Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter 2020 Sonoco Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder today's program is being recorded. I would now like to introduce your host for today's program Roger Schrum, Vice President, Investor Relations and Corporate Affairs. Please go ahead sir.

Thank you, Jonathan and good morning and welcome to Sonoco's investor conference call to discuss our second quarter financial results. Joining me today is 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 site of our website at sonoco.com. In addition, we will reference a presentation on our second quarter results which also was posted on our website this morning. Before we go further, let me remind you that today's call and presentation contain 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 available on the Investor Relations section of our website. Now, with that let me turn it over to Julie.

Thanks Roger. I will begin on slide three where you see that earlier this morning, we reported second quarter earnings per share on a GAAP basis of $0.55 and base earnings of $0.79 per share, which is within our guidance range of $0.73 to $0.83 per share. Due to the significant negative impact from COVID-19, this $0.79 of base earnings per share is well below the $0.95 of base EPS that we delivered in the second quarter of last year. At a high level, our second quarter 2020 earnings were impacted by mixed demand for our products with a net negative impact on earnings and price/cost in our industrial segment which was a significant drag on profits. Partially offsetting these headwinds was very strong productivity driven across our business. Related to the $0.24 difference between base and GAAP EPS, $0.16 is due to restructuring activities, $0.05 relates to non-operating pension costs, and $0.03 relates to various tax items and M&A expenses. I'll add that, as you can see, we did not exclude any COVID-19-related P&L items from our base earnings. Now, looking briefly at our base income statement on slide four and starting with the topline, you see that sales were $1.245 billion, down $114 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 $248 million, $27 million below the prior year quarter. Despite the reduction in earnings, our gross profit as a percent of sales was 19.9%, only a modest drop from 20.2% in the second quarter of 2019. SG&A expenses of $121 million were favorable year-over-year by $10 million driven by a significant focus on reducing controllable costs as well as the impact of the pandemic to reduce expenses like travel…

Thank you, Julie and good morning, everyone. Let me start by providing an update on the impact of the virus to the company. Then I'm going to talk briefly about demand trends we experienced in the second quarter. And finally provide you some thoughts about what we see entering the third quarter. First, I'd be remiss if I didn't say thank you to our entire Sonoco team for the tremendous job they accomplished in the second quarter for not only helping us achieve our financial performance, but in meeting the critical needs of our customers during what was clearly the most difficult operating environment we've experienced since the great recession. Unfortunately neither Sonoco nor our associates or their families have escaped the impact of the virus. While Sonoco has been designated as an essential provider of consumer, medical and industrial packaging around the world, we were forced to close several of our operations and temporarily during the quarter due to active virus cases and government mandates. Demand in some markets was negatively impacted by virus-related shutdowns and we had to take steps to right-size certain operations to better match the environment. As areas around the world continue to reopen, we're beginning to see improved demand for more of our products and services which I'll speak to in just a moment. The health and safety of our associates, suppliers, customers and the general public are a top priority and we've put in place numerous safety measures to better protect our people. We spent approximately $4 million during the quarter to provide our associates with personal protective equipment and to increase cleaning and sanitizing of our facilities. We expect these additional safety expenses to continue as we're seeing the virus spreading and hotspots developing in several regions of the United States and…

Certainly. [Operator Instructions] Our first question comes from the line of George Staphos from Bank of America. Your question please.

Thanks very much. Hi, everyone. Good morning. Thanks for all the details and all you're doing with COVID. I guess, I had a two-part question to start on productivity folks. You did a very strong job as you pointed out on productivity in the quarter. Kudos to everyone on your team. How much, I mean just to put it this way, how much is left in the tank Howard in terms of your ability to keep putting up good productivity with volume being as challenged as it is in some markets? And then, kind of, a related question, you noted how over time during recessions and periods like this Sonoco has always found ability to become more productive to your benefit. What do you worry about from the other side in terms of your customers maybe finding ways that they can become more productive and maybe lessening if at all some of the purchases that they've made from you in any product categories? How should we think about that coin?

