Sonoco Products Company

Good afternoon, ladies and gentlemen, and welcome to the Q1 2021 Chronicle Earnings Conference Call. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance, please press star zero. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Roger Schrum. Please go ahead.

Thank you, Angela, and good morning, everyone, and welcome to Sunoco's first quarter 2021 investor conference call. Joining me today are Howard Coker, President and Chief Executive Officer, Roger Fuller, Executive Vice President, and Julie Albrecht, Vice President and Chief Financial Officer. A news release reporting our financial results was issued before the market opened today and is available on the investor relations website at sunoco.com. In addition, we will reference a presentation on our first quarter financial results, which 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 operation. 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 with that, let me turn it over to Julie.

Thanks, Roger. I'll begin on slide three, where you see that earlier this morning, we reported first quarter earnings per share on a gap basis of 71 cents and base earnings of 90 cents per share, which was at the top end of our guidance range of 80 to 90 cents per share. At a high level, our first quarter results reflect solid top and bottom line results despite various unexpected headwinds from severe weather in the U.S. and global supply chain disruptions. In terms of the $0.19 difference between base and gap earnings per share, $0.05 related to restructuring and asset impairments, $0.05 was from non-operating pension costs, $0.03 reflects the loss on our display and packaging U.S. divestiture, And six cents primarily is related to acquisition and divestiture transaction costs. Moving to our base income statement on slide four and starting with the top line, you see that sales were $1,353,000,000 up $50,000,000 from the prior year period. I'll review more details about our key sales drivers on the sales bridge in just a moment. Gross profit was $278 million, $11 million above the prior year's quarter. This performance resulted in a solid 20.5% gross profit as a percent of sales, which was equivalent to the first quarter of last year. SG&A expenses, net of other income, were $138 million, an increase of $15 million year over year. This increase was expected and key drivers were higher expenses for normalized management incentives, strategic IT spend, as well as property insurance premiums. All thus resulting in first quarter 2021 operating profit of $140 million. I'll discuss the key drivers on the operating profit bridge in a few minutes. Net interest expense of $18 million was $2 million higher than last year due to higher debt balances than in the first quarter of 2020. As a reminder, this relates to our conservative liquidity actions in the uncertain COVID-19 environment. Income tax expense of $31 million was $2 million below last year due to both our lower pre-tax profits and slightly lower effective tax rate. Our current quarter's base effective tax rate was 25.7%. Moving down to net income, our first quarter 2021 base earnings were $92 million compared to $95 million last year. On slide five, you see our new operating and reporting structure that is more simplified and better reflects how we are managing our businesses going forward. With this change, we are reporting our results in two segments, consumer packaging and industrial paper packaging. Our remaining businesses are presented in an all-other group. Our previous protective solutions and display and packaging segments have been eliminated, and their businesses moved into this new structure. Changes to the consumer packaging segment include moving our TEQ healthcare packaging and industrial plastics businesses into All Other. Industrial paper packaging is relatively unchanged, except that our fiber protective packaging unit has been added from the former protective solutions segment. All Other includes our healthcare and protective packaging businesses, including TEQ, ThermaSafe, our consumer and automotive molded foam business, as well as our alloyed retail security packaging unit. Now, looking at the sales bridge on slide six, you see volume mix was higher by $46 million, or 3.5% for the company as a whole. This increase reflects solid demand and two additional shipping days in this quarter versus last year. I will add that the severe US weather event in February of this year had a negative impact on our top line of around $9 million. Our consumer packaging segment volume was up $24 million, or 4.5%. We continued to have impressive growth in global rigid paper containers which saw volumes increase by 8%. Plastic food volumes were up almost 3%, while our flexible volumes were essentially flat. In our industrial paper product segment, volume mix was up $13 million, or 2.6%, driven by strong recoveries in our protective fiber and our global tubes, cores, and cones businesses. Finally, our all other groups saw an increase of $9 million, or 3.3%. This was driven by stronger volume across our industrial plastics business, as well as our medical plastics and thermo safe businesses. Moving to price, you see that selling prices were higher year over year by $48 million. This was primarily in our industrial segment as we worked to recover escalating OCC costs around the globe. Moving to acquisitions and divestitures, you see a top line reduction of $60 million, which is mostly driven by the display and packaging Europe divestiture, but partially offset by the addition of canned packaging in August of 2020. And finally, the sales impact from foreign exchange and other was positive by $16 million. The primary driver was foreign exchange translation associated with a weaker U.S. dollar year over year. So moving to the operating profit bridge and starting with volume mix, our higher sales volume combined with favorable sales mix had a strong lift on operating profit of $20 million. This favorable impact was spread among the segments, but with a more pronounced impact in industrial due to improved sales mix across our global paper mills. Shifting to price cost, I will remind you that this category includes the earnings benefit from higher selling prices