Sonoco Products Company (SON) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by and welcome to the Sonoco 2020 Shareholders Meeting Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker, Chairman of the Board, Mr. John Haley. Please go ahead, sir.

Good morning, and welcome to Sonoco's 2020 Annual Meeting. On behalf of your Board of Directors and the company's management, we thank you for joining us today via webcast or teleconference. Given the exceptional circumstances we're all facing resulting from the COVID-19 global pandemic and given restrictions regarding large public gatherings, Sonoco strongly believes it is in the best interest of our shareholders' health and safety to conduct today's meeting remotely. We appreciate your understanding due to this unique situation. I will now call the business meeting to order and advise you that the annual report for 2019, notice of annual shareholders meeting, proxy statement and proxy were mailed on or before or about March 13, 2020 to shareholders of record as of February 26, 2020, notifying each of the annual meeting to be held today. Just over 101 million shares of our common stock were outstanding and entitled to vote, and each share of common stock has 1 vote. We've appointed Elizabeth Kremer of Sonoco and Mark Zimkind of Continental Stock Transfer & Trust Company as inspectors of election to tabulate the ballots. Our bylaws provide that the presence in person or by proxy of a majority of the outstanding shares entitled to vote constitutes a quorum. Before we go further, let me introduce our Corporate Secretary, John Florence, who is also Sonoco's Vice President of Human Resources and our General Counsel. Mr. Secretary, will you please advise if a quorum is present?

Mr. Chairman, the inspectors of election have confirmed that proxies executed by holders of more than 90% of the outstanding shares entitled to vote were delivered to the transfer agent prior to the meeting. Therefore, we do have a quorum present.

Thank you, John. The annual meeting of Sonoco Products Company is duly convened, and we are ready to consider the matters of business. Mr. Florence has the meetings of -- the minutes of last year's meeting. In the interest of expediency, I would entertain a motion to dispense with John's recitation of the minutes, so that we may move on with the rest of the business portion of the meeting. Is there a motion?

So moved.

And a second?

I second the motion.

Thank you. Our next item of business involves proposals to come before shareholders. For a shareholder proposal to come before this meeting, it must have been submitted to the secretary of the company in writing before January 31, 2020, and it must comply with the requirements of our bylaws. Today, we have 6 proposals for consideration and an individual shareholder proposal. Starting with the first item, your Board of Directors recommends the election of the following directors for a 1-year term expiring at our next annual meeting in 2021: Harry A. Cockrell; R. Howard Coker; Dr. Pamela L. Davies; Theresa J. Drew; Philippe Guillemot; John R. Haley; Robert R. Hill, Jr.; Richard G. Kyle; Blythe J. McGarvie; James M. Micali; Sundaram Nagarajan; Marc D. Oken; Thomas E. Whiddon; and Lloyd M. Yates. I've been advised by the secretary that there were no other nominations submitted. Do I have a motion?

So moved.

And a second?

I second the motion.

Our second item is the ratification of the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2020. Do I have a motion?

So moved.

And a second?

Second the motion.

The third item is a resolution requiring shareholders to provide advisory, nonbinding approval of compensation of the named executive officers as described in the proxy. Do I have a motion?

I move to approve the proposal.

And a second?

I second the motion.

The fourth item is the proposal to amend Article 6(d) of the articles incorporation and Article 3 Section 7 of the bylaws relating to the vote required for removal of directors. Do I have a motion?

So moved.

And a second?

Second.

The fifth item is the proposal to amend Article 6(f) of the articles of incorporation relating to quorum or voting requirement for shareholders. Do I have a motion?

I move it.

And a second?

I second the motion.

The sixth item is the proposal to amend Article 9 Section 1 of the bylaws relating to shareholder vote required to amend the bylaws. If passed, this proposal will lower the voting thresholds to a simple majority for bylaw amendments. Do I have a motion?

So moved.

And a second?

I second the motion.

