Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 Sonoco Earnings Conference Call. At this time, all participant lines are in listen-only mode. After the speakers’ 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 hand the conference over to your speaker today, Roger Schrum, VP of Investor Relations. Thank you. Please go ahead, sir.

Thank you, Gigi. And good morning, everyone. Welcome to the Sonoco’s investor conference call to discuss our third quarter 2019 financial results. Joining me today are Rob Tiede, President and Chief Executive Officer; and Julie Albrecht, Vice President and Chief Financial Officer. A news release reporting our financial results was issued before the market opened today and is available on the Investor Relations website at sonoco.com. In addition, we will reference a presentation on our third quarter results, which was also posted on our website this morning. Before we go further, let me remind you that today’s call and presentation contains a number of forward-looking statements, based on current expectations, estimates and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties. Therefore, actual results may differ materially. Furthermore, today’s presentation includes the use of non-GAAP financial measures, which management believes provides useful information to investors about the Company’s financial condition and results of operations. Further information about the Company’s use of non-GAAP financial measures including definitions, as well as reconciliations of those measures to the most closely related GAAP measure is also available in the Investor Relations section of our website. Now, with that, I’d like to turn it over to Julie.

Thank you, Roger. I’ll begin on slide three, where you see that earlier this morning we reported third quarter earnings per share on a GAAP basis of $0.91, and base earnings of $0.97 per share. This $0.97 of base EPS is well above the high end of our guidance range of $0.88 to $0.94 per share, as well as above our $0.86 of base EPS in the third quarter of last year. We’re pleased to have delivered solid operational results in a slumping global economic environment. And I’ll add that our third quarter earnings benefited from the Corenso acquisition and from a lower than expected effective tax rate. Related to the $0.06 difference between base and GAAP EPS, $0.05 was due to restructuring activities, $0.05 relates to non-operating pension costs, and $0.03 is from M&A transaction costs. These non-base expenses were partially offset by a $0.07 non-cash gain, driven by reduction in a site-specific environmental reserve. Now, looking briefly at our base income on slide four and starting with the top-line. You see that sales were $1,354 million, down almost $11 million from the prior year period. I’ll review more details about our key sales drivers on the sales bridge in just a moment. Gross profit was $265 million, approximately $6 million above the prior year quarter as gross profit as a percent of sales was solid at 19.6%. SG&A expenses of $126 million were favorable year-over-year by $9 million, driven by cost reductions across the business, which more than offset the addition of SG&A from acquisitions, all thus resulting in operating profit of $139 million, which was $15 million above last year. Our third quarter operating profit as a percent of sales was 10.3%, a 120 basis-point improvement over the prior year period. And I’ll review the key drivers…

Thanks, Julie. Let me speak briefly about our performance in the third quarter as well as the first three quarters of 2019. And then, I will address what we see as we enter the last quarter of 2019, including updating the progress we are making on cost reduction actions to help meet our financial and operational targets. Our strong mix of consumer and industrial related businesses did an excellent job in navigating slumping global macroeconomic conditions in this quarter. By focusing our business on the areas which we can control, we continue to drive margin expansion as each of our four business segments report gains in operating profit as compared to last year. With these strong results, which included the mid-August acquisition of Corenso Holdings, which directionally contributed $0.02 per share, along with the benefit of a lower effective tax rate in the quarter year-over-year, which also contributed directionally $0.02 per share, we exceeded the high end of our guidance. As I look at the third quarter, I point out that base operating profit increased 12.1% to $139 million, despite slightly lower sales. Operating margin improved 120 basis points year-over-year, reaching 10.3% while base OPBDA improved 9.5% to $199 million with OPBDA margin improving to 14.7%, the highest margin performance since 2001. I am proud of our team’s third quarter performance, especially considering how challenging the current operating environment truly is. You’ve all read the growing amount of troubling economic data, which I believe has been and is pointing to a clear slowdown in global business activity. I’ll highlight a few factors which I believe are relevant to our businesses. First domestic manufacturing ISM Manufacturing PMI data for September showed the steepest month of contraction in the manufacturing sector since June 2009. Truckload capacity, which was tight throughout much of…

[Operator Instructions] Our first question is from Ghansham Panjabi from Baird. Your line is now open.