as well as the impact of total inflation. In our first quarter, we had $28 million of unfavorable price cost. Our industrial segment was hit the hardest with price-cost challenges due to the higher OCC costs internationally, as well as higher-than-expected inflation and operating costs like energy and freight. As usual, there is a slide in the appendix that shows recent OCC price trends, and you'll see that Southeast OCC official board market pricing was at $85 per ton in January and February this year, until market pressures caused a jump to $90 in March. This resulted in an average of $87 per ton in the first quarter, a $45 increase over the first quarter of last year. We do anticipate continued headwinds in OCC cost escalation this year, and this is evidenced in April when the market moved to $95 per ton. Next is the impact of productivity which includes all results from our productivity actions, including manufacturing, procurement, and fixed costs. You see that our total productivity was a solid $22 million year over year, with a favorable impact across all three segments. Our productivity actions remain an important focus area across our business as we work to overcome inflation and ultimately drive higher margins. Moving to acquisitions and divestitures, the $3 million decrease in operating profit is the net impact from the display and packaging Europe divestiture and the canned packaging acquisition. Finally, the operating profit change in foreign exchange and other was unfavorable by $15 million, with various moving pieces mostly within SG&A expense. Moving to slide eight, you'll find our segment analysis where you see that consumer packaging sales were up almost 8%, driven by the addition of canned packaging and higher volumes, driven by COVID eat-at-home behaviors, and the two additional shipping days in the period. Consumer segment operating profits increased by almost 19%, driven by strong volume mix and productivity results. Our consumer segment margins increased by 120 basis points to a very strong 13%. Our industrial segment sales grew by 12.5% due to year-over-year price increases as well as recovering demand in the increased days in the period. However, industrials operating profit declined by almost 16% due to much weaker price-cost dynamics compared to the prior year. These headwinds were somewhat offset by improvements in productivity and volume mix. Our industrial segments operating profit was 8.9%, down by 300 basis points when compared to the first quarter of last year. And finally, all other sales declined by 21%, primarily driven by the sale of display and packaging Europe. Operating profit decreased by 32.5% due to the divestiture as well as price-cost headwinds. For this all-other group, operating profit margins declined to 6.8%, 110 basis points lower than the prior year period. So for the total company, sales increased almost 4%, but operating margins declined slightly to 10.3%. Moving to cash flow on slide nine, our first quarter 2021 operating cash flow was a very solid $139 million, an increase of $51 million over last year. This increase was primarily driven by a reduced consumption of working capital in this year's first quarter compared to the same period of last year. Our global team's focus on disciplined working capital management continues to show in our strong cash flow results. Looking at CapEx in the first quarter, our net spend was $39 million this year, compared to $31 million in the first quarter of 2020. We do expect our CapEx spend to ramp up over the balance of this year as we make progress on Project Horizon and other important projects. Howard will be providing additional comments on this activity in a few minutes. This takes us to our free cash flow generation of $99 million for the first quarter of this year, compared to $57 million last year. And finally, we paid cash dividends of $45 million in the first quarter of 2021, compared to $43 million in last year's first quarter. On slide 10, you see that our balance sheet and our liquidity position remain extremely strong. Our first quarter 2021 ending consolidated cash balance of $588 million includes approximately $340 million of cash held in short-term investments that are very liquid and of high credit quality. I will add that while we recognize the display and packaging U.S. divestiture in the first quarter, we received the cash proceeds on the first day of our fiscal second quarter. Our consolidated debt totaled $1.7 billion at the end of the first quarter of 2021, essentially flat from year end. As we move through this year, we expect to reduce these cash balances and rebalance our debt portfolio to our historical split between floating and fixed rate debt. We expect to take actions focused on putting our cash balances to work while delivering shareholder value and continuing to position ourselves for further growth. So moving to slide 11, you see that our guidance range for second quarter base EPS is 82 to 88 cents per share. As Howard will discuss in more detail, this outlook reflects solid demand trends, but also continued intense inflation headwinds, as well as the divestiture of display and packaging U.S. Shifting to our updated full-year 2021 base earnings per share guidance, we are narrowing our guidance to the upper half of our original full-year guidance range. Our new guidance is $3.50 to $3.60 as we have increased confidence in the macroeconomic environment and the related impact on our business, especially as we look into the second half of this year. This outlook does include the impact of the Display and Packaging U.S. divestiture, which removes around $0.09 of base EPS for the last three quarters of this year. I'll also note that our cash flow guidance is unchanged for the full year. Our guidance range for operating cash flow remains at $570 to $600 million, And our outlook for full-year free cash flow is still $270 to $300 million. This outlook does exclude the approximately $150 million pension contribution that we expect to make later in the second quarter related to our pension termination process. So this concludes my review of our first quarter results and our outlook for the second quarter and full year of this year. So I'll turn it over to Howard.

