Sonoco Products Company

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2020 Sunoco earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Roger Shrum, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Josh, and good morning, everyone, and welcome to Sunoco's third quarter investor conference call. Joining me today is Howard Coker, 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 website at sunoco.com. In addition, we will reference a presentation on our third quarter results, which also is 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 websites. Now, with that introduction, I'll turn it over to Julie.

Thanks, Roger. I'll begin on slide three, where you see that earlier this morning, we reported third quarter earnings per share on a gap basis of 82 cents and base earnings of 86 cents per share, which is above our guidance range of 73 to 83 cents per share. Due to the negative impact from COVID-19, this 86 cents of base EPS is well below the 97 cents that we delivered in the third quarter of last year. At a high level, our third quarter 2020 earnings reflected mixed demand for our diversified products and negative price costs in our industrial segment. Partially offsetting these headwinds was very strong productivity driven across our business. Our third quarter base earnings were above our expectations primarily due to better operating performance in certain businesses, most notable or integrated industrial North America, as well as our protective solutions and display and packaging segments. I'll highlight that certain important aspects of our business performed in line with our expectations, including our consumer results and the price-cost impact in industrial. In terms of the 4 cent difference between base and GAAP EPS, 18 cents is due to restructuring activities and 6 cents relates to non-operating pension costs. These non-base expenses were partially offset by a non-base income tax gain of 20 cents driven by a deferred tax write-down related to the pending sale of our D&P Europe business. I would like to highlight that of the $24 million of pre-tax restructuring expense, almost $20 million is non-cash and includes nearly $15 million of non-cash charges related to actions we're taking in our perimeter of store business. Howard will be talking more about this during his comments today. I'll add that, as you can see, we did not exclude any COVID-19-related P&L items from our base earnings. During the third quarter, we incurred approximately $3.5 million of costs directly related to coronavirus, including purchasing protective gear, cleaning our facilities, and paying employees who are in quarantine for work-related reasons. Now, looking briefly at our base income statement on slide four, and starting with the top line, you see that sales were $1,312,000,000, down $42 million from the prior year period. I'll review more details about our key sales drivers on that bridge in just a moment. Gross profit was $257 million, $8 million below the prior year period. Despite the reduction in sales, we maintained our gross profit as a percent of sales at 19.6%. SG&A expenses, net of other income, were $126 million in unchanged year-over-year. Lower expenses tied to COVID, such as travel and group medical, were offset by health and safety costs incurred for the pandemic, strategic spend on technology applications, as well as the addition of acquisitions. Also, we had almost $5 million of unique other income items in last year's third quarter, that did not repeat this year, all thus resulting in operating profit of $131 million, which is $8 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 $4 million higher than last year due to the actions we've taken this year to strengthen our liquidity position by temporarily holding more cash in lieu of debt repayment. Income tax expense of $27 million was $1 million lower than last year, driven by a combination of lower pre-tax profits offset with a higher effective tax rate. Our third quarter 2020 effective tax rate of 24.1% was 180 basis points higher than the prior year period prior your quarter, due primarily to various discrete items. So moving down to net income, our third quarter 2020 base earnings were $87 million, or 86 cents per share. And looking at the sales bridge on slide five, you see volume mix was lower by $54 million, or 4% for the company as a whole. I'll highlight that while our third quarter volumes remained challenged due to COVID-19, the year-over-year volume decline was a meaningful improvement from the 6.9% decline in the second quarter. This improvement reflects quarterly sequential demand increases in each of the protective solutions, display and packaging, and industrial segments. Consumer packaging segment quarterly volume was down $1 million from the prior year, or 30 basis points. We did have nice growth in global rigid paper containers, which saw volumes increase by 2.3%, including 3% higher demand in North America. Within plastics, the prepared and specialty foods market had very strong volume growth at almost 16%, but this was offset by significant weakness in the industrial end-use market. Our flexible business saw a continued negative pandemic impact on demand in the confection market due to reduced foot traffic in convenience stores and other venues, as well