Hey, guys. Good morning.

Good morning.

I guess, Rob, first off, just picking up on your -- on the last comment you made in the press release about a more pronounced year-end slowdown, customer orders in certain markets. Can you just expand on that? Which specific segments do you anticipate that in? It seems like inventory levels across the supply chain across multiple companies that we’ve covered, point towards them being pretty lean. And so, I’m just curious as to whether you’re seeing further sort of destocking as we cycle into the year end.

Yes. I would tell you, Ghansham, the way we’ve looked at it is sort of the behavior we’ve seen. What we have seen is every quarter starts off pretty strong and then we start to see it tail off towards the end of the quarter. And when I take a look at what we experienced last year in December where we saw significant change in behavior, and I take a look at what our seasonal reductions typically are across the board, especially in December, as we looked at all of that, we have no reason to believe at this point that we will see something different. Now, to the point that you have made is, we also believe that some of our customers have been managing their inventory down. And if in fact it is as low as -- in some cases our people do think it is, then, it would not surprise us to see a bit of a surge in orders as we come to the end of the year. I just don’t know that we’d necessarily be able to ship those. We may be able to produce and drive absorption through those. But, at this point, that’s what we see, and that’s what we know and that’s what we’ve built into our guidance.

Got it. And then, switching to the consumer packaging segment, I know you called out some nuances as it relates to volume and performance for 3Q. But, just sort of stepping back, I mean, this segment has been quite weak from a volume standpoint for three years now. You have a very broad and diverse product portfolio. You’ve committed capital to it with certain acquisitions in new verticals that are really growing faster. I guess, kind of stepping back, what do you think has gone wrong from your vantage point, Rob, that has driven this level of quarterly choppiness in the segment? And then, what are the initiatives to try and change that going forward? Thanks so much.

Sure. Thanks, Ghansham. As I look across the portfolio, I am pleased with what’s happening in regards to our rigid paper business. We’ve seen -- if you recall, we saw significant volume declines especially in Europe as it related to the tobacco industry. We have now turned that corner. We’re starting to see some volume growth clearly. We do believe that some of that volume growth is being attributed to the whole issue around plastics specifically in Europe, and we’re seeing some benefit associated with that. We also are seeing some of our customers grow into white space in markets that they haven’t previously been able to participate in. If I take a look at our plastics business, I think that one of the things that we’ve clearly seen is a slowdown in terms of our customers rolling out some new products that we have won. We thought -- quite frankly, we thought that early in the first quarter we’d be ramping up some business in our plastics business. And as it turns out, we are now ramping it up in the fourth quarter. So, we really won’t see the benefit of that run rate until the first quarter. And if I take a look at the additional volume that I referenced in my comments that we won, we should see some additional benefit in the rigid plastic side as we move into the second half of next year. If I look at our flexibles business -- and again, I want to take a step back. One of the things that we have done is, if you recall, we talked a lot about looking at our businesses holistically. We said that we want to make sure that we’re achieving the value that we bring. And in some cases, we’ve made…

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

Thanks. Hi, everyone. Good morning. Thanks for the details. And I wondered -- my first two questions and maybe I’ll have a follow-on after that. But just piggyback on Ghansham teed up. So, Rob, if you talk about the fourth quarter and what is -- I guess, what is embedded in your volume outlook across the segments, to the extent that you can talk about that, relative to what you’re seeing early in the fourth quarter, recognizing -- and we’ve talked about to them prior quarter, there’s been a sawtooth where the course starts out okay and then, your customers -- everyone’s customers, it seems like pulling the horn later in the year. Can you give us a little bit of where are you now relative to what’s embedded in the guidance?