I'll tell you what, George, first -- on the first question let me pass it over to Julie with a comment. I think we've got a lot of reserve in the tank. If you look at where the productivity was driven from this particular quarter, a lot of it was on the SG&A side in terms of savings as it related to less travel, et cetera. And, of course, some of it though came from the man cap side of it where when we load up our facilities as we have seen on the consumer side of the business, I mean that just absolutely leverages our fixed cost and delivers good productivity. But let me pass that portion of the question for more details. Julie, if you don't mind?

Yeah, sure. Thanks, Howard and Hi, George. Yeah, I guess we've had two extremely strong productivity quarters this year about $27 million in each quarter. The big drivers in each quarter have been a split between procurements, and as Howard mentioned, fixed cost or within SG&A. Really from a procurement perspective, what we're seeing this year in that area is really in line with what we typically generate through our supply management activities. And so, I think we would continue ongoing to expect that type of procurement productivity running through the business. I mean that's in that $10 million to $15 million per quarter is what we target specific to procurement, and that's typically what that team and our businesses deliver. So then moving again to SG&A, again, I think we would continue to expect solid productivity in this area. Going forward, having said that as Howard mentioned as things return hopefully to normal in the world and the business environment with some of that benefit we're seeing now we're -- I'm sure some of that's going to be not as strong as it has been in Q1 and even more so in Q2. And then I guess our third category going here, manufacturing productivity, again mixed result across the business. Better as Howard mentioned in places where we have strong volumes not as good in places where we've been delevered, but still a very strong focus for us. And again, as business volumes broadly pick up over time, we would expect improvement overall in our total manufacturing productivity. So, yeah these have been very, very strong quarters this year, but nonetheless, we're still pretty bullish, maybe not quite to these amounts, but pretty bullish on productivity going forward.

And George, on the second part of the question if I understand it correctly, it's really hard for us to really say how this is impacting the productivity of our customers and subsequently how would that impact us. So I really can't answer that question at this point.

Howard, that's fair. I appreciate your candor. I guess, my follow-on question and I'll turn it over. Can you remind us or point to, what some of the marginal trends have been entering 3Q have been for your business from a volume standpoint? And Julie, back to your earlier point how much of this temporary SG&A savings do you think might reverse? Wave a wand next year we're back to normal, how much of that reverses out on SG&A if you had a guess? Thanks guys.

George, you were somewhat weak -- I think what you said was what were the volume trends in the quarter Q2?

Entering 3Q Howard sorry about that. And then what do you see --

Yeah, sure. No problem. The consumer side of the business is as we enter the quarter still is relatively strong. If you go into the Display and Packaging, it basically is where it is. The industrial side of the business, we're seeing some markets start to show positive signs, others not so. And we're seeing different activity levels around the world. And what I mean by that is, while we may see a bit of an uptick in select markets here Europe, we're -- actually, we saw it slow down later in the second quarter. And of course, we're going into the August season with that business. Probably most meaningful though in terms of positive is what we're seeing on the Protective side of the business where we were essentially shut down most of April and May from the automotive side of the business from the appliance side of it. Even impacted ThermoSafe to some extent as it related to elective-type procedures, if you will. So, the biggest pickup we're seeing right now is on that on the heavy side of the business, and that basically lays it out.

And then George to your SG&A question. As I mentioned in the comments really most of that $10 million lower SG&A is very pandemic-driven at a high level, lower travel, lower employee medical expenses. Howard did mention, we did spend about $4 million of increased expense in the quarter on protective gear and additional cleaning and that type of things around our global facilities, but again all that kind of nets to this kind of $10 million improvement. I guess, what I'd say going forward, I mean, clearly those types of costs will moderate and return to more normal levels as we get out of this. But just as a reminder, we're really investing today through SG&A dollars in our IT operations and systems, our HR operations and systems, and that -- we're already seeing some payoff in that and we will continue to see payoff in that. And so, I think as we come out of this again, we won't have these same pandemic-driven lower expenses, but we still target over time SG&A at closer to 9.5% of sales versus if you look at last year around 10% of sales. And so, that's not going to be an immediate get there, but I think when we look over 2021 and into 2022, we'd want to be trending on a normal basis down closer to 9.5% of sales.

