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.