Sure. You know what? I would tell you that it’s obviously very early as we head into the fourth quarter, but I’m bullish about fourth -- or specifically October. October typically tends to be our best month and it sets the tone for the quarter. So, at this point, I have no reason to believe that we’re not going to have a relatively good fourth -- or October. What I don’t have line of sight is December. And so, just taking a look at what we saw last December where we saw the Consumer customers really turn off the tap. I don’t know whether it’s going to be exactly the same because as Ghansham mentioned in his question, we do see customers managing their inventory little tighter. And so, as I said, we may have a nice surprise but don’t know that. And so, without knowing that we didn’t build that into our guidance in terms of orders late in the year that allow us to produce and drive some absorption and have that ready to be shipped in the first quarter. So, that’s really where we are. I would tell you, the Industrial business is tracking no differently than what we expected it to, and the Consumer business. We’re looking at it from the standpoint of probably some of the experience that we had late last year and we’ve factored that into our guidance.

So, Rob, would it be fair to say, okay, Industrial is doing its typical let’s say minus 3, Consumer is up low single but you’re guiding for flat to down in the fourth quarter, would that be a fair synopsis?

Yes. That would be a fair synopsis. I would tell you that what we’re guiding is down somewhere between 1% and 2%.

Okay. Thank you for that. I appreciate the granularity. Then, in terms of -- what you’re seeing in terms of your customers in Consumer delaying launches, why are they telling you their delaying their launches? Are they doing it because it’s the same old, in terms of uncertainty, which hurts confidence, which means you don’t spend money on marketing or capital, and if you just get into this -- not you necessarily, but everyone gets into this vortex, or is there something else going on where they’re concerned perhaps about launching a new plastic products in a world that is starting to get a little bit less comfortable with plastics, recognizing there’s lots of sides on that debate. What’s going on in terms of why the launches are going less quickly than you would have expected?

Yes. I would tell you, George, it’s a couple of things. It’s less about the construct. And part of it is just having the resources available to run through and get the trials done, not on our side, I mean, we’re ready to go. We’ve invested in the equipment, and we’ve invested in the tooling, and we’ve got things ready to go. It’s just getting their folks ready to make the switchover. So, that’s -- and I’m being very specific around a number of products that we’ve seen. I do think that they are also looking at it in terms of assessing sort of the volume dynamics. What we did see with one of the products that we did kick off this year, was that the volumes far exceeded their expectation, which created another unique dynamic. So, there was a delay in that one for a number of -- well, a couple of months and then it was full speed ahead. And so, that created a bit of a challenge for us in terms of -- from an operational standpoint because you can only put 5 gallons into a 5-gallon pail, not 6 gallons. So, we ended up having to work through all of that. But, from a customer standpoint, it’s not that they’re struggling or at least we have not seen this, George, not that they are struggling with the material construct of the package. Typically, it’s just having the resources available to be able to get this done because a lot of our customers have gone through all kinds of rightsizing, and if you will, early retirement. So, getting some of the newer people up to speed is probably more of the issue than anything else.

Rob, thanks. And my last quick one and I’ll turn it over. In Protective Solutions, you had a really nice improvement in EBIT. You gave some directional commentary in terms of what was driving, you and Julie did. Can you give us a bit more granularity in terms of what drove that, and how sustainable that is going forward? Thank you very much.

You bet. George, we had some really nice volume in our ThermoSafe business that offset, if you will, the -- what I’ll call the fiber business and our molded foam and automotive business. If I take a look at our molded foam and automotive business, great cost control, solid productivity year-over-year, and to address, if you will, right sizing that business for the volume that’s in place, our fiber business, same thing, solid productivity, and then the beauty of the volume in ThermoSafe help drive that up. So, I think, it’s sustainable. I think that business is a 10% EBIT business and we’ve had some fluctuations. I think, our folks are getting their arms around some of the volume challenged business, and they’re working hard to address that.

Our next question is from Adam Josephson from KeyBanc. Your line is now open.

Rob, one on just your tubes and cores business. Some of the -- obviously, paper is a big end market for you within that tubes and cores business. And we’ve all seen in the data how some of those markets, coated, uncoated, have taken a pretty big leg down this year. What do you make of what’s going on there? And what are you thinking along those lines for the fourth quarter? Do you expect any recovery, do you expect things to continue to get worse. What are your thoughts in terms of the paper markets specifically that you serve?

