Sonoco Products Co Q2 FY2020 Earnings Call

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. 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 we reported second quarter earnings per share on a GAAP basis of $0.55 and base earnings of $0.79 per share, which falls within our guidance range of $0.73 to $0.83 per share. The significant negative impact from COVID-19 has led to base earnings per share of $0.79, which is below the $0.95 of base EPS from the second quarter of last year. Overall, our second quarter 2020 earnings were affected by mixed demand for our products that negatively impacted earnings, along with price/cost issues in our industrial segment which significantly affected profits. However, we did see strong productivity across our business, which partially offset these challenges. The $0.24 difference between base and GAAP EPS includes $0.16 from restructuring activities, $0.05 related to non-operating pension costs, and $0.03 from various tax items and M&A expenses. Notably, we did not exclude any COVID-19-related items from our base earnings. Looking at our base income statement on slide four, sales were $1.245 billion, a decline of $114 million from the same period last year. I will provide more details about our key sales drivers shortly. Gross profit was $248 million, down $27 million from the prior year. Despite the decline in earnings, our gross profit as a percentage of sales was 19.9%, only a slight decrease from 20.2% in the second quarter of 2019. SG&A expenses were $121 million, which is favorable by $10 million year-over-year due to a strong focus on reducing controllable costs and the pandemic’s impact on expenses like travel and employee medical costs. This resulted in an operating profit of $127 million, which is $18 million lower than last year. I will discuss the key drivers of operating profit shortly. Net interest expense rose to $19 million, an increase of $3 million from last year as we took steps to strengthen our liquidity position by temporarily holding more cash instead of repaying debt. The increase in our debt balance is mainly due to the $600 million of 10-year bonds issued in April. Income tax expense was $29 million, down $4 million from last year, driven by lower pretax profits and a higher effective tax rate. Our effective tax rate for the second quarter of 2020 was 26.6%, which is 110 basis points higher than last year due to changes in the mix of our non-U.S. earnings. Consequently, our base earnings for the second quarter of 2020 were $80 million or $0.79 per share. Additionally, our OPBDA margins improved by 20 basis points to 15.1% compared to 14.9% last year, despite the economic challenges. On slide five, looking at the sales bridge, overall volume decreased by $94 million or nearly 7%. The consumer packaging segment saw volume increase by $14 million or around 2.5%, particularly in global rigid paper containers, which grew by approximately 8%. However, this growth was offset by weak sales in the industrial end-use market within our plastics business. The display and packaging volume dropped by $19 million or almost 14% due to lower demand in domestic displays and retail security packaging. Paper and industrial converted products volume fell $51 million or just over 10% due to weak demand for paper and core tube products, particularly in our Conitex operations, driven by the downturn in global textile markets. Lastly, sales volume in protective solutions decreased by $39 million or almost 30%, mainly due to reduced demand for our molded foam automotive products and consumer fiber packaging for appliances. Regarding prices, selling prices were down year-over-year by $12 million, with impacts split approximately 60-40 between our industrial and consumer segments due to lower market indices. The acquisitions contributed positively to the top line, adding $34 million, while foreign exchange fluctuations negatively impacted results by $43 million, largely due to a $30 million loss from foreign exchange translation stemming from a stronger U.S. dollar. Moving to the operating profit bridge on slide six, the combined effect of lower sales volume and mix negatively impacted operating profit by $27 million. This impact was generally consistent across the segments in line with the sales volume results. In terms of price/cost, we experienced $22 million of unfavorable price/cost dynamics, mainly due to non-material inflation affecting the industrial segment. In terms of acquisitions, Corenso and TEQ contributed $2 million to our second quarter 2020 operating profit. Additionally, our total productivity yielded a strong benefit of $27 million year-over-year, with procurement and SG&A cost productivity leading this positive effect. The final change in other factors contributed positively by $3 million, mainly in SG&A. Moving to slide seven, consumer packaging sales increased by 2% due to solid volume growth and the TEQ acquisition, though it was mitigated by some operational exits, foreign exchange impacts, and reduced pricing from lower resin markets. Consumer segment operating profits surged nearly 37% because of increased demand for global rigid paper containers and strong productivity, lifting margins from 10.4% last year to 14%. Display and packaging sales declined just over 20% primarily due to weak demand and foreign exchange impacts, yet operating profit rose almost 2% as cost reductions offset the lower demand. Our industrial segment's sales decreased nearly 12%, primarily due to a volume decline of 10%, along with weaker market pricing and foreign exchange impacts, partly alleviated by the Corenso acquisition. Operating profit in this segment fell by 51%, reflecting a substantial decline in global demand, weakening market pricing, and significant OCC price increases during the second quarter, with some offset from the Corenso acquisition and solid productivity. Protective solutions sales dropped almost 32% due to reduced demand across all three businesses from COVID-19, leading to a 69% decline in operating profit and a margin drop to 5% compared to last year's 10.9%. For the entire company, sales decreased by 8.4%, and operating profit fell over 12%, resulting in a company-wide operating margin of 10.2%, down 50 basis points from last year. Transitioning to cash flow on slide eight, year-to-date second quarter 2020 operating cash flow reached $281 million, compared to $40 million in the same period last year, an increase of $241 million. This growth is mainly driven by the $175 million after-tax pension contribution that negatively impacted last year's cash flow. Working capital