as lower seasonal Halloween volume. I'll highlight that when we remove the weak volume in our industrial plastics business, our third quarter consumer segment volumes actually grew by 1%. Display and packaging volume was below last year, down $9 million, or 6%, due to lower demand in domestic displays, paper amenities, and retail security packaging. Volume in paper and industrial converted products was down $41 million, or just over 8%. due to weak volumes in our global paper mill network, as well as across our tubes, cores, and cone operations. I'll note that this volume decline, however, was a solid sequential improvement over the 10.4% decline that we had in the second quarter. And finally, sales volume in protective solutions was down nearly $3 million, or almost 2%, driven mostly by virus-related demand weakness. Moving over to price, you see that selling prices were lower year over year by $6 million. This was primarily in our consumer segment, largely driven by resin price declines in our plastics and flexibles businesses. Moving to acquisitions, you see an impact on the top line of $30 million from the tech and canned packaging acquisitions in consumer and the corinzo acquisition in our industrial segment. I'll note that Corinzo is included in the acquisitions category for just over one month of the third quarter, since it was acquired in early August of last year. And finally, foreign exchange and other was negative by $12 million, with the largest driver being a $5 million negative impact from foreign exchange translation due to the stronger dollar. And in addition, this includes about $4 million of lower sales from our exit of certain small operations in the consumer segment. 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 $17 million, driven primarily by the industrial segment. Shifting over to price cost, We had $27 million of unfavorable price costs with about half of this due to non-material inflation. Most of the remaining unfavorable change occurred in our industrial segment 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 you'll see that Southeast OCC prices averaged $70 per ton in the third quarter, which although down from the second quarter of this year, was double the $35 per ton average in last year's third quarter. Moving to acquisitions, you see that our corinzo, tech, and canned packaging acquisitions contributed $2 million to our third quarter earnings. Next is the impact of productivity. where you see that our total productivity was a strong $40 million year over year. We had solid execution across our productivity levers in materials, shop floor execution, as well as fixed costs, all due to a combination of deliberate cost controls and restructuring benefits. And finally, the change in other was unfavorable by $6 million with various moving pieces. Moving to slide seven, you'll find our segment analysis, where you see that consumer packaging sales were up 40 basis points, driven by the addition of tech and canned packaging, partially offset with a slightly weaker demand, lower prices tied to resin, the exit of certain small operations, and negative foreign exchange translation. Consumer segment operating profits increased by almost 20%, primarily driven by strong productivity. Our consumer segment margin increased to 11.6% versus the 9.8% in the third quarter of last year. Display and packaging sales were down almost 5%, mostly due to lower demand. Operating profit, however, was up almost 21%, and margins improved by 170 basis points to 7.8%. The negative earnings impact from the lower demand was more than offset by fixed-cost productivity. Our industrial segment sales fell by over 7%, primarily due to the weak global volumes. Industrial's operating profit declined by 42%. This was a direct result of the significant drop in demand, as well as the much higher OCC market pricing relative to the third quarter of last year. These headwinds were somewhat offset by solid improvements in productivity. The industrial segment's operating profit as a percent of sales was 7.5%, a nice sequential improvement over 6.9% in the second quarter, but lower than the very strong 12% in the third quarter of last year. And finally, although protective solution sales were flat year over year, operating profit increased by 25% due to strong productivity. This segment's margins improved to 13.3% from the prior year's quarter of 10.6%. So for the total company, sales were down approximately 3%, and operating profit margins declined slightly to 9.9%. Moving to cash flow in slide 8, Our year-to-date third quarter 2020 operating cash flow was $490 million, compared with $239 million in the same period of last year, an increase of $251 million. The largest driver to this increase was the $200 million of voluntary pension contributions, which did reduce last year's operating cash flow. Midway down the slide, you see that our current year-to-date increase in net working capital of $16 million was $26 million lower than the increase in the third quarter of last year. Overall, our working capital management has been very solid this year, despite the challenging business environment. Moving on to free cash flow, which we define as operating cash flow less net capex and dividends. Our free cash flow through the first nine months of this year