Sonoco, a diversified global packaging company based in Hartsville, South Carolina, reports that its first-quarter 2020 net sales declined compared with figures in the same time frame in 2019. First-quarter 2020 net sales were $1.3 billion compared with $1.35 billion in the first quarter of 2019, the company reports in a news release on its latest earnings report.
The sales decline was driven by lower volume and mix, reduced selling prices and a stronger U.S. dollar. Sonoco reports that these negative impacts were somewhat offset by increased sales from acquisitions.
Gross profit was $266.6 million in the first quarter of 2020 compared with $270.1 million in the same period in 2019. Gross profit as a percentage of sales was 20.5 percent, an improvement from 20.0 percent in the same period in 2019, the company reports. First-quarter selling, general and administrative expenses decreased $18.7 million from the prior year to $123.9 million. According to Sonoco, this decrease was driven by a significant focus across the business on reducing controllable costs, which were partially offset by the addition of expenses from acquisitions.
Sonoco’s Paper and Industrial Converted Products business segment (which includes paperboard tubes, cones and cores; fiber-based construction tubes; wooden, metal and composite wire and cable reels and spools; and recycled paperboard, linerboard, corrugating medium, recovered paper and material recycling services) achieved $475.0 million in sales in the first quarter of 2020, which is down from $496.0 million in the same time frame in 2019. Segment operating profit was $54.0 million in the quarter compared with $48.4 million in the same time frame in 2019.
Sonoco reports that sales in this segment declined 4.2 percent in the first quarter of 2020 from the prior year’s first quarter as lower selling prices, declining volume and mix and the negative impact of foreign exchange offset sales from the company’s acquisition of Corenso Holdings in August 2019. The lower volume and mix was driven by weakness in global tubes, cores and cones, which was partially offset by improved volume and mix in North America’s paper and recycling operations.
Additionally, the company’s Paper and Industrial Converted Products segment operating profit improved 11.6 percent in the first quarter above the prior year’s first quarter as earnings from productivity improvements and the Corenso acquisition offset general inflation and issues related to volume and mix.
Outlook for Q2 of 2020
In the company’s latest earnings report, it made initial projections on second-quarter 2020 base earnings; however, the company states that actual results could vary substantially due to COVID-19 and other risks and uncertainties.
“The only thing certain about the rest of 2020 is there will be tremendous uncertainty,” says Howard Coker, CEO at Sonoco. “After a strong first quarter, we are projecting a difficult second quarter as the pandemic is expected to continue impacting the vast majority of the U.S., and most of the world, resulting in rising unemployment and market disruption. That said, we expect our consumer-related businesses to continue performing well in the second quarter as food consumption trends should continue to be driven by stay-at-home consumers.”
Coker says the company expects its paperboard operations in North America to remain “relatively steady” in the second quarter of 2020 in response to increased demand for board in the tissue and towel market. He says the company also expects recovered paper prices to rise in the second quarter of 2020 as well.
“We expect recycled fiber prices to continue to increase during the second quarter, which is expected to benefit our recycling operations,” Coker says. “However, despite many of our sales contracts having material cost recovery mechanisms and an expected cost-driven increase in general market pricing for recycled paper-based products, we expect these higher input costs will provide a difficult headwind to our paper and industrial converted products businesses.”
Response to COVID-19
Across the world, Sonoco is considered an essential provider of consumer, industrial and medical packaging. The company reports that its associates are deemed “essential critical infrastructure workers” under the guidance of the U.S. Department of Homeland Security and have received similar designations by the majority of other governmental agencies in the 36 countries where the company operates.
Sonoco reports that nearly all of the company’s global operations continue to operate and serve customers’ critical needs. However, certain customers whose products have not been deemed “critically essential” have had to suspend operations due to the COVID-19 pandemic while others have been unable to fully staff their operations and are taking downtime as a result. Sonoco reports that it’s monitoring these developments closely.
In addition, the company is putting the health and safety of its associates, contractors, suppliers and the general public as a top priority. In response to COVID-19, the company reports that it is conducting health screenings for personnel entering its operations, routinely cleaning high-touch surfaces, following social distancing protocols, prohibiting noncritical business travel and encouraging associates to work from home when possible. The company also has a COVID-19 microsite to keep its associates up to date on the company and health authority information, guidelines and protocols.
Additionally, the company formed a global task force to develop and implement business continuity plans to ensure its operations are prepared to continue producing and shipping product to its customers without a disruption. The company reports that it has a diverse global supply chain and to date has not experienced raw material or supply disruptions. However, certain raw materials pricing has increased significantly since January, including old corrugated containers (OCC), which is the largest raw material used by the company’s recycled paperboard mills. Sustained OCC pricing at current, or higher, levels is likely to pressure near-term operating margins.
Coker adds, “One of the strongest aspects of our company, culture and people is our ability to rally ourselves through a crisis. Over our more than 120-year history, we have successfully navigated through floods, fires, hurricanes, financial market distortions and now one of the worst pandemics in generations. Sonoco is a financially strong company. We believe our diverse business mix will remain resilient during the expected pandemic-driven recession and that we will come out of this crisis as a much stronger company.”