Yes. Do I think it’s going get worse, Adam, from what we’ve experienced? I don’t think so. There is nothing that we’re aware of that in terms of someone taking additional downtime that we haven’t built into our forward thinking. But, has that market been challenged? Absolutely. And we’ve seen actually quite frankly specifically the paper side has been a little more challenged than some of the other markets. I guess, that’s the best answer I can give…

Yes. No. Sure. Just one more on the URB industrial business. So, you talked about some selling price declines and mostly related to being historically low OCC. I’m just wondering how much of the price declines are just OCC pass-throughs versus any underlying price weakness within URB.

In our Industrial business, about a third of our contracts are tied to OCC and so our more pure pass-through on a quarterly basis. And then, the remainder are roughly split between, let’s say, tan bending chip and just other kind of more just broad paper market indices.

And one on OCC, Rob. Obviously, it’s historically low. Do you have any -- I know it’s early days, it’s mid October, but any expectations for next year, given that China is likely to buy even fewer times next year?

Yes. I mean, we’re right in the planning portion right now as we’re thinking about it. We think it’s going to be flat around this $35 a ton level is what we believe to be true. And that’s taking into consideration that we also believe that China will curtail the permit from 12 million tons of imports to about 6 million tons, and North America will get its proportionate share. So, that’s our best thinking as of today.

Thanks Rob. And then, just last one relatively on recycling. So, usually, I see when you are making good money in your industrial business, you are losing money in recycling, just because of the impact that OCC prices have on each of those two businesses. Can you talk about where recycling fits into your strategy, and are you willing lose money indefinitely in that business, assuming OCC stays low as long as you can provide fiber to the rest of your business, or how are you thinking about recycling, just given what happened in that industry over the past year or two with historic low OCC and other recycling prices?

Yes. If I think about recycling and why we’re in recycling, it was obviously to ensure that we get good quality fiber as an input into our paper mill system. Do we -- if I had a business and said that I’m going to lose money indefinitely, the answer is no, we wouldn’t do that. But again, this is an integrated play for us. So, a couple of things that we have been doing as it relates to our recycling business. As you know, it’s nice that OCC is at $35 a ton, but there’s a cost associated with picking that up. I think, the vast majority of our customers understand that. So, if you will, addressing that going to our customers with respect to some of those respective challenges and they get it. I think the other thing that we have done, as I think about our MRFs and I think we’ve talked about this in the past as well, it has to do with how we have changed the model and where we used to pay for material. We’re now going to municipalities and saying at these price points we’re going have to revert that back to where you’re going to have to contribute towards us addressing that. That has been underway for the better part of the year. And then, ultimately the question is, all right, if it’s really about feedstock for us, we’re constantly assessing what we need and where we needed it and what that overall footprint might look like. So, lots of things going on as we’re thinking about it. But, we’re getting arms wrapped around it, but it’s a critical part of, if you will, our integrated play. If magically, we said gosh, we had an unlimited supply that would never be disrupted and we could buy that at a fair price that would be another assumption you build into it and take a look at it.

Sure. Thanks. I appreciate it. Thanks, Rob.

You bet.

Thank you. Our next question is from Steve Chercover from D.A. Davidson. Your line is now open.

Thank you. Good morning, everyone.

Good morning.

So, my first question is just a modeling question. Can you give us the profit drag from the Atlanta pack center through the first three quarters of last year, and I guess for the full year as well?

Steve, could you just speak up a little bit, because we’re having a hard time hearing you?

Sure. I was just wondering, if you could tell us what the profit impact was from the Atlanta pack center for the first three quarters of last year, and then for the full year?

Let us left that up and maybe we’ll go to your next question, while -- we’ll look it up, while you are going to next question.

You could circle back. Okay. The second one is more theoretical. If you were to forgo acquisitions going forward and held exchange rates flat, do you have a view of how your volumes would trend across your segments?

It’s -- let me -- I’m going to go back to say that again. So, if we said exchange rate held flat?

Yes, and no acquisitions. Do you think that your segments are growing over -- not next quarter, but going forward, longer term?

Yes. The answer is yes. I really do believe that they would be growing. And as I’m just sort of thinking through, as I look at -- as I think about next year and what my expectation would be, there’s absolutely I would expect to see some moderate organic growth. And when I say moderate, moderate organic growth, and I also know that we’ve got some carryover in terms of acquisition sales dollars, as I think about next year.