Thanks, Jill, and good morning, everyone. Excuse me, let me provide some additional color regarding our first quarter performance, and then I'll talk about what we see entering the second quarter. Let me start by saying how proud I am of how our team came together to work through the challenges stemming from severe winter weather and global supply chain disruptions to meet the needs of our customers while delivering a better than expected start to 2021. Our operations were impacted by winter storm Uri in February, with more than 40 of our U.S. plants being temporarily shut down due to a lack of natural gas or electricity. Most of the shutdowns were only for a few days, and we were able to meet the needs of our customers. However, the storm aggravated already tight supply chains, which is further impacting the availability and prices for resins, chemicals, adhesives, and trays. Despite these headwinds, our consumer packaging segment had a strong result, producing the second best operating profit ever, as many of our products continue to benefit from consumers' at-home eating habits. As an example, our global rigid paper container business registered an 8% improvement in volume mix, with North America up 6%, Europe up 9%, and Asia up nearly 30%. Our customers are telling us they are seeing young consumers rediscovering staple foods as they experiment with cooking at home. For example, we have seen a resurgence in products such as refrigerated dough, which is up 27% this quarter in North America and equally as strong in Europe. Our customers are also telling us that the adoption of remote work is providing a structural change in demand for convenient, frozen, and prepared meals. This trend is helping our recyclable plastic food trade business, which has seen double-digit growth for the past several quarters. And as I believe, we'll start seeing some COVID-impacted categories start to improve as markets continue to reopen. Categories such as confection, food service, and some medical products are showing signs of growth, and we expect this to continue as the year goes on. Switching to our industrial business, we are clearly seeing global industrial markets reopen, which helped our industrial paper segment report sequential improvement in results for the third consecutive quarter, although operating profits remain down year over year. In the first quarter, industrial segment sales grew 12.5% due primarily to volume growth and higher selling prices implemented to offset higher raw material costs. and non-material inflation. Global tube, core, and cone volume mix improved 3%, as North America volumes were down about 1%, which was more than offset by strong improvements in Europe, Brazil, and Asia. Unfortunately, our industrial business continues to be negatively impacted by price costs due to rising recovered paper, chemicals, adhesives, and freight. We have mobilized our inflation recovery plans with targeted pricing actions already in the market, others communicated to our customers, and some yet to come. Year-over-year, Reese's Tan Bending Chip Index has moved up 11% to $780 a ton, and medium prices have moved nearly 20% to $735 per ton. Demand for URB and medium remains strong, and backlogs in North America continue. are at the highest levels in recent history. As a result, we fully believe additional increases that have been announced will be reflected later in the second quarter. After a slow start due to the pandemic, we're still making solid progress on Project Horizon and still expect a conversion of our number 10 paper machine to URB to be completed in the second quarter of 2022. As we previously mentioned, we're investing approximately $300 million in capital this year, into our consumer and industrial businesses. In addition to Project Horizon, we've identified a number of excellent projects that we expect to provide solid growth and margin improvement with returns well above our cost of capital. For instance, we're building a new thermoforming line in our Waynesville, North Carolina, plastic food tray plant, to meet the increased demand I spoke to earlier for retail and institutional frozen meals. We're expanding our proprietary Sunopost appliance packaging technology into Europe with the opening of a new manufacturing facility in Poland. This new facility will open this summer to service new customers with our 100% recycled paper-based protective packaging. I'll mention that we saw a 29% increase in Sonopost appliance packaging volumes in North America in the first quarter alone. In addition, we are funding the launch of two new products in our ThermoSafe temperature-assured packaging business, including our new Pegasus ULD system, which offers a first-of-its-kind passive temperature assurance unit load device that can provide a cost-effective alternative for shipping sensitive pharmaceuticals by aircraft around the world. Finally, we're funding a number of automation and technology projects to boost productivity in our operations. Earlier this year, we announced we would be partnering with ISI, an advanced manufacturing automation and robotics company, to help us advance use of automation throughout our global operations. In addition, we're funding capital projects across multiple businesses that will speed production, lower operating costs, and reduce the need for product handling labor, which is proving to be extremely difficult to recruit and retain in the current work environment. After capital spending, returning cash to our shareholders remains a top priority. For 96 consecutive years, we have paid cash dividends to shareholders. and we have increased our dividend for 38 straight years, and our payout provides just under a 3% yield, nearly twice the S&P index payout. In addition to approving our regular quarterly dividend yesterday, our board has approved a new share repurchase authorization of up to $350 million. This new authorization further demonstrates our financial strength and illustrates our focus on a balanced capital allocation strategy. Finally, we'll continue to improve our portfolio by selectively acquiring and divesting businesses to strengthen our core consumer and industrial base. Our strong balance sheet and robust cash flow provides us the flexibility to evaluate and pursue most internal and external opportunities. However, we do remain committed to maintaining our investment-grade credit rating. Let me wrap up with a few remarks regarding our second quarter and four-year outlook. While we are cautious near-term about inflationary risk, we are becoming more confident in our ability to benefit from the developing post-pandemic economic recovery, particularly in the second half of the year. As I mentioned, we expect to see continued inflation in recycled fiber, resins, chemicals, adhesives, freight, and other operational costs. We have a number of operational and commercial levers that we can pull to offset this pressure, of course, including price. We also expect demand in most of our consumer and industrial businesses to remain solid for the foreseeable future. The pandemic has provided a period of significant elevated consumer demand, and we believe consumers will largely maintain the habits they have acquired over the past year. With 80% of our consumer portfolio focused on fresh, frozen, and processed foods, We believe we're uniquely positioned to continue benefiting from consumer at-home eating needs. Demand for uncoated recycled paperboard remains strong globally, and our tube, core, and cone products are also seeing a resurgence in demand, frankly, to near pre-COVID-19 levels in most of our served markets. Finally, I'd be remiss if I did not mention our sustainability efforts. particularly since today is the 51st anniversary of Earth Day, and we have quite a number of activities planned. Recently, we hired a senior leader of sustainability, reporting directly to me, to work more closely with our customers to identify opportunities to meet their challenging product requirements. With that in mind, we continue to expand our environmentally-sensitive line of sustainable packaging that incorporates increased recycled content and improved recyclability. EnviroSense is represented across our portfolio from rigid plastics to flexibles to our iconic paper containers. In fact, we recently began working with a customer in Europe to transition their product in one of our EnviroCan paper containers from a less sustainable substrate. We do expect this trend to continue. Now, operator, would you please review the question and answer procedures?

Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question is from the line of Gabe H. with Wells Fargo. Please go ahead.

Good morning, guys. Thanks for taking the question, and congrats on a solid start to the year. I was curious, maybe, Howard, if you can talk a little bit about the consumer segment. And I think one of the questions or a lot of interest that we're getting is, you know, folks are somewhat fixated on week-to-week meals and data that is obviously negative because we're comping some pantry stocking. But to the extent you have any visibility, can you comment at all about inventory levels either within your operations or Again, kind of what you detect on your customer side and, I guess, you know, the potential for any kind of choppiness over the course of the year.

Thanks, Gabe. You know, I'd say inventories are tight right now, particularly if you think in context of the impact of the winter storm. You know, we, as well as our customers, in terms of their feedstocks, have had to – go through various different channels just to ensure that we're able to maintain the flow of goods and products. Our inventories are low right now, and what we're hearing from our customers is very similar. So we really aren't seeing a big concern there. The other I would just note that we've talked about in the past as it relates to the products that we actually serve on the consumer side, they're relatively quickly consumed. So we're just not seeing... any of what you're referencing here as it relates to inventory in the system, our side, our customer side, and their customer side from that standpoint, and thus my comment about the turnover of our products in the pantries.

All right. Thank you. And then I guess, Julie, the one thing that stood out to me on the operating profit bridge, and I think you called it out mostly, was maybe some management incentive comp, but that $15 million or so, is that expected to kind of continue over the course of the year, or can you give us any look into how that might play out?

Yeah, sure. Yeah, we actually, I would say that type of variance or, you know, bridge item probably will continue, as we've mentioned in our full-year guidance. You know, we absolutely planned for higher IT strategic spend. We knew property insurance premiums were going up. And as well, you know, as long as 2021 played out like we expected, we would be back to accruing incentives at target versus or, you know, or appropriately depending on our outlook for the business versus, you know, what we were doing last year where obviously there was, you know, weakness very specific to COVID-19. So, yeah, I think, you know, I think I mentioned that our SG&A results, while higher year over year in the first quarter, were pretty much as expected. And so I'd expect that to continue, you know, generally through the year.

Okay. Thank you, and good luck.

Your next question is from the line of George Stokos with Bank of America. Please go ahead.

Hi, everyone. Good morning. Thanks for the details. My line drops. I apologize if you already answered this question. Howard, congratulations on the performance in consumer. When you were talking about where you're adding capital this year, you enumerated a number of projects. One area you didn't really mention was composite cans, even though the paper can business seems like it's having a great year. why are you spending or why are you not spending behind the growth that you're seeing in composite cans? And if you are spending, where are you putting it in terms of the growth outlook there?

Yeah, thanks, George. Yeah, and the intent and the list I went through was just to kind of give you a snapshot across the portfolio. We absolutely are engaged in capital expenditures on the can side of the business. You know, from a project perspective, we've got what looks like a second line that we're going to be putting into Brazil for growth that we're seeing there. Canned packaging is just absolutely starting to – I hate to use the word explode, but it seems like – in fact, I actually went – not that I wasn't listening to Julie, but I was checking my emails while she was – and just got note that we picked up even another series of customers related to that technology. And so we are extremely bullish in putting a lot of dollars, particularly on an international perspective. And then finally, didn't spend a lot of time talking about automation, but that's across the portfolio. You know, it's something that... drives the return in and of itself, but also addresses what I think we have a problem just across the country in terms of labor availability. But no, we're very focused and are excited about the opportunities that we have going forward on the canned side of the business.

I appreciate that, Howard. Again, even listening to this, and it sounds like, again, you have very impressive growth and some great returns so far with canned packaging. You didn't really say much about North America even though, again, we're seeing volumes that, frankly, we haven't seen in the whatever 25 years that we've covered your company. So does that suggest that you're not as optimistic about the composite side in North America, even though you're saying consumers are rediscovering packaged foods again, or are you being modest and there is investment and growth there that you expect will be sustained? How would you answer that question?

Yeah, absolutely. We're still very bullish on North America. And yes, we've seen good growth really for the last multiple quarters in North America. But to say what I've already said, what's surprising to us is to see some categories that are highly seasonal that have just lifted. So Yes, we're very bullish. As we talk about canned packaging, yes, I speak to it in terms of Europe, but we're looking at it as a global play. It's a new acquisition that we had hoped to start deploying the technologies on a pretty rapid basis around the world, and COVID came around. Here we are. We're starting to make progress in Europe. We've got projects identified elsewhere globally. It also relates to the automation partnership that we just engaged in with the company ISI that I noted. One of the major intents is to help us further leverage here in North America and around the world the technologies that we've acquired through the canned packaging acquisition. Again, very, very pleased with the performance and the look forward across all markets that we serve with our can business.

Howard, thanks. My last one, I'll turn it over, just a quick one. Rigid plastic, you noted growth, but it seems like, just remembering from the press release, fresh food was a bit of a weak patch for you there. I'm assuming that's just related to COVID and shoppers still not being out necessarily and shopping in the perimeter of the store. But, you know, if I remember correctly, what was driving that relative weakness, and is any of it related to kind of the ongoing issues you've had in that business over time? Thanks, and I'll turn it over.

Sure. Thanks, George. I think you're getting it from the perimeter perspective. It's somewhat seasonal as it relates to the berry harvest. But, Roger, do you have?

Yeah, George and Roger. The only other comment is some of that volume weakness you're seeing is from our consolidation efforts that we took place on the West Coast last year. And the good news is the even impact is where we expect it to be, but we did give up some volume in that consolidation.

Thank you, Roger. I'll turn it over. Thanks, Howard.

Your next question is from the wildlife, Adam Josephson with KeyBank. Please go ahead.

Thanks. Good morning, everyone. Julie, one question on the guidance. So you lost $0.09 from the sale of U.S. display. You nonetheless raised your full year range by $0.05 at the midpoint, so $0.14 underlying increase. I assume that's all volume related. Is there Any other moving parts there? Are your inflation expectations higher than they were three months ago? Can you just talk about whatever moving parts there were in that five-cent uplift?

