Sonoco Products Company

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2021 Sunoco Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to turn the conference over to your speaker for today, Roger Shrum, Vice President, Investor Relations. You may begin.

Thank you, Tawanda, and good morning, everyone, and welcome to Sunoco's fourth quarter and full year 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 fourth quarter financial results, which was posted on the 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 uncertainty. Therefore, actual results may differ materially. Furthermore, today's presentation includes the use of non-GAAP financial measures, which management believes provides useful information to investors about the company's financial condition and results of operations. Further information about the company's use of non-GAAP financial measures including definitions as well as a reconciliation of those measures to the most closely related GAAP measure is also available in the investor relations section of our website. Now with that I'm going to turn it over to Julie.

Thank you, Roger. I'll begin on slide three where you see that earlier this morning we reported fourth quarter earnings per share on a GAAP basis of 66 cents and base earnings of 90 cents per share. which is the high point of our guidance range of 84 to 90 cents per share and 8 cents greater than the base EPS we delivered in the fourth quarter of 2020. Our fourth quarter operational results were driven by favorable total productivity and, importantly, also by positive price cost. These factors were partially offset by unfavorable impacts from lower volume mix solely driven by four less shipping days in the quarter, as well as the divestiture of our displays and packaging business. Now moving to our base income statement on slide four, and starting with the top line, you see that sales were $1,439,000,000, up $63,000,000, or nearly 5% over the prior year period. I will review more details about our key sales drivers on the sales bridge in just a moment. Gross profit was $264 million, $11 million below the prior year. This resulted in an 18.3% gross profit as a percent of sales compared to 20% in the fourth quarter of 2020. SG&A expenses net of other income were $143 million an $11 million reduction year over year. This decrease was expected and was mostly driven by different timing for incentive comp expenses in each year. So all of this resulting in fourth quarter operating profit of $125 million. I'll discuss the key drivers on the operating profit bridge in a few minutes. Net interest expense of $12 million was a $6 million reduction from the prior period due to lower debt balances and a lower average interest rate. Income tax expense of $27 million was $1 million higher than the prior year's quarter, reflecting our higher pre-tax earnings as our effective tax rate was relatively flat quarter over quarter. Moving down to net income, our fourth quarter 2021 base earnings were $89 million compared to $83 million in 2020, an increase of approximately 7%. Now, looking at the sales bridge on slide five, you see volume was lower by $38 million, or almost 3%, driven by our consumer and industrial segments and somewhat mitigated by stronger demand in our all other group of businesses. It is important to note that we had four less shipping days in the fourth quarter prior to the fourth quarter of 2020, which reflects around a 6% headwind. So adjusting to a same-day basis, our total volume mix actually increased by approximately 3%. Consumer packaging volume mix was down $22 million, or almost 4%, but when adjusted for the same number of days, this segment's volume increased in the low single digits. This was driven by solid demand improvement in flexibles and plastics food, while global rigid paper containers was down slightly, as volumes did drop off in late December as certain key customers were negatively impacted by COVID and supply chain issues. Industrial packaging volume mix was down $26 million, or almost 5%, but actually higher by 1% to 2% when adjusting for the same number of days. On this adjusted basis, global tubes, cores, and cones experienced stronger demand, but this was mostly offset by lower volumes in our global paper operations. Finally, our all other group saw volume mix grow by almost 6%, but increased by an estimated 12% on the same day basis. And all of this is adjusted to exclude the display and packaging divestiture. This stronger demand was driven by our industrial plastics and our thermo safe businesses. So moving down the sales bridge to price, you see that selling prices were higher year over year by $204 million as we continue to battle inflation globally. Around two-thirds of this increase was recognized in our industrial segment, driven by both contractual and open market price increases. Moving down to divestitures and acquisitions, you see a top-line negative impact of $88 million which is driven by the divestiture of our former display and packaging business in the all-other group. And finally, the sales impact from foreign exchange and other was negative by $16 million, and the primary driver was the negative foreign exchange translation impact from the stronger U.S. dollar year over year. Moving to the operating profit bridge on slide six and starting with volume mix, Our lower sales volume, driven by the four less shipping days, and combined with the impact of mix, had a negative impact on operating profit of $20 million. Next is the impact of total productivity, which added $14 million of earnings year over year, with the favorable impact being predominantly in our consumer segment. Moving 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 the fourth quarter, we had $11 million of favorable price costs, with most of this impact falling in our industrial segment. As usual, there is a slide in the appendix that shows Southeast OCC official board market pricing. There, you'll see the trend of declining OCC prices during the fourth quarter of 2021, and this trend does continue in early 