Okay. And then, finally…

Hi, Steve. It’s Julie. To your question about the year-over-year positive impact on operating profit from exiting the Atlanta pack center, that’s about $7 million of year-over-year benefit. And just as a reminder, that falls into the other category on our operating profit bridge.

Okay. Thanks, Julie. And then, my last question is with respect to the summit, the sustainability summit that you hosted in September. Was it well attended, and are there any highlights that you’d like to share with us?

Yes. There were 170 people that attended the summit. It was a number of CPGs. We also had NGOs. We had a couple of folks from government. We also had a few folks from some of the packaging associations join us, as well as academia. The objective of the summit was to bring all these groups together to try to connect the dots between -- dots as to what I’ll call the unintended consequences, making decisions on a material construct without thinking through what the ramifications were. And that was -- it was the start of what I hope to be an annual event that we will allow Clemson to carry the ball forward and bring more companies together. What was the pleasant surprise of that takeaway, a number of our competitors have now asked whether they could participate as we move forward on that. And I view that as a positive, because this goes back to questions that one of your colleagues asked, how are you going to get the conversation growing? You can’t do it as just a packaging organization. You got to bring the CPGs as well as the supply side to the table. And one of the folks that did talk was from Dow. So, I was pleased. In fact, I was -- it surpassed my expectations quite frankly, in terms of the folks that came and the feedback that we received from the two days.

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

I wanted to ask on the Paper and Industrial Converting segment. Given some of the weakness that we’re seeing across, again, kind of printing paper grades and impact on cores, you guys have talked about mostly focusing on optimizing that segment. Could you talk at all in terms of your -- matching your supply and demand on the URB side and/or on the converting side? You guys have been quietly doing that along the way. But, anything that stands out to you, kind of shocked little bit so that operating rates are kind of mid-90s, any thoughts there?

Sure. I would tell you that on the URB side, we’re continuing to run very strong and we’re seeing prices for the most part hold up. What has changed is any contractual arrangements we have. Those are the ones we made the adjustments to. But, we are running in 98% range in the URB side, where we clearly -- and with that said, I want to make sure that I understand your question, Gabe, appropriately. So, if I miss it, just come back and make sure that I answer it. As it relates to volume in terms of tons, obviously with the acquisition of the Corenso business, we picked up another mill, which I’m very pleased with the assets that we have there. I think, it allows us to take a look at our network through a different lens. And that was part of the process that we started back in 2017 when we said we are going to invest $68 million into our paper network here in North America to invest in our best machines. And if and when the situation arose, we --don’t be surprised if there was some curtailment of some of the high cost machines as we move forward. So, our objective is to make sure, first and foremost that we have the best and the lowest cost supply of paper into our converting side, the tube and core side, and as well as into our post business and the Protective Solutions business as well as into our Consumer side of the business for the cans. And so that’s what our real focus is with respect to the paper network. Did I answer your question?

Very helpful -- it did Rob, absolutely. I wanted to switch gears to the cost control figure that you threw. I think, you said you upsized it $20 million to $25 million for this year. And I was curious if you could comment at all, how much of that might be, I’ll call it structural or permanent, or let’s say the things do come back in 2020 or the volume trajectory improves, how much that might come back next year?

The expectation is none of that’s going to come back next year. This is focused about permanent takeout. And it’s a broad spectrum of things. I would also tell you that we’re investing in some technology so that it allows us to address that -- the cost structure of the company further down the road in a more sustainable way. And I’d bore you with all kinds of details, but the devil is in the detail, and working through all those things. So, this is just something that quite frankly is the course of what we as a management team need to do and have been doing. We saw the storm clouds coming early in the year. We started the process beginning in late January and set out some targets. Our folks have come back with a lot more than what we initially set out. So, we got a game plan going forward. We do expect to see some of that impact in the fourth quarter as well as we continue through the balance of the year. So, initially, our target was in the $15 million range, bumped it up to $20 million. I’m very confident that we should be able to achieve $25 million.

Our next question is from Brian Maguire from Goldman Sachs. Your line is now open.

