Sonoco Products Company

Ladies and gentlemen, thank you for standing by and welcome to the second quarter 2020 Sunoco Earnings Conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. 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 Sunoco's investor conference call to discuss our second quarter financial results. Joining me today is Howard Kolker, President and Chief Executive Officer, Roger 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 sunoco.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'll 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, the 79 cents of base earnings per share is well below the 95 cents 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 24-cent difference between base and GAAP EPS, 16 cents is due to restructuring activities, 5 cents 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 top line, you see that sales were $1,245,000,000. 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. Growth 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 and employee medical. all thus resulting in operating profit of $127 million, which is $18 million below last year. I'll discuss the key drivers on the operating profit bridge in a few minutes. Net interest expense of $19 million was $3 million higher than last year due to the actions we have taken to significantly strengthen our liquidity position by temporarily holding more cash in lieu of debt repayment. The primary driver to our higher debt balance this year is the new $600 million of 10-year bonds that we issued in April. Income tax expense of $29 million was $4 million lower than last year, driven by a combination of lower pre-tax profits and a higher effective tax rate. Our second quarter 2020 effective tax rate of 26.6%, was 110 basis points higher than the prior year quarter due primarily to changes in mix of our non-U.S. earnings. So moving down to net income, our second quarter 2020 base earnings were $80 million, or 79 cents per share. I'll add that our second quarter 2020 OpenDAO margins improved by 20 basis points to 15.1% versus last year's 14.9%, despite the broad economic challenges. Now, looking at the sales bridge on slide five, you see that volume was lower by $94 million, or almost 7% for the company as a whole. Since Howard will provide more color on our segment volume trends in his comments, I'll just provide high-level information now. Consumer packaging segment volume was up $14 million, or almost 2.5%. The most notable growth was in global rigid paper containers, which saw volumes grow by approximately 8%. However, this strong growth was muted by very weak volumes in the industrial end-use market within our plastics business. Display and packaging volume was well below last year, down $19 million, or almost 14%, due to low demand in domestic displays, paper amenities, and retail security packaging. Volume in paper and industrial converted products was down $51 million, or just over 10%, due to weak paper and tube and core volumes globally. as well as much lower demand across our Conatex operations, which was driven by very weak global textile markets. And finally, sales volume in protective solutions was down by $39 million, or almost 30%, driven mostly by virus-related demand weakness for our molded foam automotive products and our consumer fiber packaging for appliances. Moving over to price, you see that selling prices were lower year-over-year by $12 million. This impact was split about 60-40 between our industrial and consumer segments due to lower market indices, with industrial also being negatively impacted by weaker market pricing in certain areas. Moving to acquisitions, you see an impact on the top line of $34 million from the tech acquisition and consumer and the corinzo acquisition in our industrial segment. And finally, foreign exchange and other was negative by $43 million, with the largest driver being a $30 million negative impact from foreign exchange translation due to the stronger U.S.

dollar.

