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.