I just wanted to follow up on earlier one on some of the URB production data. I think, you talked about it being in the high 90s operating ranges. Just wondering if you could kind of help reconcile that versus some of the industry data we get. It seems to reflect maybe more like low-90s. And just wondering if you kind of comment on your own backlogs there, it sounds like they’re still pretty high but the industry data again is -- maybe indicates they weaken a little bit through the year. Just maybe directionally, are things still looking as strong there as they were when the year started?

Yes. I would tell you that right now, based on what we see, we expect our system to be full from line of sight that I see, certainly through November. I mean, quite frankly, Brian, where -- if you will, if I think about our paper system where I see some of the challenges, it’s really our number 10 machine, our medium machine where we have been challenged with some volume, which you would expect, given where linerboard is and box demand is, et cetera. But right now from what we have line of sight of where we see the volume continuing to be fairly strong in our mill system, certainly here in North America as well as in Europe through the fourth quarter, as best we can see it today.

Okay. And then, just switching gears, just a question on the portfolio. You obviously laid out some aggressive M&A targets for 2020, which seems like they’ll probably just be hard to hit, given the environment and deal multiples being high in general. Just wondering if you could comment on those valuations that you’re seeing in general if they come down. And then, just maybe a little bit more specifically, you obviously -- you operate in the recycle rate and URB medium machine. I think there are some CRB assets that might come available. Just wondered if you have any interest in getting into that grade, if you think there could be any synergies by having a different boxboard grade as part of the portfolio?

Yes. No to the CRB. Our focus is really on driving around the consumer side, as we’ve talked about. We’ve talked about doing some bolt-ons as it related to our paper assets, where it made good sense as evidenced by Conitex, as evidenced by Corenso, and then, growing out on the consumer side. We’ve talked what we want to do and in that space. Clearly, as you take a look at multiples, I think, the expectations, quite frankly it depended upon clearly on markets, the specificity. But, if I think about where some of the things are right now, I see a slight movement. I think, the private side is not yet caught up with the public multiples. But, I think, you’re starting to see some reality set in. So, that’s my view of the world. We’ll see whether or not that ultimately comes to fruition.

Okay. Just last one for me, for Julie. Just with sort of slight tweak down in the EPS guide, just wondering how we keep the free cash flow guide flat? Just a little bit more working capital, it sounds like just general destocking into year-end.

Yes. We do continue to have a target to have our working capital be flat from year-end ‘18 to year-end ‘19, if not slightly below that. So, we have our teams working very hard across the working capital spectrum. I’ve mentioned as well, we will have a $10 million estimated cash tax benefit in the fourth quarter, still related to the voluntary pension contributions we’ve made this year and kind of some other this and that that are unique positive cash flow items in the fourth quarter. So, we still have line of sight to the cash flow. I mean, again, our fourth quarter is generally kind of -- trends down seasonality wise anyway. So, we always have, call it slightly lower net income in our cash flow model for Q4. So, it’s really now a dramatic change. But again, we have these other levers and opportunities that I’ve mentioned to help us get to the full year guidance.

Okay. Thanks very much.

Thank you, Brian.

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

I’d like to come back to the just the cost takeout, that $20 million to $25 million number. First of all, is that an actual number for this year, it’s not a run rate number?

That is an actual number for this year.

Okay. And is all of that Rob in SG&A or is that kind of in SG&A and other areas?

Mark, it’s mostly in SG&A. There is some in other areas but it’s mostly in SG&A.

And because you had a like a huge jump this quarter and the sort of the positive benefit in SG&A, and I just wondered if you could give us any sense on a year-over-year basis, Julie, what that might look like in the fourth quarter?

We are expecting kind of quarterly run rate for SG&A to be similar in the fourth quarter as it was in the third quarter.

Okay. All right. That’s very helpful. Rob, I wanted just turn to kind of consumer plastic packaging right now. And just are you seeing any impact from kind of all of the negative pressure that we’re seeing kind of around single served plastics? Is that having any effect anywhere in your portfolio?