balances increased by $28 million in the first half of 2020, but this was $38 million less than in the first half of last year, thanks to improvements in accounts receivable and payable, even though inventory increased. This year, our tax account changes led to $17 million higher cash flow, driven by certain U.S. government assistance programs. Moving to free cash flow, defined 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 last year's $175 million pension contribution, free cash flow improved by $93 million year-over-year. Year-to-date net CapEx spending was $72 million, down $29 million compared to last year. Our cash dividends for the first half of this year totaled $86 million, compared to $84 million in the previous year. On slide nine, our balance sheet remains strong, reflecting the proactive cash and debt management we undertook in April. Our second quarter 2020 cash balance of $857 million includes around $715 million in excess cash held in liquid, high-quality short-term investments. Our consolidated debt at the end of the second quarter was $2.26 billion, an increase of $625 million from the first quarter, primarily driven by the $600 million of 10-year notes issued in April. Moving to slide ten, our base earnings per share guidance for the third quarter is in the range of $0.73 to $0.83. This broad range takes into account the ongoing uncertainties surrounding the macroeconomic conditions due to the COVID-19 pandemic. On slide eleven, I will provide additional insights into the key assumptions for our third quarter base earnings guidance. Considering COVID-19, we anticipate a mixed impact on demand for our products, leading to a slightly negative effect on earnings compared to the prior year's third quarter. Howard will provide further details on this in a few moments. We will maintain our focus on reducing controllable costs, such as travel, and expect certain other costs, like employee medical expenses, to remain lower due to the pandemic. Our outlook for third quarter SG&A as a percentage of sales is projected to be similar to our actual results from the second quarter this year. Concerning price/cost expectations for the third quarter, we currently forecast OCC prices to stabilize in the near term, although we do expect our industrial segment to exhibit a negative price/cost relationship compared to the third quarter last year. However, we believe the negative earnings impact will be approximately half of what we faced in the second quarter this year. Lastly, we anticipate a third quarter tax rate of 25.5%, which is 320 basis points higher than the 22.3% tax rate from the same quarter last year due to our increased debt balance. This, along with anticipated foreign exchange impacts, will create a headwind of about $0.10 to $0.12 compared to the third quarter of 2019. As for this year's cash flow, we continue to make significant progress in generating solid free cash flow. On slide twelve, you will see that we are capitalizing on government assistance programs globally, predominantly in the U.S., with an expected positive cash flow contribution of approximately $35 million for the full year 2020, although this impact will reverse in the coming years. We still plan to defer our voluntary U.S. pension contribution estimated at around $150 million due to the delay in the termination process until 2021, yet we will benefit from a $37 million cash tax break this year. Additionally, due to our strong cash flow results and the identification of new growth and productivity projects, we have raised our 2020 CapEx spending forecast to $195 million from the previously mentioned $170 million, maintaining $15 million to $20 million for Project Horizon. Our current liquidity position remains robust at about $1.3 billion, combining cash, short-term investments, and $500 million in revolver availability. We will also be repaying $150 million of our bank term loans early next week as we continue to 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. 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 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 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 throughout Latin America. Results from our diverse portfolio of consumer and industrial-related businesses mirrored 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 on our Flexibles Packaging business where sales volume was up 1% as demand for hard baked goods and other products grew during the quarter, but were offset by decline in gum and candy sales as consumers stayed away from impulse buys due to travel restrictions. Our plastics business also reflected the current divergent economy, and as demand for prepared and frozen foods were up significantly during the quarter. But 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 working through production inefficiencies in our Perimeter of the 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 in the lightweight board, which serves tissue and tire 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 number three 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 run 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 at full, but we expect to have to run recycled pulp to supplement machine demand. Tube and core volume in North America and Europe was down 13% and 7% respectively, as each of our served 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 ThermoSafe business was also disappointing during the quarter as drug shipments to medical clinics and doctors' offices were impacted by the postponement of non-virus-related treatments. And finally our Display and Packaging segment's 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 served 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 as 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 Products segments should continue facing a negative price/cost relationship during the third quarter due to higher year-over-year fiber cost and lower market pricing. Our Protective Solutions 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 ThermoSafe 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 flu customers during the quarter. This business also continues to achieve new business growth including a significant recent win of a new drug packaging product, which will provide good growth next year. Finally, our Display and Packaging business is expected to continue facing weak 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 Sonoco's resourcefulness, productivity, and innovation. Sonoco 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 with that operator, would you please review the Q&A procedures?