Yeah, sure. I mean, you know, really, and you're right about noting the fact that, you know, that we did have Display and Packaging U.S. in our original full-year guidance. And so, you know, very specifically that nine cents is coming out, you know, of the balance of the year. But absolutely, I mean, you know, the – the increase there in the guidance is really just second half. You know, we are pretty optimistic about volumes continuing to increase as we move through the year, as well as, you know, as we move through, you know, what we think is going to be a challenging QQ from a price-cost perspective. We think we'll then be well-positioned. We're expecting and hoping that inflation pressures will let's say, moderate into the third and fourth quarter. And then, you know, we will be, again, just better positioned from a price-cost perspective. So, you know, really, again, a lot of it relates to, you know, our bullish outlook for the second half of the year. I don't know if Roger wants to add any more color there. We're good. Okay.

Wonderful. And, Julie, speaking of raw materials, I think you and Howard talked about your expectation that OCC – will continue to go up beyond what it went up in April to 95 in the southeast. What exactly are your expectations there, as well as on resin and chemicals? And just back to OCC, obviously there were significant production disruptions in February and really throughout the first quarter, and there's significant maintenance happening in the southeast specifically, so one would think that OCC wouldn't be going up by too much, but obviously it is. So can you just talk about what exactly – you're experiencing and how much more you expect it to go up and why. And then also in Europe, I think OCC is at an all-time high. Just any thoughts there as to when you would expect that to moderate?

Yeah, this is Roger. I'll start and Howard and Julie can add in. But as we look at the second quarter, and some of this is pretty recent, but we're expecting OCC throughout the quarter to get up into the 120s at this point. That's more than probably was expected 30 days ago. But you know, everyone knows the strength of the container board market. That continues. We're seeing very strong bids for any new open opportunities that come forward for future contracts for OCC. We're starting to see some more availability of containers. Still pretty tight, but they're becoming available, so you'll start to see more exports. So all that, in our opinion, is going to drive OCC up a little bit further than expected probably 30 days ago. So to answer your question, up into the 120s by the end of the second quarter. To hit the price side of that, you've seen the move in RISI last week on both medium and URB. So we fully expect we can offset that, but we do expect that additional OCC headwinds. On resin, you've seen the impact in the first quarter tremendous. We expect most resins will peak in the second quarter. If you look at the basket of Sunoco resins, about half of what we buy is PET. We see that peaking this month. Polypropylene probably peaked at the end of the second quarter. The rest of the basket, all the other resins, will peak sometime in the second quarter. So as Julie said, we expect the second quarter to be our toughest quarter from a price-cost standpoint. in our resident-based businesses. And finally, Europe, we are starting to see those record OCC prices start to peak out in Italy and Spain. So as you said, they are at record levels, but we expect those to moderate. And we're in the midst of our third or fourth price increase announcement in Europe to recover that inflation as well.

Thanks a lot, Roger. And just last one for me. Can you talk about freight and labor? I forget if you mentioned it earlier on the call, but are you expecting those pressures to moderate? I assume you're not expecting the labor pressures to moderate given the enhanced unemployment benefits. But any thoughts for labor, how consequential that has been for you, what your expectations are, et cetera?

Yeah, you said it on labor, Adam. Very difficult. We are struggling to hire the people we need in many of our operations. That goes back to Howard's comments on automation issues. We've got four or five really strong projects in our Tier 1 plants to help us with headcount, not to remove jobs of people we have today, but to operate our lines and supply products to our customers. So labor will continue to be a challenge. We don't see that moderating at all this year. Freight, again, another difficult quarter in the first quarter. I think we projected a 10% increase in freight for the year. We probably saw more than that in the first quarter. That We're seeing some moderation, so I'd say that's still a good number for the year. It tightens from time to time, but at that level of inflation, it's probably still a pretty good number to use in your evaluation. Thanks a lot, Roger.

Your next question is from the line of Josh Spector with UBS. Please go ahead.

Yeah, hi. Thanks for taking my question. Just curious on the industrial volumes side of things, So understanding the first quarter impact from storms in the U.S., I'm just curious what utilization and what output could do from a volume perspective sequentially into the second quarter. I don't know if you could provide any characterization of how you're thinking about that.

Yeah, this is Roger. As we look at the second quarter, we're seeing a sequential 1% to 2% improvement in volumes from the first quarter. Obviously, year over year, a very strong improvement because we're in the midst of the beginning of the pandemic. But if you look at tubing core in that 1% to 1.5% range, URB, we will get recovery from the storm, so probably in the 3% to 4% range. So sequentially, again, I think that 2% quarter-over-quarter volume improvement is a good number to use.

Thanks. So that's helpful. And just within the consumer paper packaging side, to kind of come back to that, I don't know if there's a way that you can frame the typical churn that you see in that business or like a win-loss ratio. I'm just curious if things are any different now versus two years ago. So if some of the consumption trends normalize, would you expect sales to be higher or lower versus that timeframe?

Yeah, Josh, this is Howard. I'd say right now things are fairly stable. It's here in North America, as I noted earlier, We are seeing volume pickups in Europe and Asia. Europe, actually, substantially. And that seems to be related to not only the can packaging acquisition, but the overall sustainability footprint of the package. And Asia is just continuation. It's been double digits for... multiple, multiple quarters, and as we noted earlier, 30% in this quarter. So if there's a win-loss, I'd say it's probably, we don't really track it that way, particularly on a global base, but I'd say we're on the winning side at this point in time.

Got it. Thank you.

Our next question is from the line of Mark Wildey with Bank of Montreal. Please go ahead.

Good morning, Howard. Good morning, Julie. Roger. Good morning. Good morning. Just to start off, Howard or Julie, I wondered if you could talk about that share repurchase authorization, some thoughts on cadencing. And historically, you've used repurchases just to offset options dilution. Is there any shift in kind of strategy in terms of how you're thinking about share repurchase maybe as a part of your overall capital deployment strategy?