Mark, two places. One, we talked about and that goes back to late last year, when we talked about a customer who took one product -- or product line out of plastic and put it into a fiber bowl, here in North America. And the only other one that I can think of in terms of having a direct impact on us has been in Europe, where amazingly enough, a European took 100% recyclable plastic construct, put it into a fiber poly coated material that is not recyclable. So, don’t know what the outcome of that is or that will happen in Europe. Do we do we get calls in Europe more so than the U.S. in terms of talking about plastic and fiber? Yes. But, when you think about the product, the portfolio we have, we’re predominantly in Europe, we are predominantly in plastic on the industrial side. So, we’re dealing with heavy-duty type product that fiber isn’t going to be able to participate in. And then, we’re also in the medical space with the product that’s going into the operating theaters. So, that’s not going to be a changeover. So, that’s where we’re seeing it the most pronounced would be there Europe. And so, while we had conversations early on, I think, what we are now starting to see, in light of what we did at the summit and what others are doing, I think, people are starting to recognize there’s a lot more to this issue than simply saying, we must stop. The other thing I would say to you is the vast majority, the vast majority of our products in both flexibles and in rigid plastics, are not single use.

Yes. Rob, just to kind of follow on it. Are you seeing any kind of opportunities to take the composite can into some markets that may move away from plastic?

Yes, we are.

Okay. That’s good. And then, finally, I wondered if you could just kind of update us on prospective portfolio moves, because you’ve not only talked to us about sort of bolt-ons and industrial and growing in consumer, but you’ve also got some pieces of the portfolio that you’ve hinted might be disposal candidates at some point. So, could you just kind of update us on where you’re at from that perspective?

Sure. We’re -- Mark, as you know, we’re always looking at the portfolio to address what makes the most sense for the long term for the Company. And that will continue as we look at anything and everything with inside portfolio. But, we also have been pretty clear in terms of where we said, we want to invest that is in the paper side in the plastics, rigid plastics, specifically in thermoforming and into specific markets, as well as in the flexible space and in the flexible space again into specific markets. That’s about all that I’ll comment on at this time.

Okay. All right. Sounds good. Good luck in the fourth quarter and into next year.

Thank you, Mark.

Thank you. [Operator Instructions] And our next question from Salvator Tiano from Vertical Research. Your line is now open.

I wanted to clarify a little bit and build on Adam’s question on pricing pressure in the Paper and Industrial business. More specifically you had your price cost that was negative year-on-year, despite the main cause to OCC being down significantly since last summer. So, can you elaborate a little bit of what the pricing pressure you see in excess of the contractual pass-throughs? And what specific end markets are contributing to that and how should we think about it in the next few quarters?

Sure. This is Julie. I’ll take that. I think, Rob’s already mentioned that in our corrugating area. With the number 10 machine we are seeing some market weakness in that area. So, that had a contribution to that negative price cost for operating process. And as well in the Industrial area, we’ve kind -- we’ve just had in the third quarter some timing of contractual resets where we are kind of catching up to some of the market dynamics around the lower OCC versus the cost of operating and some of that Rob’s mentioned as well. So, two main drivers there in Industrial one being the some weakness in the corrugating market, and the other being timing of some contractual resets in various parts of the Industrial segment.

Perfect. And just as a follow-up. I was just wondering, you mentioned roughly one-third of the business is contractually linked to the bending chip index, right, for URB. And is there a sensitivity you can provide now or perhaps we can follow up later with regard to what would happen if we see this index repriced by $10 or any other amount you would like to provide?

Sal, this is Roger. As we talk, we’re generally looking at the portfolio, because we have a mix of contracts that are either tied to tan bending chip or OCC or -- generally speaking, we give a plus 10 or minus 10, have general direction of plus or minus $1 million EBIT impact as you see movements in raw material.

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

Thanks for taking the follow-up. Real quick and protective packaging segment seeing growth in temperature assured products. One I know that that tends to follow sometimes certain treatment, FDA approvals or what have you. But, one, do you foresee continued growth in that area? And then, two, do you have the capacity to accommodate that.

Yes. Gabe, the answer to specifically your question around ThermoSafe, we’ve broadened out, if you will, the markets that we’re participating in. So, we are seeing part of the growth is coming from clearly dealing with the Biologics that we’re serving. But, we’ve also broadened out into some other markets where that’s starting to grow fairly nicely. And that’s what’s driving it. And do we have the capacity? The answer is yes, we have the capacity to continue to serve and continue to grow that business.