Certainly. 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 the 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?

On the first question, let me turn it over to Julie for her comments. I believe we have a lot of capacity left. This past quarter, our productivity improvements mainly came from savings in SG&A, particularly due to reduced travel. Additionally, some gains were achieved through staffing as we ramped up our facilities in the consumer sector, which allows us to leverage fixed costs and enhance productivity. Julie, would you like to provide more details?

Sure, thanks, Howard and hi, George. We've experienced two exceptionally strong productivity quarters this year, each bringing in about $27 million. The key contributors have been a mix of procurement and fixed costs within SG&A. From a procurement standpoint, what we’re witnessing this year aligns well with our typical results from supply management activities. We expect to maintain this level of procurement productivity, targeting around $10 million to $15 million per quarter, which is usually what our team delivers. Regarding SG&A, we anticipate continuing solid productivity in this area. However, as things return to normal in the world and business environment, we expect that some of the benefits we’re currently seeing may not be as pronounced as they were in Q1 and especially Q2. On manufacturing productivity, results have been mixed across the business. We've seen better performance in areas with strong volumes, while it hasn't been as robust in other segments that have experienced deleveraging. Nonetheless, it remains a key focus for us. As overall business volumes improve, we expect to see better total manufacturing productivity. These have been very strong quarters this year, and while we may not reach these levels going forward, we remain optimistic about productivity.

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. Can you tell us what the volume trends were in the second quarter?

Entering the third quarter, Howard, I'm sorry about that. What do you see?

The consumer side of the business remains relatively strong as we enter the quarter. In terms of Display and Packaging, it is stable. On the industrial side, we are noticing some markets beginning to show positive signs while others are not. There are varying levels of activity globally. For instance, we observed a slight uptick in select European markets, but we also saw a slowdown later in the second quarter. As we move into the August season for this business, it's noteworthy that the most positive developments are coming from the Protective side. We experienced a significant shutdown in April and May primarily affecting the automotive and appliance segments, which also had some impact on ThermoSafe related to elective procedures. Currently, the most significant improvement is in the heavy side of the business, which summarizes the situation.

In response to your question about SG&A, most of the $10 million decrease is largely due to pandemic-related factors, such as reduced travel and lower employee medical expenses. Howard noted that we incurred about $4 million in additional expenses this quarter for protective gear and enhanced cleaning across our facilities, but overall, this still leads to the $10 million improvement. Looking ahead, these costs will likely normalize as we move past the pandemic. It's important to note that we are currently investing SG&A dollars in our IT and HR operations and systems, which is already yielding some benefits, and we expect this trend to continue. As we emerge from the pandemic, while we won't maintain the same reduced expenses, our goal is to align SG&A closer to 9.5% of sales, down from around 10% last year. Although reaching this target won't happen immediately, we aim to trend towards that level in 2021 and into 2022.

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, as we start the third quarter, the trend lines remain quite strong. Rodger, do you have additional insights on the consumer side?