Yeah, Mark, I'll start, and Howard can add some comments there. You know, I think our view on share repurchase, really as usual, is that, you know, we have that as a tool, right, as a part of our overall, you know, capital allocation strategy and how we return, you know, cash and value to shareholders. So, you know, we did refresh, the board refreshed the authorization this week to shift from number of shares to share a dollar amount, which we do think kind of better signifies, again, this kind of, you know, return of value to shareholders, although, quite frankly, we do keep our eye on dilution, but, you know, it's not the sole driver for, you know, how we would now look at share repurchase. So I think, you know, the bottom line is we're just, as usual, and extremely right now, very well positioned with our balance sheet, you know, the cash, our leveraged to, you know, have share repurchase on the table as a way that we, again, continue returning value to shareholders.

Okay. Howard, did you have any thoughts, or does that kind of cover us on that?

No, I was saying, Joe, they summed it up nicely.

Thank you. Okay. And then I'm just curious, in terms of the new divisional segmentation, you know, for a time you've been kind of breaking out protective and temperature assured and I'm just wondering whether we should read anything into this new segmentation in terms of your strategy for, you know, which businesses you're going to grow or not grow.

Yeah, thanks, Mark. No, really it was triggered because we had the display and packaging segment that once we divested Europe, we recognized, and as you know today, we've sold the U.S. side. We knew that. that sector or segment was going to dissolve. And so we took a different approach in terms of how we are going to structure ourselves. And that's how we've landed at this point with what you see today. So it was driven by the vestures, frankly.

Okay. And last one for me, Howard. Is it possible to just get a few thoughts about how you're thinking about acquisitions at the moment, which areas you're focusing on, and whether you've shifted focus at all over the last, you know, 12 to 18 months as you've settled into the CEO seat.

Yeah. Mark, I'd say no, really, you know, not – of course, there's evolution over time. We've talked about the strategic planning review process that this team has been through over the last year or so, and – You know, our focus really is on what I've stated from the very beginning, is that we're going to focus on markets, segments that we feel like we have a right to participate in, that we have core competencies around. And that does get across the breadth of our portfolio, some stronger than others, but still active, engaged, and engaged. and we'll let you know as the next one comes through. But it's all around where we've got a right to be in that particular business, be it a bolt-on or otherwise.

Okay, very good. Thanks, Howard. I'll turn it over.

Thanks. Your next question is from the line of Gonstrom Pajavi with Baird. Please go ahead.

Good morning, everybody. You know, Howard, as you kind of think about previous economic cycles and how your industrial segment has recovered, is there anything that you think could be different with the current recovery cycle than maybe what you've seen in the past from a macro perspective? And also, how is the segment specifically positioned differently, if at all, this time around?

Things do feel different coming out of – Out of last year's recession, if you want to call it that, the growth around the world is looking very positive. From a structural perspective, we think that the markets here in North America are in good shape and orderly, if I can say that. As we go, as you say, around the world, down in South America, we've done a lot of work, not only there, but Europe and the U.S. in terms of rationalizing our operations, right-sizing the business, positioning ourselves for success. when we see those, but certainly being able to take the opportunity when we see situations like we're seeing right now where it feels like things are really starting to heat up. So, you know, barring the inflation that we're facing right now that I think we should see us driving through in the second quarter, we feel like we're structurally in a very, very sound position to come out stronger than possibly we had in previous recoveries. over history.

Okay, and then on the, you know, consumer packaging volumes, I mean, just stripping out the two extra selling days or shipping days, the growth in rigids, was there any pull forward associated with that? And then also, I'm trying to get a sense, maybe Julie, you know, the margin increase in that segment year over year, was that a function of mix? Or was there anything else that, you know, kind of boosted the margin in the context of obviously higher inflationary costs, etc.? ?

Yeah, gosh, I might say on the pull forward, no. I would not classify that as what's going on right now at all. So we're seeing pretty stable but much higher demand on a global basis.

And to your second question about the margin improvement, we did have some positive mix, absolutely, in that sales volume perspective, really across that portfolio. Not in every business, but in And, you know, the larger businesses and consumer, very nice mix. You know, as well, just good productivity, right? When you think about, you know, the higher volumes, we're able to leverage our fixed costs, you know, very effectively. That obviously helps margins as well. And there, you know, with some pricing increased, too. So, you know, it's really kind of across the board, but I would definitely attribute a lot of the margin improvement to very nice sales mix. as well as the strong volumes just helping drop through better productivity to the bottom line.

So, Julie, just to clarify, so for Q2, which is seasonally, I think, stronger than 1Q for that segment, so 13% operating margins in the first quarter, do you think margins will be at that level, higher or lower for the second quarter?

You know, our outlook right now, because of the price-cost challenges that we've mentioned several times on this call – We don't expect the consumer margins to be quite at the 13%. So, you know, maybe 100 basis points or so below that. But, you know, so, you know, again, we expect volumes to remain solid sequentially in the segment. But, again, a bit of concern over, like Roger was mentioning, resins and how we're able to pass through those costs, the timing of that. Especially, we expect that to be a slight increase headwind Q1 to Q2 for consumer.

Got it. Thanks so much.

Your next question is from the line of Cal White with Deutsche Bank. Please go ahead.

Hey, good morning. Thanks for taking the question. I actually wanted to ask about resin and follow up on that. Is there a way to put a finer point on the impact of the lag in the past year of resin that occurred this quarter and then also what you're expecting for next quarter in terms of the dollar amount?

