Sonoco Products Co Q1 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 Sonoco 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. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Roger Schrum, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning everyone and welcome to Sonoco's investor conference call to discuss our first quarter financial results. Joining me today are 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 website at sonoco.com. In addition, we will be referencing a presentation that's focused on our first quarter results, which was also posted on our website this morning. Before we go further, let me remind you that today's call and presentation contains a number of forward-looking statements based on current expectations, estimates, and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties. Therefore, actual results may differ materially. Furthermore, today's presentation includes the use of non-GAAP financial measures, which management believes provides useful information to investors about the company's financial condition and results of operations. Further information about the company's use of non-GAAP financial measures, including definitions as well as reconciliations of those measures to the most closely related GAAP measure, is also available in the Investor Relations section of our website. Now let me turn it over to Howard for some brief comments.

Thanks Roger and good morning everyone. Let me start by simply saying, thank you to our entire Sonoco team. I can't really come close to expressing how much we appreciate the great work all of our associates are doing during these unprecedented times. The stories we are hearing from around the world about the extraordinary efforts our people are executing to meet the critical needs of our customers are truly humbling. Our team's efforts on controlling what is vitally important, including the health and safety of our people, the quality of our products, productivity improvements and cost management led to an outstanding first quarter. I would also point out that our balanced mix of consumer and industrial businesses performed extremely well during the quarter as we had strong results across many of our businesses, particularly in the month of March which we believe was largely attributable to consumer spending more time at home. That said, the pandemic's impact is clearly starting to weigh on some of our served markets as we enter the second quarter. Also, the unprecedented increases in recycled fiber costs will have a significant negative impact on our second quarter results which we, of course, will eventually recover. July will go through all of these results and our guidance in a minute. Because Sonoco is a global company with more than 320 operations in 36 countries, we have been experiencing the realities of the virus outbreak since it was first reported in China in January. As the virus spread throughout Asia into Europe, the Americas and now across the globe, we have been working with our team to protect and help our associates meet the critical needs of our customers and where we can, contribute to our communities to help drive increased testing and assist healthcare workers. Throughout the globe, Sonoco is an essential service provider of consumer, industrial and medical packaging. Eighty percent of our consumer packaging sales are linked to food products where we are being called on to meet an increased demand from consumers who are having to stay at home. Our paper operations in the U.S. and Canada produced over 200,000 tons of uncoated recycled paperboard which is used to wind toilet paper and other tissue and towel hygiene products. Our global tubes and cores operations play a key role in servicing the food, hygienic, medical and textile industries. We also produce flexible and thermoformed medical packaging and our ThermoSafe division provides temperature-assured packaging for critically needed virus testing and transportation of life-saving vaccines and other drugs. Throughout this crisis, our associates have rallied to meet our customers' calls for help during the pandemic. Recently, our Alloyd division received an urgent call from a medical customer to see if we could use our unique digital printing and laser scoring capabilities to produce plastic face shields to be used by medical providers and first responders. Our Alloyd team was able to deliver these much-needed supplies under very tight timelines. In addition, we are trying to help out where we can in our local communities. We donated hundreds of safety glasses and other protective gear to our local medical center here to keep nurses and medical staff safe as they treat patients. These are just a few of the efforts which illustrate how our team is impacting lives around the world and we couldn't be more proud of their efforts. With that, Julie, why don't you take us through the first quarter numbers and I will come back to discuss our recently announced project horizon machine conversion and conclude with some color on what we are seeing entering the second quarter.