We're seeing a sequential improvement from the second to the third quarter, particularly in flexibles. While there was a significant decline in Q2 and we expect to be down compared to Q3 last year, there will be some positive momentum. Additionally, we're observing improvements in the foodservice segment within flexibles. However, we are noticing a downturn in plastics and frozen food trays, which is expected. On a more positive note, there is a notable increase in demand for portion control plastic cups, which will contribute to sequential growth. As mentioned earlier, we anticipate the consumer segment to remain strong in Q3, though not as robust as it was in Q2. In Display and Packaging, we foresee continued weak volumes in the third quarter. The back-to-school season will be affected by COVID, resulting in lower year-over-year sales. Promotions are still down, but our pack centers in Display and Packaging have performed well, particularly in oral care and health and beauty, driven by increased home usage. Although we expect a decline quarter-over-quarter, there is some sequential improvement moving into Q3.

Okay. Howard, could you remind us about the usual timeline for the Board's review of the dividend? You have a long history of annual increases, so any thoughts on that given 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.

Thank you, Gabe. We initially reduced our capital spending like many others, out of caution and uncertainty about the future. However, after assessing this quarter and looking ahead, we believe we are in a strong position to resume our investment plans. Our intention is to restore capital levels for projects and productivity improvements that we had postponed until next year. We are now ready to seize those opportunities. Specifically, we will need about $5 million for a project related to our Corenso mill to address an existing situation. The remaining $15 million is strategically set aside as we have the cash available to enhance our productivity moving forward.

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 Gabe, before I hand it over to Rodger to elaborate on our thoughts regarding resin trends with consumers, you’re exactly right. The consumer sector experienced a slight positive in price versus cost during the second quarter, so you were correct in your assessment. I’ll let Rodger provide more insights on the price versus cost dynamic in the consumer segment going forward.

Yes Gabe, you addressed it. We have observed some minor increases across most resin categories, which we've included in our guidance. As you know, we have quarterly price change mechanisms, so any changes we don't capture in the third quarter will be addressed in the fourth. Therefore, I don't see any significant issues not covered in the guidance. However, as you mentioned, we are beginning to see all resin markets improve and gain momentum as we move 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. Adam, I'm assuming you meant June when you mentioned July. The quarter unfolded as we anticipated. The consumer side of the business saw a sequential increase in April, May, and June. However, the surprising aspect was a strong performance in industrial during April, which significantly dropped in May, followed by a slight recovery that plateaued as we entered June. On the Display and Packaging front, the situation was similar; May experienced a significant decline with some improvement in June, though still below our desired levels. Looking ahead to Q3, we project that as conditions improve, the consumer side will see reduced at-home assumption, resulting in a decline compared to Q3 but an increase from Q2, and a rise compared to the previous year. For Display and Packaging, we anticipate stable performance between Q2 and Q3, while the industrial side is expected to follow suit with slight variations I mentioned earlier, noting some progress in North America and a slower recovery in Europe, particularly with August approaching. The notable increase we foresee for this quarter is in the Protective segment of the automotive and appliance sectors, as well as in the ThermoSafe area with virus-related shipments, which we expect to see a strong uptick going into Q3.

I really appreciate that, Howard. Just two more questions from me. One regarding OCC. Prices dropped significantly in June and July after spiking earlier in the year when many mills were taking downtime in May and June. We recently received the box data for June, which showed a substantial increase. It seems the mills that paused their purchases in May and June have resumed buying now that they've depleted much of their inventory. Are you anticipating that OCC prices will strengthen as the mills begin purchasing again? What are your expectations for the remainder of the year in this regard?

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, I understand. Howard, while you're not providing full year guidance, could you share your thoughts on the direction we're headed? You're anticipating relatively stable earnings in the third quarter. Typically, there's a significant decline from the third to the fourth quarter due to seasonal factors. This year is particularly unusual. Could you help us understand how the seasonality of earnings might differ this year compared to previous years, especially considering how poor the second and third quarters are likely to be?

I can only speculate, but we need to see how Q3 unfolds. There may be a stronger recovery than we expect. If that doesn't happen, we could end up with significant pent-up demand heading into Q4, leading to an unusually strong performance in that quarter. I'm not sure how to interpret that, but it’s a possibility.

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 etc., 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 happy to. I wanted to elaborate on what Howard mentioned and what I've shared previously. Strong productivity was the primary factor in the consumer segment, resulting mainly from the balance between purchasing and fixed costs across the company. Regarding the strong volumes in global Rigid Containers, their manufacturing productivity was also commendable, as that throughput effectively contributes to profitability. Overall, the productivity in the consumer segment was impressive. We noted higher volumes that resulted in a typical drop-through to operating profit, along with a slight positive impact from price and costs. These were the main factors influencing the operating profit margins in the consumer segment.

