and you guys had some test launches with some of your brand owners and customers. Just given the environment and the climate that we are in, are you seeing any of your customers look to maybe rethink or delay some of those launches? Maybe they are just focused on other things trying to make sure they can get the shelf stock at the supermarkets? Or maybe they are just worried consumers may not want to go for new concepts in a time where there's so much uncertainty? Any kind of change on those plans?

Hi Brian. It's Rodger. I would call it more of a delay. I mean obviously, sustainability is going to be critical. It is critical. It will be critical again in the future. We are seeing some slowdown in delay and some of the people that were thinking about potential conversions. Obviously, rigid plastics packaging in today's environment with the virus, especially transparent is very popular. So that's a good thing for many parts of our business. We have some major projects we are working on with some of our large customers for growth going forward that are continuing. It's tougher in today's environment, but it's continuing. So I would just characterize it as a delay at this point. Nothing more than that.

Yes. I think, if one thing I will add to that is, we have said it multiple times that our customers are trying to figure out how to get their outputs ups. So we are actually seeing, we are limiting the number of SKUs they want to put out. They are just trying to pump out as much volume as they can. It's not just with us. It's across the entire sector.

Okay. That makes sense. Thanks. And yes, stay safe everyone. Thanks.

Thanks.

Thank you.

Thank you. Your next question comes from George Staphos with Bank of America. You can proceed with your question.

Hi guys. Thanks for taking the follow-on late. I had two questions. One was just to piggyback on what Brian had teed up. I suppose at this juncture if your customers are delaying sustainability, it's not based yet on any data they have on consumer perception. I don't know if you have any commentary on that. I guess it would be -- there can't be, because it's been such a recent event in terms of what's been happening with COVID but wanted your thoughts there. And then you might have mentioned this earlier again, my phone had cut out. On the $45 million reduction in CapEx, the gross number, if you will, can you quantify or bucket where those CapEx reductions occurred? Thanks guys and good luck in the quarter.

So, George, on the delay in sustainability. First off, to be clear, we are very, very engaged and active with customers in terms of projects, just the commercialization there of this, I think going to be delayed. But we are continuing to work on select projects in that regard. The $45 million in CapEx, I think is really across the business. We are still focused on some pretty critical growth productivity projects that Rodger and his team, we have done this before. We look and say, hey, what can wait for another day. And that's really across the entire company.

So Howard, there was no specific area that got a little bit more weight in terms of reduction. Is that fair?

That is fair.

All right guys. Thanks very much.

You are welcome.

Thanks again, George.

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

Thanks everyone for taking my follow up. Julie just on pension. You were, in hindsight, smart enough to make that a $200 million contribution a year or two back. And then you were going to top it off with this $150 million that you have deferred to next year. Can you just talk about how likely you are to make it next year? And then relatedly, to the extent you have mark-to-market your assets and liabilities, what the funded status is looking like with just the steep drop in discount rates and a smaller drop in asset prices?

Yes. Sure Adam. And I will tell you, we are grateful amongst ourselves and with our Board that we all made this decision to last year fund up to about 95% on a PBO basis, right, which is a normal accounting basis and shift. We are really at about 93% invested in fixed income. And that's of $1.4 billion of pension plan assets. So it's pretty meaningful and very specifically with those investments they are liability matched. And so we work really closely and monitor this monthly even before this crisis, right, with our actuary and our investment managers to make sure that the assets and the liabilities are moving in sync. So we continue to estimate that on a PBO basis, we are still around 95% funded and we remain very committed to the ultimate termination process. So we are just, quite frankly there are certain parts of the timeline we control and certain parts that we don't control. We weren't even sure it was going to be wrapping up this year anyway, but we are taking some actions to specifically push it into 2021. But we do remain committed to ultimately putting in the final amount and annuitizing and removing the liability from our balance sheet.

Thanks Julie.

Yes, of course. Thanks.

Thank you. Our next question comes from Gabe Hajde with Wells Fargo. You may proceed with your question.

Thank you guys for taking the follow-up. I will try to make it brief. I was just curious if you have seen any change in challenger brands versus kind of bellwether brands that we are accustomed to seeing in the center isles of grocery store? I am just curious if they are able to deeper pockets and more resources whether it's supply chain or otherwise that ensure that their products are in fact on the shelf?

Gabe, you were a little soft on the middle part of that. Could you repeat that again? Change in --?

I apologize. Just any change from challenger brands to the bellwether large staples that we are accustomed to seeing in the center isles of the grocery store?

I don't think we have seen that at all. All I can say is that our customers and not only center of isle but perimeter as well as in the frozen side are just pushing out all they can. So is there a slowdown as it relates to the emerging brands? I really can't speak to that. It's just a heavy demand period right now. I would suspect maybe that would be the case. But certainly not impactful and certainly not impactful to us.

Thanks again.

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Roger Schrum for any further remarks.

Thank you again Josh. And again let me thank each of you for joining us today. We appreciate your interest in the company. And as always if you have any further questions, please don't hesitate to contact us. Thank you again.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.