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

Thanks so much for taking my follow-up. Rob, just one more on the inventory issue and your discussion about it. I know you said that at beginning of each quarter you see a surge in orders and toward the end you see just the opposite. So, is it really just that that you’re talking about for December or is there something more to it than that? Because, I think, Ghansham was the one who said he thought general inventories have been run down, but it seems like that’s been the case all year. So, I don’t know why now would be really any different than what’s been the case earlier this year.

Yes. The only thing that I would say is, it being yearend for a lot of our customers, they tend to manage getting to certain metrics for the Company that they serve. And so, that is a behavior that we typically see in the fourth quarter, and that’s why we also see that, if you will, that seasonal adjustment that I referenced earlier. So, that’s the driver in our thinking right now.

Okay. So, you don’t see customer inventories being just abnormally low at the movement. You’re expecting them to run them down at the end of the quarter, as they’ve been doing throughout the year basically?

That is what we believe to be true. Yes, Adam.

Yes. Thanks, Rob. Just a couple others. You mentioned -- I think, Mark asked about plastic losing and you talked about the fiber bowl and the fiber poly coated material that’s not recyclable. Does that -- and I know one of your competitors just talked about gaining share in paper cups and paper bowls but many of that stuff has poly coated material. Does that seem to be a sustainable, no pun intended, not environmentally friendly, but a sustainable shift if the product costs more and it’s not recyclable anyway. I just don’t know why CPGs would increasingly gravitate to that kind of product.

Well, again, you are talking to -- this is one man’s opinion. It is such a highly emotionally charged issue as it relates to the polymer constructs. And I think, part of it is about educating our consumers and allowing them to make a much better informed decision. But, it is a very highly emotional piece. Ultimately, if we’re really talking about true sustainability and recycling, we’ve got to look at all of that. So, I think we’re just looking at a portion of it. I think, the other thing and actually you didn’t ask the question, but the other piece is as we look at material costs for recapturing all this material, will we see a rise in recycled, if you will materials, will it exceed the cost of virgin materials, then I would not be surprised if we don’t see that. In fact, we are seeing that already.

I really appreciate it. And just one last one on plastics. Some of your large recent acquisitions have been in -- of companies that make plastic packaging for fresh produce in California, Florida and obviously there have been unusual weather patterns really since you made those deals in many companies, not just in the U.S. but elsewhere experiencing abnormal weather patterns. How is that affecting your outlook for that -- the businesses you acquired and how you’re managing them?

Yes. It’s a great question. Clearly, there was some self inflicted pain, but the weather definitely had a play on it. The way we look at this business is a little bit differently, we don’t look at it as a manufacturing business. It’s a service business that happens to manufacture and it’s a function of just having great data to support our customers. So, we’re doing a lot more work with respect to connecting to those customers to drive more predictive analytics. And that’s a journey that we started and we’re working hard towards doing that. And that’s where the value is, is having the product as and when needed. And we stumbled a little bit when we, as I mentioned earlier, shuttered a facility in California in the fourth quarter, moved a number of machines to three different sites along with the tooling and the ramp didn’t go as well as we’d hoped. As we look forward, I would tell you that the acquisitions in terms of the growth opportunities are right in line with what we thought they would be. The issue is making sure that we capture all of that as appropriately as we can.

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Roger Schrum for closing remarks.

Well, thank you, Gigi. Sonoco will be hosting its Annual Breakfast Meeting with the financial community on Friday, December 6, 2019 in the Villard Room at the New York Palace Hotel at 455 Madison Avenue. As is our custom, breakfast will be served starting at 7:30 am and presentations will begin just before 8:00 am. Rob and other members of our executive leadership team will provide strategy and business updates, and Julie will provide a first look at our financial targets for 2020. Of course, there’ll be plenty of time for your questions. And as always, we’ll be very mindful of your time and should be completed around 9:30 am. Invitations for the event will be going out this afternoon and those interested in attending should contact the Company through my assistant Robin Hayter, by phone or by email. Those who can’t attend of course in-person can join us at the meeting via our webcast at sonoco.com under the Investor Relations section. And as always, thank you again 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 very much.

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