Moving to the operating profit bridge on slide six and starting with volume mix, our lower sales volume combined with the impact of mix had a negative impact on operating profit of $27 million. This net impact is spread among our segments generally in line with the sales volume results that I just reviewed on the sales bridge. Shifting over to price cost, We had $22 million of unfavorable price costs, with half of this due to the net impact of non-material inflation. The balance of this impact is mostly in our industrial segment and is driven by a combination of higher OCC costs and lower market pricing. As usual, there's a slide in the appendix that shows recent OCC price trends, And there you'll see that Southeast OCC prices averaged $100 per ton in the second quarter of this year, compared to a $42 per ton average in last year's second quarter, as well as a $42 per ton average in the first quarter of this year. Moving to acquisitions, you see that our Corrinzo and Tech acquisitions added $2 million to our second quarter 2020 operating profits. Next is the impact of total productivity, where you see that our total productivity benefit was a strong $27 million year over year. The main contributors to this positive impact were procurement and SG&A cost productivity. And finally, the change in other was favorable by $3 million with various moving pieces, but mostly in SG&A. Moving to slide seven, you'll find our segment analysis where you see that consumer packaging sales were up 2% with solid volume growth coupled with the addition of tech. These were reduced by our exit of a forming films operation in flexibles, negative foreign exchange translation impact from the stronger dollar, as well as lower pricing due to a much lower resin market. Consumer segment operating profits increased by almost 37% on the surge in global rigid paper container demand and strong productivity. Our consumer segment margin increased to 14% versus the second quarter of last year when the margin was 10.4%. Display and packaging sales were down just over 20%. primarily due to weak demand and the negative FX translation impact. Operating profit, however, was up almost 2%, and margins improved by 120 basis points to 5.6%. The earnings impact from lower demand was more than offset by cost reductions and strong earnings performance in our tax center operations versus last second quarter. Our industrial segment sales fell by nearly 12%, mostly due to volume declining by 10%, but also due to weakening market pricing and negative FX translation, all partially reduced by the addition of the Corinzo acquisition. Industrial operating profits fell by 51%. The weak earnings this quarter were a direct result of the significant drop in worldwide demand, weakening global market pricing, as well as the dramatic OCC price increase during the second quarter of this year, with some offset from the Corinto acquisition, as well as solid productivity. The industrial segment's operating profit was 6.9%, compared to 12.5% in the second quarter of last year. Protected solutions sales were down nearly 32% due to the significant decrease in demand due to COVID-19 across all three businesses in this segment. Operating profit declined by almost 69% due to the lower demand and associated deleveraging of these operations. This segment's margins declined to 5% from the prior year's quarter of 10.9%. For the total company, sales were down 8.4%, and operating profit declined by over 12%, resulting in a company-wide operating margin of 10.2%. This was a 50 basis point decline from last year's second quarter. Now moving to cash flow on slide eight, our year-to-date second quarter 2020 operating cash flow was $281 million, compared with $40 million in the same period of last year, an increase of $241 million. The largest driver to this increase is the $175 million after-tax pension contribution that reduced last year's operating cash flow. Midway down the slide, you see that our working capital balances increased during the first half of 2020 by $28 million, However, this was $38 million lower than the increase in the first half of last year. This was the result of improvements in both accounts receivable and accounts payable, partially offset by higher inventory. Next, looking at the change in tax accounts, you see that this year we had $17 million of higher cash flow in this area. This was driven by our utilization of certain government assistance programs in the U.S. Moving down to free cash flow, which we define as operating cash flow, less net, CapEx, and dividends, our free cash flow for the first half of this year was $123 million, an increase of $268 million over the same period of 2019. Excluding the $175 million pension contribution last year, free cash flow improved by $93 million year-over-year. Net capex spending was $72 million year-to-date, a reduction of $29 million compared to the same period last year. And finally, our cash dividends paid in the first half of this year were $86 million and compared to $84 million in the prior year period. On slide nine, you see that our balance sheet is extremely strong and reflects the cash and debt positioning we did in April of this year. Our second quarter 2020 consolidated cash balance of $857 million includes approximately $715 million of cash that we consider to be excess that is held in short-term investments that are very liquid and, of course, of high credit quality. Moving on to our debt balances, our consolidated debt totaled $2.26 billion at the end of the second quarter this year, an increase of $625 million from the first quarter. The main driver to this increase was the $600 million of 10-year notes that we issued in April. Now moving to slide 10. you find our base earnings per share guidance for the third quarter, which is 73 to 83 cents per share. This wide range reflects ongoing uncertainties regarding the challenging macroeconomic conditions stemming from the COVID-19 pandemic. Turning to slide 11, I'll now provide some additional comments about the key assumptions for our third 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 third quarter of last year. Howard will provide more comments about the expected impact on our businesses in a few minutes. Also, we will continue our focus on controllable cost reductions in areas such as travel, and we expect certain other costs, like employee medical expense, to continue at lower levels due to COVID-19. Our outlook for third quarter SG&A expense as a percent of sales is similar to our actual results for the second quarter of this year. Moving to our price cost expectations for the third quarter, While we forecast that OCC prices will stabilize in the near term, we do expect our industrial segment to have a negative price-cost relationship compared to the third quarter of last year. Having said that, we expect this negative earnings impact to be about half of what we experienced in the second quarter of this year. And finally, specific to certain non-operational earnings assumptions, we have assumed a third quarter tax rate of 25.5%, which is 320 basis points higher than our 22.3% tax rate last year. Also, our interest expense will be higher than the third quarter of 2019 due to our increased debt balance that I mentioned a few minutes ago. These two non-operational items, plus the anticipated impact from a negative FX translation, to combine for an expected 10 to 12 cent headwind versus the third quarter of 2019. Now shifting to this year's cash flow, we continue to take important actions to generate solid free cash flow this year. As you see on slide 12, we are taking advantage of government assistance programs around the world with most of the impact being here in the US. For full year 2020, We expect these programs to provide us with approximately $35 million of positive cash flow, but I will note that this cash flow impact will reverse in the next couple of years. We also still plan to defer our voluntary U.S. pension contribution, estimated at approximately $150 million, and related to the termination process, delayed into 2021. but we do have a related $37 million cash tax benefit this year. Next, due to our solid cash flow results and the identification of new growth and productivity projects, we have increased our 2020 CAPEX spending outlook to be $195 million from the $170 million that we mentioned in April. This outlook continues to include $15 to $20 million of capital for Project Horizon. And finally, our current liquidity position is extremely strong at approximately $1.3 billion with a combination of cash, short-term investments, and our $500 million revolver availability. I'll note that we are proactively repaying $150 million of our bank term loans early next week as we continue our focus on maintaining an investment-grade balance sheet. This concludes my review of our second quarter financial results and our outlook for the third quarter. So, Howard, I'll turn it over to you.