Yes, this is Roger. Everybody's pointing at me, so I'll answer. I can't really give you a specific dollar amount. I think if you look at the impact, Julie's mentioned impact and consumer. The other impact will be in the all-other category with the removal of the U.S. display and packaging business. That segment will be 100% resin-based, so we are expecting some margin pressure in that segment as well. But I went through kind of where we saw the residents peaking. So again, I think the second quarter is our toughest quarter. But at this point, I can't put a specific dollar amount on for you.

That's right. Just shifting gears to temperature-assured packaging in regards to the vaccine rollout, how's it going relative to your expectations? And does the current pause in one of the major vaccines have a major impact on you relative to the other vaccines out there?

Yeah, this is Roger. It's going okay. If you think about, again, going back a little bit of history, we supply about half of the packaging for the normal flu vaccine every year to a tune of $20 million in sales or so. You know, over time, we expect the COVID vaccine to get into that normal level of routine and sales for us. Our closest relationships, frankly, are with J&J and AstraZeneca. You just mentioned one of the headwinds there. So, yes, we've gotten off to a slow start. We did have impact in the first quarter with some support areas for vaccines. We expect that to ramp up throughout the year as these vaccines get full approval by the FDA. They're being distributed by the government today, primarily in larger packages as it gets more into the retail environment. And these class, mild, smaller packages, we expect the impact for Sunoco to improve at that point. So I would think it's a lot like the flu vaccine going forward for us in the second half of this year and into 2022. Got it.

Thank you. I'll turn it over and go up in the quarter. Thanks.

Thanks. Your next question is from the line of Salvador Tano with Seaport Global. Please go ahead.

Yeah. Hi, Howard, Jillian, Roger. Firstly, a couple of questions on some items that are in your updated guidance. If I understood correctly, with the U.S. display and packaging sale, that was $0.09 for just three quarters now. So we're talking about roughly a $0.15 raise in the full year number. So firstly, with regard, I guess, to the U.S. URB pricing, is it correct to assume, based on what you said before, that you're now incorporating even the third price hike that you announced in March in the guidance? And secondly... I wanted to ask about productivity here also, because I think your initial bridge from last quarter showed around 50, 55 million productivity improvements for the year, but you already delivered 22 in a single quarter. So is that something that also is coming above what you expected earlier?

Yeah, maybe I'll start with the productivity question, and Howard and Roger can clarify a little more on the pricing increases because there's so much activity there. You can tell it's an extremely dynamic environment with price and cost changes. You're right. We've started out the year, the $22 million operating profit delivered from productivity is a really, really solid start to what we were expecting for this year and what's in our guidance. You know, as I say, you know, embedded in our guidance is probably a slight, increase in what we expected before, but I would say at the same time, nothing really dramatic there. When I looked at it, we delivered about a third of our gross productivity in the first quarter of our full year expectations, so a little ahead of what we expected, but not dramatic. But it's possible that we could land the year, and I would hope we would land the year, above our expectations today. But I would say in the guidance, nothing really material related to productivity above expectations, but maybe slightly.

And, Sal, briefly on the URV, no, our last increase was not baked into guidance. It's effective, I think, April 26 or so. And you really should not be surprised if you see further increases as we progress through the quarter.

Just to clarify, when you said further increase, you mean in URB price or in the guidance?

All. Okay. But certainly URB, with what we're seeing, as we've already talked about, we're seeing everything we buy is inflating.

Okay. Sorry, go ahead. You go ahead. Oh, just one last question on industrial paper packaging. Can you break down essentially how the legacy business, tube scores, et cetera, would have performed in terms of operating profitability if you didn't have the fiber-protective business that I think has been doing very well in the past few quarters?

No, we really don't look at it that way, you know. Again, we're happy with how both businesses performed, and both are being impacted equally as it relates to the URB and OCC-type increases that we're seeing.

Yeah, Sal, this is Roger from, and I'll just remind you that that's an integrated product, so it uses paper that's produced in our paper division, and then it's converted into the product, the post that we sell. So it obviously makes sense to be in that particular area. but there was already profitability for the paper that was being sold into that segment anyway. So, again, it's not a material number to talk about.

Well, and honestly, that's a really nice business, but it's really not that material, quite frankly, when you look at the entire industrial paper segment that we have. So it wouldn't be a big needle mover anyway.

Thank you very much.

Your next question is from the line of George Statsos with Bank of America. Please go ahead.

Hi, guys. Thanks for taking the follow-ons. I'll be quick. So can you update us on Project Horizon, both in terms of where you stand relative to your prior guideposts? It sounds like you maybe are off to a little bit of a slow start with the storms. You know, so where do you stand in terms of starting the stock prep area? And related – What projects beyond this project horizon might you have down the pipe? You know, maybe you can shed a little bit of color on in terms of your ability to use mixed waste and other types of furnace relative to OCC. Second question is just one more on composite cans. I think at one point in time you'd expected volume to be down for the year modestly because of the comparison, the very strong comp from 2020 that you had Is that still the case? Could you give us a number for the year? And then last question, back maybe to Adam's question on guidance. So I think looking out this year, this was two quarters ago, you know, the ballpark was somewhere around 340-ish when we did the math on the divestitures and dilution, and you've done a good job, obviously, of performing and raising the guidance. When you think about that variance from the 340 to 350 to 360, Is it mostly mix? Is it mostly pricing? Is it volumes of productivity? If you could just stack rank them. Thank you, guys. Good luck in the quarter. Appreciate the time.