The final item is an advisory nonbinding shareholder proposal regarding right to call a special shareholder meeting, which is outlined in the proxy. At the request of the shareholder, I would like to ask Elizabeth Kremer to read the proposal verbatim.

Shareowners ask our Board to take the steps necessary to amend the appropriate company governing documents to give the owners of a combined 10% of our outstanding common stock the power to call a special shareholder meeting or the lowest percentage under state law. The Board of Directors would continue to have its existing power to call a special meeting. Special meetings allow shareholders to vote on important matters such as electing new directors that can arise between annual meetings. It is important that our bylaws give 10% of our outstanding common stock, or the lowest percentage under state law, the power to call a special shareowner meeting since South Carolina law does not allow us to act by written consent. This proposal topic, sponsored by William Steiner, won 78% support at a Sprint Annual Meeting with 1.7 billion yes-votes. This 78% support might have been higher if more shareholders had access to independent proxy voting advice. This proposal is a contender to obtain a majority vote like the 2019 shareholder proposal for a simple majority vote standard that was approved by 71% of Sonoco shareholders. A 10% stock ownership threshold is important because 25% stock ownership threshold for shareholders to call a special meeting at some companies may be unreachable due to time constraints and the detailed technical requirements that can trip up half of shareholders who want a special shareholder meeting. Thus, a 25% stock ownership threshold to call a special meeting can really be a 50% stock ownership threshold to call a special meeting for all practical purposes. A special meeting is a means to elect a new director. This may be of greater interest now since Philippe Guillemot, on the Sonoco Audit Committee, was rejected by 22% of Sonoco shareholders at the 2019 Annual Meeting. Any claim that a shareholder right to call a special meeting can be costly, may be moot. When shareholders have a good reason to call a special meeting, our Board of Directors should be able to take positive responding action to make a special meeting unnecessary.

Thank you, Elizabeth. Do I have a motion?

Mr. Chairman, I wish to note that the Board has recommended shareholders vote in favor of this proposal, and I move to approve it.

And a second?

Second the motion.

I want to make everyone aware that Sonoco will be releasing its first quarter 2020 financial results before the market opens tomorrow, Thursday, April 16. You're invited to listen to a webcast teleconference between management and the financial community starting at 11:00 a.m. Eastern Time on our website at sonoco.com. Mr. Secretary, please report on the preliminary tabulation by the inspectors of the voting on the resolutions presented to this meeting.

Mr. Chairman, the inspectors of election have reported that shareholders have voted to elect all nominees for Director and have voted by a majority to ratify the selection of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2020. Shareholders approved the advisory resolution on executive compensation as well as Proposals 4, 5 and 6 related to the amendment of the articles of incorporation and the bylaws. Finally, the advisory nonbinding shareholder proposal regarding the right to call a special shareholder meeting was approved by a majority of votes cast.

Thank you, John. This concludes the business portion of our annual meeting. I would now like to turn the meeting over to Howard Coker, President and CEO, to provide an update on the state of the company. Howard, the floor is yours.