Thank you very much.

Thank you. Our next question comes from the line of Mark Wilde from Bank of Montreal. Your question please.

Thank you. Good morning, Howard. Good morning, Julie.

Good morning.

Howard, I wondered if you could just walk us across what you're seeing in your different Consumer Packaging markets right now in terms of activity whether there's been any easing as supply chains return to normal. And then over in Display and Packaging, I wondered, if we could just get your thoughts on kind of more or less promotional activity as we had kind of back-to-school season and holiday season this year.

Sure, Mark. Thanks. On the consumer side, we're -- right now as we enter into the beginning of the third quarter the trend lines are still fairly strong. So, Rodger, you've got some more detail on the consumer side?

Yeah. We're seeing -- just on a -- yeah. I think, specifically in flexibles, Mark we'll -- I think we'll see a sequential quarter two to quarter three pickup confection. And as Howard mentioned in his earlier comments, it was down significantly in Q2 and it will be down versus Q3 last year as we roll into Q3, but we'll see some sequential improvement. Also in flexibles, we're seeing sequential improvement in the foodservice area as well. We are seeing some moderation in plastics and frozen food trays as you would expect. And on the other hand, we're seeing a fairly significant pickup in portion control plastic cups. So, we'll see that sequentially. So as Julie said earlier in consumer, we're going to be strong again in the third quarter just not quite as strong as we saw in the second. Display and Packaging we're expecting as we said continued weak volumes into the third quarter. The back-to-school season is obviously going to be impacted by COVID, so we expect lower year-over-year sales there. Promotions are still down. The one area in D&P that's been strong Mark is our pack centers. Oral care and health and beauty have been strong. We expect that to continue in the third quarter and that's just a result of people staying home more and using those products more is what our customers are telling us. So down again quarter-over-quarter, but some sequential improvement into the third quarter versus the second.

Okay. And Howard if I could just -- can you just remind us on the dividend what's the normal time line for the Board review of the dividend. And you've got a very long history of kind of annual increases so just any thoughts around that just in the context of the current environment?

Yeah. Actually, the normal time period would be in our February time frame, but considering the circumstances we are having discussions every Board meeting. As it stands right now while the cash situation looks good we're remaining cautious right now and that's why we held it where it is at this point in time. But I'm sure, the Board will take another look at it in the October time frame and see where we stand at that point.

All right. Very good. I’ll turn it over.

Thank you. Our question comes from the line of Gabe Hajde from Wells Fargo. Your question please.

Yes. Thanks for taking the questions guys. I was curious if you could expand upon any kind of the new investments that you guys have found. A bump in CapEx by $25 million I appreciate it's not huge numbers, but in an environment where a lot of folks are dialing things back, it's good to see you guys have been able to find new opportunities.

Thanks Gabe. Frankly, we had pulled back on our capital as a lot of folks did and frankly to be conservative, not knowing what we're going into. As we've gone through this quarter and frankly as we look forward we feel like we're going to be okay to pick back up. And for the most part what we're saying is, we're -- and best is bringing back the capital levels where we've got some good projects, good productivity opportunities across the company that would have been deferred into next year. We're in a position to take advantage of those now. So that was the point. I will add though there is one project with the -- related to our Corenso mill that's going to consume somewhere around $5 million of capital to rectify a situation we have there. The remaining $15 million is really targeted because we have the opportunity because we have the cash to put ourselves in a better position going forward from an overall productivity position.

Okay. And the second follow-up, I guess, Julie did I hear you correctly you said price/cost was for the quarter in industrial, a $24 million hit? And then if I look at the bridge for the overall company it was $22 million. So I'm inferring from that. I think $2 million positive elsewhere. I'm assuming most of that was in consumer, where you had falling resins. We've got the $0.04 increase in for June and it seems like they're pushing it for more in July. Is there a risk that we see a price/cost squeeze in the second half in consumer?