Thank you, Julie, and good morning, everyone. Let me start by providing an update on the impact of the virus to the companies. 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 Sunoco 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 Sunoco nor our associates or their families have escaped the impact of the virus. While Sunoco 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 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, with hotspots developing in several regions of the United States and throughout Latin America. Results from our diverse portfolio of consumer and industrial-related businesses mirror the current divergent macroeconomic environment. Our consumer packaging segment produced record results due to strong demand for food packaging driven by consumers' stay-at-home eating habits. I'll remind you that 80% of the revenue produced from our consumer packaging segment is for food products, with the rest serving medical and specialty markets such as adhesives and sealants. During the second quarter, we produced record results from our rigid paper containers business, with sales volume up approximately 8% globally. If you look more closely at some of the markets we serve, you'll see volume growth far beyond levels we have ever experienced. For instance, refrigerated dough sales volume was up more than 60% during the quarter in North America and up 33% in Europe as consumers were baking more at home. Juice concentrate, a segment which has been in decline for years, was up 40% in North America, while miscellaneous food products were up 20% and snacks up 8%. We produced good results in our flexible packaging business, where sales volume was up 1% as demand for hard-baked goods and other products grew during the quarter, but offset by decline in gum and candy sales, as consumers stayed away from impulse buys due to travel restrictions. Our plastic business also reflected the current divergent economy, and as demand for prepared and frozen foods grew up significantly during the quarter, these volume gains were offset by declines in industrial products such as plastic spools, reels, cores, etc. Demand for fresh foods such as berries and eggs also improved year over year during the quarter, However, we are still looking through production inefficiencies and our primary store operations on the West Coast. We pointed out in April that we expected the second quarter would be very difficult for our paper and industrial products business due to the pandemic's impact on demand, along with a significant negative price-cost relationship due to rising OCC prices. On the URB side of our business, we saw sales volume growth and a lightweight board growth which serves tissue and tile markets, which were up 14% during the quarter, but this was more than offset by declines in heavyweight board serving our industrial converted markets. We permanently closed our Trent Valley, Ontario mill and the No. 3 machine in Hartsville during the second quarter in an effort to right-size our production capacity and push tons into our lower-cost mills. To reduce inventories, we also took commercial downtime during the quarter, roughly 19,000 tons, and we've ran a fair amount of recycled pulp, particularly from our corrugated medium machine. Total pulp production was approximately 29,000 tons in the quarter. As we enter the quarter, our system is currently running near full, but we expect to have to run recycled pulp to supplement machine demand. Two, the core volume in North America and Europe was down 13% and 7% respectively, as each of our short markets experienced contraction due to the slowdown in graphic paper, textiles, and even film markets, which we feel was more likely timing versus actual demand. Price-cost was extremely negative during the quarter, impacting segment operating profits by $24 million. As OCC prices rose to $125 in May and then eased in June and July, we project, though, that prices will stabilize during the third quarter around the current $70 per ton in the southeast. Protective Solutions experienced a more difficult quarter than we were expecting as the automotive and appliance markets were essentially shut down from the end of March through most of May. Volume in the pharmacy business was also disappointing during the quarter as drug shipments to medical clinics and doctor's offices were impacted by the postponement of non-virus-related treatments. And finally, our display and packaging segments top line declined approximately 20% as domestic display and retail promotion activity declined due to the lockdown of many retail stores during the quarter. However, operating profit in this segment actually improved year over year as our team anticipated the slowdown and aggressively took out costs. Overall, we assume that global economic conditions will gradually improve from second quarter lows, although demand recovery is likely to be tempered by virus hotspots, which could slow the reopening of additional business activity. On slide 13 of our presentation, we again show what we believe will be the impact of the continuing pandemic recession on our short markets in the third quarter. You see the green box means we expect positive impact, yellow neutral, and red a negative. As we've seen during the first half of the year, we expect our consumer packaging segment to continue to do well in the third quarter, and sales of food packaging should continue to benefit from consumer stay-at-home although volumes may not be as strong as the second quarter. We expect our industrial-related markets to experience weak demand compared to 2019, and our team will remain focused on productivity actions to offset. In addition, our paper and industrial converted product segments should continue facing a negative price-cost relationship during the third quarter due to higher year-over-year fluctuations. fiber costs, and lower market pricing. Our protective solution businesses serving automotive and appliance markets are seeing a gradual reopening of customer factories, and we expect demand to improve during the period. We remain very bullish on our thermo-safe, temperature-assured packaging business, as we expect it will benefit from a strong flu vaccine season and a return to more normal demand from its drug and food customers during the quarter. This business also continues to achieve new business growth, including a significant recent win on the new drug packaging product, which will provide good growth next year. Finally, our display and packaging business is expected to continue face-to-week retail promotional activity, but should partially offset the weakness through continued cost controls. In closing, history has shown that past disruptions of the magnitude of the current virus-induced recession, as painful as they can be, have often boosted Sunoco's resourcefulness, productivity, and innovation. Sunoco remains a financially strong company with solid cash flow. We believe our diverse business mix will remain resilient during these unprecedented times, and we will come out of this crisis as a much stronger company. Now, without operator, would you please review the Q&A procedures?