Thank you, John, and good morning, everyone. Let me start by saying how humbled I am to have the opportunity to speak with you today as Sonoco's new President and CEO. I am truly honored to have this opportunity to work alongside our more than 23,000 teammates globally as we embark on our next chapter together. Despite the difficult circumstances we all face due to a global pandemic, I can honestly say I could not be more positive about our future. One of the strongest aspects of our company and culture is our ability to rally ourselves through a crisis. I can think of many events of our more than 120-year history, where together, we successfully navigated through floods, fires, hurricanes, wars and even financial market distortions to come out a much stronger company. For those of you who are not familiar with me, I've spent my entire 35-year career working across the globe in a wide range of our consumer and industrial businesses. And for the past decade, I've been a member of the company's executive committee and haven taken part in helping shape our strategy. I am a believer that great things in business, and most of the time in life, are not done by one person. They're achieved by a team. Sonoco has a strong experienced leadership group that is focused and committed to ensuring a vibrant future. Our success has never been tied to any single individual, but to the contributions of our people. Because of that, we don't expect a lot of strategy changes in the near future. Certainly, we'll make adjustments over time, particularly in light of the current economic uncertainty, that they will be based on a shared vision for what is best for our customers, our shareholders and our people. Finally, I do expect you will see more urgency around dealing with issues we've been discussing for some time. Now before we go further, let me remind you that today's presentation contains a number of forward-looking statements based on current expectations, estimates and projections. These statements are not guarantees of our future performance and are subject to risks and uncertainties. Therefore, actual results may vary materially. Additionally, this presentation includes the use of non-GAAP financial measures, which management believes provides useful information 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 these measures to the most closely related GAAP measure are available on our annual report and on the Investor Relations section of the company's website at sonoco.com. Clearly, we're living in unprecedented times. The fact that I am delivering my first speech to shareholders via WebEx is a prime example of the difficulties we're facing today. Because Sonoco is a global company with more than 320 operations in 36 countries on 6 continents, we haven't experienced the realities of coronavirus 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, contributing to our communities to help drive increased testing and assist health care workers. I am confident we're taking all necessary steps to ensure our associates can work safely through these trying times. We've restricted travel. We've asked a large number of our teammates to work in their homes and provided them the tools necessary to keep them connected and make them productive. And we've done everything in our power to meet the increasingly complex needs of our customers to supply them with essential products and services. Throughout the globe, Sonoco was an essential service provider of packaging. 80% of our consumer packaging is used for food products, where we are being called on to meet an increased demand for 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 personal hygiene products. Our global tube and core operations play a key role in servicing the food, hygienic, medical and textile industries. We also produce flexible and thermoform medical packaging, and our ThermoSafe division provides temperature-assured packaging for critically needed virus testing and transportation of lifesaving vaccines and other drugs. I'm really proud of how our associates have rallied to our customers' calls for help during this crisis to aid and fighting this deadly virus. Recently, our Alloyd division received an urgent call from a medical products customer to see if we could use our digital printing and laser scoring capabilities to produce plastic face shields to be used by medical providers and first responders. Alloyd has been experimenting with a unique digital process where we take a file straight from an engineer's computer, convert it to a machine code and are able to make parts in an hour with no tooling or lead time. Our customer asked for 100,000 face shields, and we were able to deliver them in a couple of days. The customer has since increased its orders twentyfold, and I'm pleased to say our Alloyd team is filling the order and preparing to produce more. Our ThermoSafe division has geared up operations and is working with one of the nation's largest logistics companies and a large medical products company to ship virus test kits to hospitals and medical research labs across the country using our unique temperature-assured coolers. And our tube and core operations in Spain worked overtime to deliver tubes to be used by an automotive supplier who has retooled their operations to again produce face masks for area hospitals. In addition, we're trying to help out where we can in our local communities. We