2022. Moving to divestitures and acquisitions, you see that the divestiture of our former display and packaging business reduced operating profit by $10 million. Moving now to the segment analysis on slide seven, you see that consumer packaging sales were up by 3.3%. driven by higher selling prices, which were mostly implemented to offset cost inflation. Our consumer segment operating profits fell by 14.2%, driven by unfavorable price costs, as well as lower volume due to fewer shipping days. And both of these were partially offset by strong productivity results. Our consumer segment margin declined to 9.6% versus the fourth quarter of 2020, when their margin was 11.6%. Moving to our industrial segment, sales grew by 20.5% due to year-over-year price increases partially offset by lower volume solely due to the fewer days in the period. Industrial operating profits surged by 32.6% driven by favorable price costs partially offset by lower volume. Our industrial segment's margin profile increased to 8.7% compared to last year's 7.9%. Our all other sales declined by 25.7%, driven mostly by the sale of our display and packaging businesses, but partially offset by the stronger volume mix and higher pricing. All other operating profit decreased by 34.5% due to the display and packaging divestiture and price-cost headwinds. Margins declined to 5.8% from the prior year's 6.5%. So for the total company, sales were higher by 4.6%. And operating profit was relatively flat, resulting in a company-wide operating margin of 8.7% compared to last year's 9.2%. Shifting to cash flow, about halfway down the next slide, you see that our full year operating cash flow was $299 million compared with $706 million in 2020. While we did have various large non-cash items related to our pension termination process, I am going to focus my comments on the most important drivers to actual cash flow. So first, during 2021, we contributed $125 million to our U.S. inactive pension plan related to the termination process of that plan. Another important driver was the year-over-year $158 million negative swing in cash flow from net working capital. During 2021, our working capital balances steadily increased, driven by increased business activity, inflation, as well as unique supply chain dynamics. I'll note that our increased working capital balances during the fourth quarter of 21 is contrary to our historical trends. However, the current operating environment uniquely impacted our working capital balances which is reflected in the higher year-end positions. Moving down to our full-year CapEx spend, our net spend was $243 million in 2021 compared to $181 million in the prior year. This $62 million increase is mostly due to spending on Project Horizon. This takes us to 2021 free cash flow of $56 million compared to $525 million in 2020. I'll also highlight that in 2021, we paid cash dividends of $179 million. On slide nine, you see that our balance sheet and our liquidity position remained strong, which did serve us well as we completed the Ball Metal Pack acquisition in January. As a reminder, Both Moody's and S&P affirmed our credit ratings in conjunction with this acquisition. So that concludes my review of our fourth quarter results. So I'll move into my review of our first quarter and full year guidance for 2022. Beginning at the top of slide 10, you'll first see our reported first quarter and full year 2021 base earnings per share of 90 cents and $3.55 respectively. So following a review of our consumer peers and discussions with outside advisors, we've decided to treat amortization of acquired intangibles as a non-base expense going forward. So going forward and including the metal pack acquisition, approximately 50% of our sales are in our consumer segment. So we feel this change to our base earnings represents a more clear view of our operational performance and improved comparability to our consumer peers. When removing this amortization expense from base earnings, our 2021 restated earnings per share are $1 and $3.93 for the first quarter and the full year of 2021 respectively. Our outlook for first quarter 2022 base earnings using the new definition and including our recently acquired Ball Metal Pack business is a range of $1.25 to $1.35 per share. While our full year 2022 base earnings are expected to be between $4.60 and $4.80 per share. At the midpoint of these ranges, We have added back 17 cents in the first quarter related to amortization expense, and 65 cents is added back for the full year. This full year guidance represents a 20% increase over our 2021 restated base earnings per share, and this increase is driven by both strong performance by our legacy businesses and by the addition of ball metal packs. Our 2022 guidance is based on the same key assumptions for our legacy business that we reviewed in early December at our Analyst Day. And in a few minutes, Howard will provide additional comments about key drivers to our 2022 outlook, including our strong start to this year. Specific to our acquisition of Ball Metal Pack, I'll note that our 2022 sales are now expected to be between $7 billion and $7.3 billion, including the sales from the acquisition. Also, we've increased our forecast for interest expense by $34 million to a new full year estimate of $88 million. In addition, we're providing an outlook for our full year EBITDA, which is between $910 and $960 million. Moving to slide 11 in our 2022 cash flow guidance, we are targeting to generate $715 million of operating cash flow and $390 million of free cash flow, both significantly above our 2021 results. Similar to our base earnings, our key assumptions for our cash flow outlook are consistent with what we reviewed in December. However, we have now included the impact of what I'll call Sunoco metal packaging by including their EBITDA and CAPEX spending, as well as the incremental interest and income tax expenses, which are roughly offset by the cash tax benefit we expect to receive related to purchase accounting. So that concludes my comments, so I'll turn it over to Howard.