So by the way Gabe before -- I'll turn it over to Rodger to give a little more color on our thoughts on resin trends with consumer, but you're exactly right. Consumer was slightly positive price/cost in the second quarter. So you did accurately pick up on my comments. But I'll turn it over to Rodger for a little more color on price/cost in consumer going forward.

Yes Gabe, you covered it. We have seen some slight increases starting across most resin categories. We've covered that in our guidance. We have -- as you know we've got quarterly price change mechanisms, so whatever we don't pick up in the third quarter we would pick up in the fourth. So I don't see anything there that's significant that we've not covered in the guidance. But we are as you said starting to see all resin come off the bottom and start to accelerate into the second half of the year.

Thank you.

Thank you. Our next question comes from the line of Adam Josephson from KeyBanc. Your question please.

Thanks, good morning everyone. Hope you and your families are well. Howard on demand, would you mind just going through the cadence of volume trends in the quarter? I assume that April was good just you had the remnants of the panic buying that really started in March. Can you just talk us through how trends varied across the company through the quarter? And then how July compared to what you saw in 2Q on average? I know volume/mix was down 7% in 2Q. I'm just wondering if July was comparable much better than that. And then within your 3Q guidance, what kind of decline you're assuming in volume/mix compared to the down 7-ish in 2Q?

Sure. And Adam I'm assuming -- you mentioned July I'm assuming you mean June. But yes, the quarter kind of played out exactly as we expected. The consumer side of the business really did ramp up sequentially April, May, June. I guess the surprise in the quarter is April was relatively strong in industrial and then we just saw it completely fall off in May and a slight uptick, but basically it's leveled off as we entered into June. On the Display and Packaging side similarly it basically -- May -- look if I boil it all down, May across the board is where we saw the heavy drop with some improvement into June, certainly not to the levels that we would like to have seen. But as we look into going into Q3 basically what we've modeled out is, we think that as things open up that our consumer side of the business there'll be less assumption at home and our consumer side of the business will be down from Q3, but certainly up from -- excuse me Q2, but up from -- well up from say prior year. Display and Packaging, we see it somewhat more of the same Q2 to Q3. Industrial similarly -- well basically the same Q2 to Q3 but different moving pieces that I mentioned earlier that we see some improvement say in North America and a slower type recovery in Europe particularly with August coming into play. The big jump that we see going into this quarter is on the Protective side of the business for the automotive the appliance sector even on the ThermoSafe side of the business with the virus shipments etcetera that's where we see the strongest pickup going into Q3.

I really appreciate that Howard. Just two more for me. One on OCC, so obviously prices went down quite a bit in June and July after having spiked earlier in the year as a bunch of mills were taking downtime in May and June. We just got the box data for June it was up quite substantially. So I guess the mills that had stopped buying in May and June are buying again now to -- now that they've sold out of much of their inventory. Are you expecting OCC to firm up here as the mill start buying OCC again? And what do you think will happen as the rest of the year progresses along those lines?

I think the operable word is firm up. That is what we expect. We're sitting at about $70 right now and that's what we're modeling out at this point in time. So that's about as good as I can get you Adam. We think the balance is there. Maybe we could see another $10, but right now, our models are holding at that $70 range.

Yes. No, I -- understood. And then just last one, Howard. I know you're not giving full year guidance, but just if you could give me any kind of direction here. So you're assuming flattish earnings sequentially in 3Q. Normally, there's a pretty big drop off 3Q to 4Q, just for seasonality reasons. I know this year is an exceptionally unusual one. Would you help us think about just the seasonality of earnings much differently this year than in most previous years just given how bad 2Q and 3Q will have been this year compared to previous years?

Adam, I would only be speculating, but there's got to be -- we have to really see how Q3 plays out. Maybe there's a much stronger recovery than we're anticipating. If not does that leave a situation where there's a very large pent-up demand going into Q4 and we see a very unusual, very good Q4. I just don't know how to play that out. And really it's -- but that could be a scenario.