donated hundreds of safety glasses and other personal protective equipment to Carolina Pines Medical Center here in Hartsville, to keep nurses and medical staff safe as they treat patients. Our Perimeter of the Store division donated thousands of pounds of clear PET sheet to Georgia Tech in Atlanta to assist in making 50,000 disposable face shields for medical personnel. This really illustrates how our team is impacting lives around the world, and we couldn't be prouder of their efforts. Clearly, our people are making Sonoco strong. Each year, we hold our annual meeting to report on the previous year and discuss our plans going forward. While our reflection on the past may seem somewhat irrelevant due to the current crisis, it may be relevant to understand how our company has weathered difficult times in the past to again prosper. It was just over a decade ago, we were all dealing with what we thought, at the time, was one of the worst recessions in our nation's history. Yet, as this graphic shows, Sonoco has thrived since the great recession of 2009, continuing to grow sales and earnings while remaining focused on returning value to our shareholders. As I reflect on 2019, it proved to be an unpredictable year for Sonoco as a slowdown in global manufacturing activity impacted our industrial business and our consumer business faced some unevenness as our customers' order patterns and volumes reacted to market uncertainties. That said, we produced record base earnings and improved gross margin and operating margin by focusing on those things we can control. Our consumer packaging business, which accounts for approximately 44% of the company's sales, recorded a 2% increase in operating profit in 2019, while expanding margins 30 basis points to 9.8%. The increase in profit and margin was largely driven by productivity improvements and a positive price/cost relationship, along with the full year benefit of 2 acquisitions made in 2018. These positive factors were partially offset by volume decline and isolated manufacturing inefficiencies in certain global plastics operations. In response, we are investing in new machinery and tooling to improve quality and performance from operations serving our Perimeter of the Store markets. Our Paper and Industrial Converted Products segments accounted for 37% of our sales in 2019. And operating profits increased about 4%, while generating 11.1% operating margin, up slightly from the prior year. The main drivers for the sales and operating profit improvement was the 2018 acquisition of Sonoco Conitex and the August 2019 acquisition of Corenso Holdings North America. The integration of both these businesses has gone extremely well, and they will continue to be solid contributors. We're very pleased with the strong turnaround delivered by our Display and Packaging segment as operating profit more than doubled in 2019, while operating margin expanded to 5%, 2.2% in 2018. Increase in operating profit was largely due to increased domestic and international volume, up 5.2%, and the absence of losses from last year's exit of a packaging center contract. Our Protective Solutions segment also reported a strong performance in 2019, with operating profit up 17% and operating margin expanding to 9.8% from 8.1% in 2018. Our ThermoSafe temperature-assured business had a record year in both sales and earnings and they expect to launch 2 new product categories this year, serving pharmaceutical customers. Our industrial-related businesses are entering the new decade in their best shape in nearly 20 years. Particularly, if you look at our market position, profitability and margins, Sonoco clearly benefits from having a vertically integrated supply chain as we're better able to control the inputs and capture value in each phase of the papermaking and converting process. On the Paper side, we're continuing to invest in our best mill assets to optimize our production costs and improve margin and cash generation. And in our tube, core and cone converting operations, we're focused on serving the right customers with the right offering and the right products in the right markets while continuing to drive costs down. Our largest served paperboard market is in North America. So acquiring Corenso in Wisconsin for $110 million last August, it made a lot of sense for us. First, it gives us best-in-class Fourdrinier machine flexibility to produce a wide variety of high-performance paper grade. Prior owners invested $35 million to rebuild the machine in 2008 and recent capital improvements further expanded its production capacity. The mill also provided us with attractive converting assets and long-term partnerships, new paper and tube and core customers. To further strengthen our U.S. and Canada URB mill system, I'm pleased to announce that your Board of Directors has approved an $83 million investment over the next several years, which will significantly lower our operating costs and improve cash generation. The majority of this investment will go to transforming our Hartsville Corrugated Medium Machine, which we call the #10 machine, into a state-of-the-art URB operation with annual production capacity of approximately 180,000 tons. This new machine is being designed with the goal of being the largest and lowest-cost producer of URB in the world. We're calling this investment Project Horizon, as we will be creating a much brighter future