Okay. Regarding your comments on the third quarter and a slight moderation, many food companies that have reported so far are still discussing significant sales growth at the retail level and very low inventories in the channel. Do you anticipate that trend will continue? Is it reasonable to expect that this volume dynamic could persist for multiple quarters?

We have adjusted our outlook for the consumer segment going into the third quarter based on feedback from our customers, who indicate that it will remain strong, but not to the same extent as before. While segments like dough experienced significant growth, we anticipate a more moderate performance compared to the second quarter, unless there is a change in the reopening of the country, which seems possible. If that happens, we would expect our consumer results to resemble those of the second quarter. Conversely, we might see declines in sectors like automotive. Ultimately, regardless of the direction, we believe our portfolio balance will hold if our forecasts are accurate. If we are incorrect and the economy experiences more shutdowns, we may still be correct, 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?

Thank you, Brian. We are very happy with the onboarding process and performance of TEQ. However, they have been affected by the COVID situation, particularly because a part of their business is related to elective surgeries, which have seen a decline in demand. Overall, we are pleased with the integration. We have recently completed the installation of ear protective coverings for thermometers, producing around 1.5 billion units and adding an additional 1 billion units of capacity. As the situation improves and these investments take effect, combined with the positive cultural integration of the team, we are optimistic about TEQ’s future. Regarding mergers and acquisitions, we are still actively pursuing opportunities. There are some challenges, but not related to due diligence. We have several potential acquisitions we hope to discuss soon, and the same applies to our divestiture efforts that we have mentioned previously. We are continuing to make progress.

Okay, that's great. Just one more question from me. We've discussed inter-quarter trends and trends in early July, and I'm curious about your estimate of inventory levels both for your company and at the customer level. Did companies significantly reduce their inventories during the downturn, and are we expecting a rebound? Or do you believe inventories are at normal levels?

I would say that we reduced some inventory, as I mentioned earlier with the downtime on the paper side of the business, but we do not see any significant issues or opportunities related to that.

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.

Thank you for the follow-up. Howard, could you provide an update on the operational issues and progress with the Perimeter of the Store business? You mentioned some challenges on the West Coast. What are the positives, and what aspects are not performing as well as expected? What needs to change for this business to meet the expectations set at the time of acquisition? Additionally, how important is this business to Sonoco's overall consumer strategy? My second question, relating to Brian’s earlier inquiry, concerns the increase in materials for items like thermometers and their covers. Are there any other direct advantages you’re experiencing in your healthcare packaging segment due to COVID? If you covered this previously, I might have missed it, so could you please remind us? Thank you, and good luck this quarter.

Thank you, George. Regarding your second question, I will let Rodger address the operational issues. Concerning the ThermoSafe business, we're currently experiencing some pent-up demand outside of the consumer sector. We anticipate a 20% to 30% increase in the shipment of regular vaccines this season. Unfortunately, these shipments have been delayed. We were hoping to see them start by the end of the second quarter, but the government is concerned about overwhelming the market and the potential for vaccines to be administered too early, which could reduce their effectiveness later in the flu season. There are also issues with West side shippers, among others. We expect a significant surge moving forward, rather than in the previous quarter. I will let Rodger discuss the operational aspects related to the Perimeter of the Store.

Hi, George. I think I mentioned last quarter, maybe the quarter before, that we have made some significant capital investments in the Perimeter of the Store operations on the West Coast, both in equipment and tooling. We're seeing that pay off. Year-over-year, our output and uptime have improved, which is a positive development. However, we have faced challenges in our Guadalajara operation in Mexico due to several issues, primarily related to leadership, and we are addressing that along with other market challenges. Additionally, the West Coast is highly competitive, with imports from Asia affecting our performance. In contrast, our East Coast operations are performing very well and meeting marketplace expectations. Regarding our consumer businesses, there is a minor connection to our flexible business, as we are working on membrane closures for produce and making good progress there. We are also seeing strong growth in the agriculture sector. Beyond that, while it serves as a growth target for us, the connections are limited, aside from some synergies in resin purchasing, but those are the connections we identified 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.