Yeah. Thanks so much, Howard.

Thank you. Our next question comes from the line of Ghansham Panjabi from Baird. Your question please.

Thank you, and good morning, everybody.

Good morning.

Good morning.

For your consumer segment and specific to 2Q, can you just help us bridge the operating profit increase on a year-over-year basis? I mean, sales up 2%, EBITDA up just under 40%. I assume part of that is just higher fixed cost absorption and you mentioned productivity et cetera, but just give us more color on that?

Yes. First off in consumer segment and in total do remember that in our plastics side of the business, we do carry our industrial portion of our industrial plastics does show up and report out in consumer. So in total I think if you will reconcile that, we're probably rather than a two percentage type growth rate, it's more like 4% if you pull that industrial piece out of there. But fair enough question good mix, good productivity. And Julie's pointing at me, it looks like she's got some even more detail. So Julie, would you please?

I'd be more than happy to. Yes, I just wanted to provide a little more color to again what Howard said and what I've mentioned already. But definitely, strong productivity was the biggest single contributor to the consumer segment. And that was really mostly like the total company split between purchasing and fixed costs. But again to some of the points about strong volumes in global Rigid Containers, their manufacturing productivity was good as well, because that throughput is very effective, very productive, when it comes to profitability. So just really nice all around productivity for consumer. We mentioned higher volumes that had a pretty normal drop-through to operating profit, a little bit of price/cost positive impact and that's really -- those are the three main drivers there to the operating profit margins in consumer.

Okay. And then in terms of your comments on 3Q and obviously a modest moderation or -- I can't remember the exact words you used. But a lot of the food companies that reported thus far are still talking about outsized point of sales growth at the retail level and very low inventories in the channel. So do you expect a continuation of that? I mean, is it fair to assume that it will be a multi-quarter sort of continuation in terms of the volume dynamic there?

Ghansham actually, we have tempered down the consumer side going into Q3 based on our customers and what they're telling us that it will still be very strong. It just won't be as -- going back to my earlier comments where those segments such as dough et cetera were just absolutely through the roof they'll still be strong, but we don't feel like they're going to be a strong as we saw in Q2, unless we see a reversal in this opening up of the country and it looks like we may be heading in that direction. And if that's the case, we certainly would expect that our consumer results would then start looking more like Q2. And on the flip side of that, you could expect that maybe the automotive and other sectors would be down. I guess the point here is that whichever way we go, we feel like the balance of the portfolio if we're right in how we've modeled it, it will be what it is. If we're wrong and there's more of a shutdown in closures within the economy, we will be right again, but for different reasons.

Sure. And just one final one Howard. For the Protective segment specifically for 3Q, just given that autos are ramping back up and your comments on ThermoSafe, is it likely in your view that margins could actually be comparable to last year on the third quarter?

Yes. I would think so. I think automotive is probably the end of the last month we're up to about 80% in terms of...

Capacity.

That's right capacity. So, yes. Yes, Ghansham, if you look at the mix of that segment for our guidance, the answer is yes, it could be.

Yeah. Thanks so much guys.

Thank you. Our next question comes from the line of Brian Maguire from Goldman Sachs. Your question please.

Hey, good morning. Thanks for fitting me in. I just wanted to ask on how the TEQ acquisition has been performing now that you've owned it for a couple of months. And then sort of a related question just on your outlook for M&A, how is the pipeline looking? Are you able to kind of get out there and do due diligence on deals given travel restrictions? Or to I guess kind of take a moratorium on thinking about acquisitions for the time being?