for our North American URB system while resolving the volatility we have experienced over the past several years as an independent producer of corrugated medium. Project Horizon will start with the development of a new recycled fiber stock prep system in Hartsville, which will allow us to use lower cost, mixed paper and old corrugated containers as our raw materials. Our existing #10 machine is a high-speed Fourdrinier machine that will be upgraded with new forming, pressing and roll finishing capabilities as well as new electronics and controls. When completed, this new machine will be able to produce a wide range of URB paper grades, which will allow us to meet many of our internal and trade customer needs. Design work and stock prep development will begin later this year and the machine conversion should be completed and online early 2022. As part of the mill system optimization program, Sonoco will also increase capacity of the Corenso mill in Wisconsin. After the full ramp of -- after the full ramp-up of production, we're projecting this investment will provide approximately $24 million in annual cost savings while delivering returns well above the cost of capital. The company also expects to drive additional cost savings from supply chain optimization, increased consumption of lower-cost mixed paper along with environmental and power consumption savings. As a result of the conversion, we will be exiting the volatile corrugated medium market by the end of 2021 and the expected efficiency of the converted machine will give the company the opportunity to rationalize some of the higher-cost assets in our mill system. I will mention that we have made the difficult decision to permanently close our #3 URB machine in Hartsville and our Trent Valley, Ontario, Canada, paper mill due to slowing market conditions. We're working with the affected employees in Hartsville to transition them into other roles in the mill complex or provide retirement or other benefits. In Trenton, we're working with the local unions to develop a closure agreement. This chart shows a cost viability analysis of our URB operations in the U.S. and Canada. After this investment is completed, the #10 machine is projected to be the lowest-cost producer in the world, and Sonoco's mill system will be in the top quartile of performance and have nearly a 20% cost advantage over the nearest supplier. And finally, this investment will also ensure the long-term viability of our Hartsville paper mill complex. Project Horizon will also generate important environmental impacts, including reducing electricity consumption in our U.S. mill system by 16%, which will drive a 16% reduction in greenhouse gas emission, while total water used for our mills in the region will decline by 25%. Now let me switch gears and speak about our consumer and medical packaging business. As I mentioned, 80% of our more than $2.3 billion in sales generated by this segment are tied directly to food packaging over our rigid paperboard, flexible packaging and rigid plastics formats. The remaining sales are in fast-growing medical packaging and specialty products, such as fiber and plastic caulk tubes for adhesives and sealants. Currently, we are focused on meeting our customers' growing demand for stay-at-home consumers. However, developing more sustainable packaging is undoubtedly the biggest challenge and opportunity facing all consumer packaging companies today. A recent industry research study predicts the global sustainable packaging market, which it defines as all packaging substrates that could either be recycled, degraded or reused, will expand at $255 billion globally by 2026. Because Sonoco produces packaging from paperboard and plastic formats, we believe we have a unique opportunity to provide a portfolio of more sustainable solutions for our customers who are feverishly looking for options. Sonoco is a global market leader in the production of paperboard cans with sales totaling more than $1.1 billion in 2019, and we produce more than 6 billion units annually. We serve a diverse mix of food products where our cans have become the iconic brand for several, such as stacked chips and refrigerated dough. We also serve a variety of other categories, including salty snacks, nuts, powdered infant formula, coffee, juice concentrate and powdered beverages. We have large operations in North America and Europe, and we still see significant growth opportunities in emerging markets. During 2019, we started our fifth production line in Kutno, Poland, and we have a sixth line ready-to-go in 2020 to meet growing demand in Eastern Europe. Last summer, we opened our first operation on the African continent located just outside of Johannesburg, South Africa, and we started up a new plant in Brazil in the third quarter of 2019, and expect it to be fully commercialized this year. As I mentioned earlier, our customers are becoming more interested in sustainable, recyclable or degradable food packaging. To meet this need, we formed a partnership with Tellus, a producer of sugarcane pulp products, to develop the technology to produce fully recyclable bowls and trays for frozen and chilled foods. We call this new product, Natrellis, and starting this month, it has been launched with a new frozen meal line produced by Primal Kitchen. The new dual-ovenable meals are available this spring and summer at HyVee, Publix, Natural Grocers, Whole