Absolutely. Thanks, Howard. I will begin on slide six we issued earlier this morning. We recorded first quarter earnings per share on a GAAP basis of $0.80 and base earnings of $0.94 per share which is above our guidance range of $0.83 to $0.89 per share. This $0.94 of base earnings per share is above the $0.85 of base EPS that we delivered in the first quarter of last year. At a high level, our first quarter 2020 earnings were impacted by overall lower demand which was more than offset by strong productivity, spread among various categories of fixed and variable costs. In terms of the $0.14 difference between base and GAAP earnings per share, the primary drivers were $0.09 due to restructuring activities and $0.06 related to non-operating pension costs. Now looking briefly at our base income statement on slide seven and starting with the topline, you will see that sales were $1,303 million, down $48 million from the prior year period. Gross profit was $267 million, $4 million below the prior year quarter as our gross profit as a percent of sales was a very strong 20.5%. SG&A expenses of $123 million were favorable year-over-year by $19 million, driven primarily by cost reductions across the business which more than offset the addition of SG&A from acquisitions. All of this resulted in operating profit of $144 million which is $16 million above last year. Our first quarter operating profit as a percent of sales was 11%, a solid 150 basis point improvement over the first quarter of 2019. Net interest expense of $16 million was $1 million higher than last year due to higher average debt balances but mostly offset by lower interest rates on our floating rate debt. Moving to net income, our first quarter 2020 base earnings were $95 million or $0.94 per share. Our first quarter effective tax rate of 26% was 190 basis points higher than the prior year quarter due primarily to various discrete items. So moving down to net income, our first quarter 2020 base earnings were $95 million or $0.94 per share. I will add that first quarter OPBDA margins improved by 200 basis points to 15.8%, versus the 13.8% in the first quarter of last year. Now looking at the sales bridge on slide eight, you see that volume was lower by $36 million or 2.6% for the company as a whole.

I will let Julie cover more detail. But as we look at Q1, really the cost controls, this was what we do. We have been looking at our overall cost for really, we are always challenging ourselves. So a lot of what we are seeing in Q1 were activities that we put in place through the second half of last year. As it relates to the go forward, we have a lot of activity going on.

Hi everyone. Good morning. Howard, thanks to everyone at Sonoco for the efforts with the pandemic. I had a question on the cost controls. When did they go into place? And what do you expect to be able to generate from these cost reductions and productivity on an ongoing basis? And relatedly, how volume dependent are they? And then I had a couple of follow-ons.

Yes. I will let Julie cover more detail. But as we look at Q1, really the cost controls, this was what we do. We have been looking at our overall cost for really, we are always challenging ourselves.

When we look at the second quarter, you obviously have several pieces of this. You have got the continued benefit from permanent cost take out in our organization.

If you turn to slide 15, I want to spend a few minutes talking about Project Horizon which is what we are calling a new $83 million capital investment over the next several years that will significantly lower our uncoated recycled paperboard mill operating costs in the U.S. and Canada.

Yes. Thank you Howard. Mark, I will just give a few examples here. You go back to 2008, 2009, our industrial drop was about 17% from a volume standpoint in the depth of the recession. So if you look at the U.S. in the second quarter, what we are modeling are low double-digit type declines driven primarily by you know, we see the global textile market off 30% to 40% in the quarter.

Howard, I wondered, just to start off, if you can give us any sense of the type of volume we might expect in the industrial business in the second quarter? I think that's typically the most cyclical piece.

Yes. I will tell you what, Mark, I have got, as you know, Rodger Fuller here. And I think he can give you some pretty detailed color on that. What I will say is if we look at where we were in 2008 and 2009, the mix of businesses has changed. So from a macro perspective and again, I will let Rodger get into more detail. We are not looking at a similar type trough as we saw back in 2008 and 2009.

That's perfect, Rodger. I wondered, could you also give us a sense of what the bounce back has been to date in China?

Yes. I would say, we were down to, we are probably now at like to sell on average of 60% capacity across our and this is the industrial. If you look at consumer, we have been fine. But in industrial, I think we are running at something like 60% capacity.

So late in the call, but I am largely good. But this COVID crisis seems like the blackest of black swans. So compared to 2008, did you have time to even prepare? You had a long detonator fuse in 2008. And what lessons are you applying in the current environment?

You know, one of the things we did early is go back to 2008, 2009 as we talk about our liquidity, obviously our cash balance, the impact it had on various sectors. And as we modeled out into Q2, we try to look at what did we see in 2008 and 2009 by market and by segment and then carry that over to, we are a different company today from a mix perspective.

Thank you again. Let me thank each of you for joining us today. We appreciate your interest in the company. And as always if you have any further questions, please don't hesitate to contact us. Thank you again.