Great. Thanks, George. On Horizon, things are going extremely well. Yeah, we are delayed by a quarter, and that really relates to the actual machine conversion. Just to remind, the project was – A couple of things. One was, of course, to take the medium machine and convert it to the largest URB machine in North America. But the other portion was logistics and flow around the campus. And if you come down here now, you'd be amazed at the amount of activity going on. So we expect stock, you mentioned stock prep specifically, I think that's expected to be up probably late October-ish, sometime late third quarter, early fourth quarter. That particular system will be set up with the cleaning equipment to manage mixed waste. I'm not sure exactly what you meant on what other projects that we may see coming into the future. but kind of what I was talking through in my prepared comments that we've got do we have a $100 million project horizon that's visible at this point in time but the answer to that is what we do but we're working on that that may be some time to come before we actually pull the trigger on that but we've got just a multitude of projects that were represented to the examples I gave and my commentary. I'll just finish on Horizon by just saying that, yeah, things are holding as we had expected with that one-quarter delay. And to add to that, you know, the medium market is good right now, so it does not impact the financial expectations that we had built into the models the way the machine is performing right now. On CANS, I would Just ask Julie if she would give a couple of comments and move on to the second.

Yeah, George, you're right. Our volume expectations for the global paper containers business were originally to be down kind of that 2% to 3% range. And, you know, I think we are more bullish on that business now for the full year. You know, we had the great start, and, again, we – are optimistic about, again, these eat-at-home and different types of at-home cooking trends are going to remain more in place than maybe we did when we started the year. So, you know, is the rigid paper container business flat year over year versus down 2% to 3%? I think that would probably be our outlook at this point. And, you know, if I captured your question on the guidance – I think most of this, you know, again, improvement that went in, you know, the tightening, the slight raise of that midpoint really is volume mix driven with some small contribution from productivity, like I was mentioning a few minutes ago. But, you know, I'd probably put it two-thirds in volume mix and a third in productivity just at a high level.

That's perfect. Thank you so much.

Your next question is from the line of Adam Josephs with KeyBank. Please go ahead.

Thanks for taking my follow-up. Howard, just one strategic question. So you have projects rise, and you're talking about these other projects. It seems as though the company is investing more in itself than perhaps it has in years past, and at the same time you're pruning the portfolio by selling display just to simplify the the business mix, all of which suggest that you're focusing really on growing earnings internally rather than relying on M&A to do so. But at the same time, obviously, Bloomberg mentioned that you were in the running for the crown business. So can you just talk about how you're thinking about growing the company in the years to come? How much just from internal investments, how much from M&A? what your preferences are to the extent you have any and why. Thank you.

Thanks, Adam. Yes, as we talk about investing in ourselves, we have recognized that there are a lot of opportunities to mine, and in your words, more profitability, but equally important is there's opportunities to mine growth. Yes. So we think that if you were to parade the uses of cash, your best use is if you can grow with what you've got, top and bottom line, that's a wise use. But acquisitions are extremely important to us. They will be going forward. We are in the market at all times looking at what opportunities may lay, and so we're I can simply say that you'll be hearing from us on both sides. You'll be hearing that acquisitions will not stop us from continuing to do what we think are the right things as it relates to capital investments going into our base as we broaden the portfolio or strengthen the base through acquisitions. So TBD, you guys will be the first to know when we pull the trigger.

Thanks so much, Howard. Good luck in the quarter.

Your final question is from the line of Mark Wild with Bank of Montreal. Please go ahead.

Hey, Mark. Yeah, just two quick ones. Howard, can you just put a little more color on what you think has tightened the URB business up? I mean, I'm hearing one thing that might be coming into play is some URB mills actually running some container board where possible.

You know, I have not heard that. Roger, do you? Have you heard?

Maybe just on the margin, on the fringes, Mark. You know, it was tight. Really, what tightened it up is coming out of the pandemic. Everyone came into the reopening with very low inventories. And then you tack on top of that the storm impacts, the demand for tissue and towel through the pandemic. Just very low inventories across the system. So, yeah, there may be on fringes some of the mills running other products on potential URB mills, but mostly it's just demand from the recovery.

Yeah, and I'd also add, we didn't note this, but in our first quarter while we had the outages related to the storm, we had two really significant shutdowns. The entire Hartsville complex was down for close to a week. with planned downtime that we had pushed and pushed and pushed. And even as tight as we were, there was just no way that we could pass on the shutdown. So somewhat self-inflicted as well, at least in terms of our position and our performance for the quarter. But we had to complete those downtimes.

Okay. And then, Howard, just the other one. Just a quick update on your efforts to re-engineer the composite can. I think a lot of this has been going on over in Europe. But also maybe with that, just, you know, how important is that, you know, re-engineering of the can in terms of the structures to the customers around the world? Or is it just Europe?

I think Europe is where it really is. You know, here in North America, you know, and I think it's another way to talk about sustainability in our package is We've been collected and recycled through the steel stream for a long, long time, and that continues today. So recent data I saw that maybe 90% of our cans were captured in our MRS and other MRS. So it's more of a perception issue, I think, is what you're seeing in Europe. You know, we're recycled within the carton stream there, but what we're seeing is just right or wrong. a perception around plastics and our customers or future customers are coming to us saying, look, we'd like to get out of this format that we're in from a perception perspective. Maybe it is or is not recyclable, but the customers perceive it as a – our package is a paper as a more friendly alternative. So it's really Europe where we're seeing the benefit and – and where we're focusing on most of our attention.

Okay, that's helpful. Thanks. Good luck in the second quarter and through the year.

Thanks. Thanks, Mark.

Ladies and gentlemen, I'm showing no further questions at this time. I would now like to turn the conference back to Roger for closing remarks.

Okay, thank you again, Angela. And again, let me thank everyone for joining us today. We certainly appreciate your interest in the company. And as always, if you have further questions, please don't hesitate to contact us. Have a good day.

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