was $252 million, an increase of $284 million over the same period of 2019. Excluding the voluntary pension contributions made last year, free cash flow improved by $84 million year over year. Net CapEx spending was $108 million year-to-date, a reduction of $36 million compared to the same period of last year. And finally, our cash dividends paid year-to-date were $129 million compared to $127 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 earlier this year in response to the pandemic. Our third quarter 2020 consolidated cash balance of $783 million includes $578 million held in short-term investments that are very liquid and of high credit quality. Moving on to our debt balances, our consolidated debt totaled $2.14 billion at the end of the third quarter, a decrease of $129 million from the second quarter. These changes in our cash and debt balances during the third quarter reflect debt repayments, the canned packaging acquisition, and our very strong third quarter cash flow generation. Moving to slide 10, you find our base earnings per share guidance, which is 70 to 80 cents per share for the fourth quarter and $3.29 to $3.39 per share for the full year. This range continues to reflect the ongoing uncertainties regarding the challenging macroeconomic conditions stemming from the COVID-19 pandemic. You'll also see that we're expecting our full year 2020 operating cash flow to be in a range of $643 to $663 million, and free cash flow to be between $290 and $310 million. Specific to free cash flow, This updated full-year outlook is a solid $40 million improvement over our original guidance provided in February of this year. Turning to slide 11, I'll cover some of the key assumptions and circumstances impacting our fourth quarter base earning guidance. Related to demand, and first 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 fourth quarter of last year. In addition, our outlook assumes a typical seasonal year-end slowdown in some of our businesses, such as protective solutions and display and packaging. Howard will provide more comments about our fourth quarter demand outlook in a few minutes. Also, we'll continue our focus on controllable cost reductions in areas such as travel. and we expect to continue driving strong productivity results, although we don't expect our fourth quarter productivity contribution to be as strong as the third quarter. Moving to our price-cost expectations for the fourth quarter, while we forecast that OCC prices will remain stable in the near term, we do expect our industrial segment to have a negative impact price-cost relationship compared to the fourth quarter of last year. We expect this negative earnings impact to be similar to what we experienced in this year's third quarter. Specific to certain non-operational earnings assumptions, we've assumed a third quarter tax rate of 24.8%, which is 160 basis points higher than our 23.2% tax rate last year. Also, our interest expense will be higher than in the fourth quarter of 2019 due to our increased debt balances that I mentioned a few minutes ago. These two non-operational items combine for an expected three to five cent headwind versus the fourth quarter of last year. And finally, related to our M&A activity, our fourth quarter guidance includes tech, can packaging, and display and packaging Europe. So while we expect the D&P Europe divestiture to close during the fourth quarter, we don't know the exact timing, so we've kept the results in our guidance. This business is expected to contribute about a penny of EPS per month during the fourth quarter. On slide 12, you see the key assumptions underlying our full-year cash flow outlook, and I'll highlight a few of these. We do continue to take advantage of government assistance programs around the world, with most of the impact being here in the U.S. For full year 2020, we expect these programs to provide us with approximately $35 million of positive cash flow, and around $25 million has already been recognized through the third quarter. I will note that most of this cash flow impact will reverse in the next couple of years. Next, We've adjusted our 2020 CapEx spending outlook to $180 million from the $195 million we mentioned in July. This outlook continues to include $15 to $20 million of capital for Project Horizon, and Howard will discuss this strategic project more in his comments. We also still plan to defer our voluntary U.S. pension contribution, estimated at approximately $150 million, and related to the termination process into 2021, but we do have a related $37 million cash tax benefit this year. And finally, as you see on slide 13, our current liquidity position is very strong. It was approximately $1.3 billion at the end of the third quarter. This was composed of the $783 million of cash and short-term investments that I just mentioned a few minutes ago, as well as our $500 million revolver availability. Due to our excellent cash generation and stability of the financial markets, we are using $300 million of our excess cash balances to proactively repay certain bank term loans today as we continue our focus on maintaining an investment-grade balance sheet. So this concludes my review of our third quarter financial results and our outlook for the fourth quarter. So I'll turn it over to Howard.