Certainly. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchstone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of George Staffos from Bank of America. Your question, please.

Thanks very much, everyone. Good morning. Thanks for all the details and all you're doing with COVID-19. 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, 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 the related question is, You noted how over time during recessions and periods like this, Sunoco 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. 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, etc., 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 costs and delivers good productivity. But let me pass that portion of the question for more detail to Julie, if you don't mind.

Yeah, sure. Thanks, Howard, and hi, George. Thanks, 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 split between procurement and, as Howard mentioned, fixed costs or within SG&A. Really from a procurement perspective, You know, 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 kind of ongoing to expect that type of procurement productivity running through the business. I mean, that's in that, you know, $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 from. You know, so then, you know, moving again to SG&A, again, I think we would continue to expect solid productivity in this area. Kind of going forward, having said that, you know, as Howard mentioned, as things return hopefully to normal in the world and the business environment, you know, some of that benefit we're seeing now, you know, I'm sure some of that's going to, you know, kind of, be not as strong as it has been in Q1 and even more so in Q2. And then I guess, you know, our third category 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 de-levered, 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. 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.

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. Appreciate your candor. I guess my follow-on question, 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, you know, next year we're back to normal. How much of that reverses out on S&A, if you had a guess? Thanks, guys.

George, you're somewhat weak. I think what you said was what were the volume trends in the quarter, Q2? No, entering Q3, Howard.

Sorry about that.

Yeah, sure. No problem. You know, the consumer side of the business is – As we enter the quarter, still is relatively strong. If you go into a 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, We actually 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 will 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. You know, I guess what I'd say about going forward, I mean, clearly, you know, 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 services, operations and systems, and we're already seeing some payoffs in that, and we will continue to see payoffs 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 21 and into 22, 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 Wild from Bank of Montreal. Your question, please.

Thank you. Morning, Howard. Morning, Julie. 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 head back to school season and holiday season this year.

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

Yeah, we're seeing this on the – Yeah, I think specifically in flexibles, Mark, I think we'll see a sequential quarter two, quarter three pick up. Confection, as Howard mentioned in his early comments, 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 food service area as well. We are seeing some moderation in plastics and frozen food trays, as you would expect. 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. You know, 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. You know, the one area in the D&P that's been strong, Mark, is our PAC Center's 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. Howard, if I could, can you just remind us on the dividend, what's the normal timeline for the board review of, 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 timeframe, but considering the circumstances, we are having discussions every month. 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 timeframe and see where we stand at that point.

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

Thank you. Our next question comes from the line. Okay. From Wells Fargo. Your question, please. Dave.

Thanks for taking the question, guys. I was curious if you could expand upon any kind of the new investments that you guys have found bumping 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 being able to find new opportunities.

Thanks, Gabe. You know, frankly, we had pulled back on our capital as a lot of folks did. 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 bringing back the capital levels where we've got some good projects, good productivity opportunities across the company that would have been deferred in the 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 related to our Corenzo mill that's going to consume somewhere around $5 million of capital to rectify a situation we had 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 standpoint. Okay.

And the second follow-up, I guess, Julie, did I hear you correct that 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 4 cent increase in for June, and it seems like they're pushing 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 – I'll turn it over to Roger to get 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 Roger for a little more color on price cost and consumer going forward.