Thanks, Brian. Yes, first off, we're very pleased with how TEQ is onboarded and how they've performed. I will say they are -- they have been impacted by the COVID situation. A portion of the business is obviously related to -- maybe not obviously, but is related to elective surgeries and so negatively impacted as we all are aware that the demand in that area certainly has fallen. But performance in general, we're very pleased again with the integration. The -- we've just finished and are -- Rodger I think about the finished installation of the ear protective coverings for thermometers. I think we're producing somewhere about 1.5 billion units right now. We're adding 1 billion units of incremental capacity. So, look, as things open back up, as these investments come into play and as the team has culturally on-boarded very well, we're very bullish about the go-forward with TEQ. On M&A, we're still working it. To your point, yes. I mean, there are some issues not so much around the due diligence side of things. But we've got several call it bolt-ons that hopefully, we'll be talking about in the relatively near future. And I'd say the same thing relates to our divestiture activities that we've been talking about for some time now. So we're still moving.

Okay. That's great. And then one more for me. Just I think we talked a lot about inter-quarter trends and trends in early July. Just wondering, if you could give your estimate on where inventories sit both for yourself and at the customer level? Are we -- did people run things down hard during the downturn and we might see a snapback here? Or do you think inventories are kind of at normal levels?

I'd say, we're fairly -- we drew some inventory down, as I noted in the opening commentary with downtime on the paper side of the business but we don't really see any real issues and/or opportunities as it relates in that regard.

Okay. Thanks very much.

Thanks, Brian.

Thank you. Our next question is a follow-up from the line of George Staphos from Bank of America. Your question, please.

Thanks very much. Thanks for taking the follow-on, guys. Howard I wonder if you -- wondered if you could update us a bit on the operational issues and the progress you're seeing with the Perimeter of the Store business. You mentioned again, the issues on the West Coast. What's going right? What's going maybe less well than you'd like? What needs to be fixed from here for that business to be what you had expected when it was acquired? And relatedly, how integral is it to the overall consumer strategy for Sonoco products? And then my second question and piggybacking a little bit on Brian's question, you had mentioned that you're obviously seeing a pickup in materials for things like thermometers, thermometer covers. Are there any other truly direct benefits you're getting from COVID on your health care packaging business? If you had mentioned them earlier, I apologize, I missed them. If you could just remind us what you're seeing. Thanks and good luck in the quarter.

Thanks, George. Let me answer your second question and I'll allow Rodger to talk about the operational issues. But on the pickup side, outside of the consumer side, I think we're somewhat pent-up right now on the ThermoSafe business. We're expecting -- what we're hearing is anywhere from 20% to 30% increase in terms of the amount of vaccines, normal vaccines that will be shipped this season. That has been delayed. We were hoping to see that happen towards the end of the second quarter, it's been delayed, as I guess the government has said, they're worried first and foremost that we flood the market, people get the vaccine too soon and it's not effective later in the flu season. But also in terms of West side shippers, et cetera. So there's a lot of work. So we expect to see a pretty good surge going forward not so much in this past quarter. I'll let Rodger talk through the operational side of things on the Perimeter of the Store if you don't mind.

No. Hi, George. I think I mentioned last quarter, maybe the quarter before that we have made some fairly significant capital investments in Perimeter of the Store operations on the West Coast in both equipment and tooling. We're seeing that pay off. So if you look at year-over-year, our output our uptime have improved. So I'd say, that's the positive. Frankly, we struggled in our Mexico operation in Guadalajara. It's a number of issues primarily around leadership and we're dealing with that and some other market issues. And then frankly, the West Coast, as I mentioned before is very competitive. Our East Coast operations are performing extremely well up to expectations in the marketplace. The West Coast is much more competitive including some imports from Asia. So it's really a combination of all that. As far as how integral it is to our consumer businesses, there's a minor connection to our flexible business. We're working on some membrane closures for produce. We're making good progress there. So there's a connection there to our other businesses. We're seeing good growth in the ag business. Beyond that -- it's a growth target for us, but beyond that other than some resin purchasing synergies, there's not a -- more a connection, but that's the connection that we saw when we acquired those businesses.

Thank you, Roger. Appreciate it.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Roger Schrum for any further remarks.

Well, again, thank you very much Jonathan and thank everyone for their time today. And as always, appreciate your interest in the company. If you have any further comments, please don't hesitate to give us a call. Thank you for your interest.

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.