Food Markets and others. I'll also mention we're working with other food companies and looking at opportunities to expand this new product offering. Recent studies estimate the global health care packaging market will grow to approximately $112 billion in sales by the end of 2026, with growth rates in the range of 5%. Increased life expectancy, the steady introduction of new products from medical device manufacturers and pharmaceutical companies, combined with requirements for improved safety and compliance are driving market growth. Our acquisition of Thermoform Engineered Quality, or TEQ, provides us a strong platform to further expand our growing health care packaging business. TEQ produced sales of approximately $90 million in 2019 and operates 3 forming facilities in the United States, along with the new extrusion operation, which recently came online. TEQ has a thermoforming facility in the United Kingdom and a thermoforming and recyclable molded pulp fiber packaging operation in Poland. Each facility has state-of-the-art cleanroom capabilities, enabling for the production of sterile, barrier packaging systems for pharmaceuticals and medical devices. About 72% of TEQ sales are medical related, with the remainder coming from molded pulp fiber packaging and thermoform containers for a variety of consumer products, primarily in Europe. TEQ is currently gearing up to produce larger quantities of Thermoscan thermometer covers essential for the use by health care providers treating the virus. With the addition of TEQ, we recently formed Sonoco Medical Packaging Solutions, which we believe offers one of the broadest portfolios of essential health care packaging applications. This group of businesses includes ThermoSafe, our best-in-class temperature-assured pharmaceutical packaging; injection-molded vials; multi-cell cuvettes; and medical appliances, which we produce in our recently expanded cleanroom operations in Rotterdam; thermoform trays and blisters for light medical devices and over-the-counter medicines; along with our Alloyd heat sealing equipment for commercial medical applications. Combined with some flexible packaging applications, we expect sales of nearly $350 million in 2020 from our medical packaging portfolio and again, expect growth to mirror that of the industry. Finally, I'd be remiss if I did not mention our sustainability efforts. We have pledged to achieve more sustainable use and increase recyclability of our packaging. With that in mind, we launched our EnviroSense, a line of more sustainable packaging, last fall. We also held a first of its kind Sustainability and Food Waste Summit in Hartsville, to bring together our customers, regulators, academics and other thought leaders to openly discuss ideas to reduce climate change, improve recycling, eliminate food waste, and drive a more sustainable packaging supply chain. And I'm also pleased that Sonoco was named for the second consecutive year to Barron's 100 Most Sustainable Companies in America. Let me close by discussing our capital allocation priorities. Last year, we returned about $180 million to shareholders in the form of cash dividends and share repurchases. Sonoco has the longest record of paying dividends to its shareholders in the packaging space, dating back to 1925. And we have raised dividends for 37 consecutive years, including an increase paid in the first quarter of this year. Over the past decade, Sonoco has allocated $1.7 billion for dividends and share repurchases to our shareholders. I'll also mention that our Board has approved a regular $0.43 per share dividend to shareholders of record as of May 8, 2020, payable on June 10 of 2020. Based on the closing price of our stock yesterday, our dividend provides a 3.4% yield, which is 60% higher than dividends paid by S&P 500 Index. Clearly, your Board and senior management are committed to paying dividends to shareholders, and it remains one of our priority uses of cash. We actually refer to free cash flow after dividends to illustrate its importance. However, due to the current economic uncertainty caused by the virus, the Board has determined it would be prudent to defer actions to further increase the dividend until we have better clarity of the impact on the company. 2020 starts a new decade and a new year with new opportunities. Certainly, the coronavirus is providing significant challenges for all of us. There are also opportunities that we see helping our business during the rest of the year. Our strategy remains committed to driving steady growth in margins, earnings and free cash flow while continuing to return value to our shareholders. In closing, I want to thank all of you for your -- all of our associates for their dedication and support. In times of crisis, we all had the potential to do things we never thought possible. As long as we work together and look out for each other, Sonoco is a financially strong company, solid businesses and a bright long-term future. Thank you for your investment and support in our company. Let me stop and see if there are any questions.

Let me note, Howard, all the questions we have received online will be reviewed and respond to in a timely fashion.

Thank you, John. Again, thank all of you for listening, and I very much look forward to meeting you face-to-face in the coming year. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect, and have a wonderful day.