Hey, guys, you covered it. We have seen some slight increases starting across most resin categories. We've covered that in our guidance. 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 Jefferson from KeyBank. 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 of volume trends in the quarter. I assume that April was good. You had the remnants of the panic buying that really started in March. 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 X 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 next compared to the down 7-ish and 2Q? Sure.

Adam, I'm assuming you mentioned July. I'm assuming you mean June. 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 and industrial, and then we just saw it completely fall off in May, and slight uptick, but basically it's leveled off as we entered into June. On the display and packaging side, similarly, you know, it basically, 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 will be less consumption 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 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 where the automotive, the appliance sector, even on the pharma-safe side of the business with the virus shipments, et cetera. That's where we see the strongest pickup going into Q3.

I really appreciate that, Ira. Just two more for me. One on OCC, so obviously prices went down quite a bit in June and July, 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 that they've sold out of much of their inventory. Are you expecting OCC to firm up here as the mills start buying OCC again, and what do you think will happen as the rest of the year progresses along those lines?

I think the offerable word is farm 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.

Yeah, I understand. And just last one, Howard. I know you're not giving full-year guidance, but just 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 have us think about just the seasonality of earnings much differently this year than in most previous years, just given how bad 2Q and 3Q were? 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. Just don't know how to play that out, really. But that could be a scenario.

Yeah. Thanks so much, Howard. Thank you. Our next question comes from the line of Guncheng Punjabi from Baird. Your question, please.

Thank you, and good morning, everybody. Good morning. Good morning. You know, 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, you know, sales up 2%, EBIT 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.

Yeah, first off, you know, consumer segment in total, you know, do remember that in our plastic side of the business, we do carry our industrial products. portion of our industrial plastics does show up and report out in consumers. So in total, I think if you were to reconcile that with 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 point, I mean, it looks like she's got some even more detail. So Julie, would you please?

I'd be more than happy to. Yeah, 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 sales. fixed cost, but again, to some of the points about strong volumes and global rigid containers, you know, their manufacturing productivity was good as well because that throughput is very, you know, effective, very productive when it comes to profitability. So just really nice all-around productivity for consumer. You know, 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, you know, obviously it's 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 – Do you expect a continuation of that? Is it fair to assume that it will be a multi-quarter sort of continuation in terms of the volume dynamic there?

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 as 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'll be what it is. If we're wrong and there's more of a shutdown on closures within the economy, we will be right again, but for different reasons.

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

Yeah, I would think so. I think automotive is, well, at the end of last, month for up to about 80% in terms of capacity. So, yes.

Yeah, gosh, if you look at the mix of that segment for our guidance, the answer is yes, it could be.

Good. Yeah, thanks so much, guys. Thank you. Our next question comes from the line of Brian McGuire from Goldman Sachs. Your question, please.

Hey, good morning. Thanks for... Just wanted to ask on how the tech acquisition's 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. You know, how is the pipeline looking? Are you able to kind of get out there and do due diligence on deals given travel restrictions? Or, you know, do we have to kind of take a moratorium on thinking about acquisitions for the time being?

Thanks, Brian. Yeah, first off, we're very pleased with how tech has onboarded and how they've performed. I will say 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. We've just finished, Roger, I think, about to finish the installation of the ear protective coverings for thermometers. I think we're producing somewhere about 1.5 billion units right now. We're adding a billion units of incremental capacity. So, look, you know, as things open back up, as these investments come into play, and as the team has culturally onboarded very well, we're very bullish about the go forward with tech. On M&A, you know, we're still working it, to your point. Yeah, 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 online. Yeah, I think we talked a lot about inner 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, you know, do 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?

You know, I'd say we're fairly, you know, 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 or opportunities that relates in that regard.

Okay. Thanks very much.

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

Thanks very much. Thanks for taking the follow on, guys. Howard, I wondered if you could update us a bit on the operational issues and the progress you're seeing with the perimeter 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 Sunoco products? And then my second question, and piggybacking a little bit on Brian's question, you'd 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 healthcare packing business. If you had mentioned them earlier, I apologize. I missed them. If you could 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 Roger to talk about the operational issues. But on the pickup side... You know, outside of the consumer side, I think we're somewhat pent up right now in 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 what size 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 Roger talk through the operational side of things on the premise of the store, if you don't mind.

George, I think I mentioned last quarter or maybe the quarter before that we have made some fairly significant capital investments in our permanent store operations on the West Coast in both equipment and tooling. We're seeing that pay off. If you look at year over year, our output, our uptime have improved. I'd say that's the positive. Frankly, we've 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 resident purchasing synergies, there's not a moral 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 Shrum 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 at today's conference. This does include the program. You may now disconnect. Good day.