Sonoco Products Company

Thank you for standing by and welcome to the Sunoco Products first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's call may be recorded. Should you require any further assistance, please press star zero. I would now like to hand the call over to Roger Shrum, Vice President of Investor Relations. Please, go ahead.

Thank you, Lateef, and good morning, everyone, and welcome to Sunoco's first quarter 2022 investor conference call. Joining me today are Howard Coker, President and Chief Executive Officer, Roger Fuller, Chief Operating Officer, and Julie Albrecht, Chief Financial Officer. Also, I'm pleased to announce that Lisa Weeks has joined Sunoco and will be my successor as Head of Investor Relations. Lisa is on the call with us today and I will be working with her on a transition during the next several months. We're glad to have Lisa as part of the Sunoco team and welcome aboard. 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 was also 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 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 operations. 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 sections of the website. Now, with that introduction, I'll 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 GAAP basis of $1.17 and base earnings of $1.85 per share. This very strong result is 50 cents higher than the top end of our original guidance range of $1.25 to $1.35 per share and 5 cents above the updated range that we provided on March 22nd of $1.70 to $1.80 per share. In addition, These results are 85 cents ahead of the $1 of base EPS that we delivered in the first quarter of last year, with our legacy businesses driving 50 cents per share of this increase. The balance comes from the addition of Sunoco metal packaging to our portfolio, reflecting strong operating results that are net of interest expense on the debt we issued to fund the acquisition. Related to the 68 cents per share difference between base and GAAP EPS, I'll first highlight that most of these non-base items are driven by the metal packaging acquisition and or significant inflation, and most notably, the dramatic increase in steel costs this year. The largest non-base item of 37 cents per share was for acquisition-related net costs driven by the metal packaging transaction. These were primarily from the partial write-off of purchase accounting step-up on the acquired inventory, as well as cash-based professional fees. Next, we had an add-back of 14 cents per share related to an acquisition and tangibles amortization expense, which, as we announced in February, is a change in our base earnings definition starting this year. All of our prior year results have been recast to reflect amortization expense as non-base. The next item was a $0.14 per share increase in our LIFO reserve, driven by the significant steel inflation. And on a go-forward basis, any changes in our LIFO reserve will be treated as non-base. And finally, we have $0.11 per share related to restructuring and asset impairment, and an $0.08 per share net gain in other items. I'll note that these restructuring and impairment charges include $0.05 per share related to the write-down of the net assets in our small Russian operations. Howard will talk about our planned exit from Russia in a few minutes. So moving to the base income statement on slide four and starting with the top line, you see that sales were $1,771,000,000, up 31% from the prior year. I'll review more details about our key sales driver on the sales bridge in just a moment. Base gross profit was $416 million, $138 million above the prior year. This performance resulted in a 23.5% base gross profit as a percent of sales, which was 300 basis points higher than the first quarter of last year. Our SG&A expenses of $155 million increased by $30 million year over year. The key drivers were higher expenses for employee compensation and benefits, strategic IT expenses, and the lack of non-recurring COVID incentives that we received last year. So all of this resulting in operating profit of $261 million, which is 72% above last year. I'll discuss the key drivers on the operating profit bridge in a few minutes. Net interest expense of $19 million was $1 million higher than last year due to the higher debt balances related to the metal packaging acquisition. Income tax expense of $61 million was $27 million above last year due to higher pre-tax profits partially offset with a slightly lower tax rate. So moving down to net income, our first quarter 2022 base earnings were $183 million compared to $101 million last year. Now looking at the sales bridge on slide five, you see that volume mix was higher by $27 million or 2% for the company as a whole. This increase was driven by our consumer segment and our all other business group and was partially offset by lower volume in our industrial segment. consumer packaging volume was up $24 million, or about 4%, driven by strong demand growth in flexible packaging and in plastic food. For our industrial paper packaging segment, volume mix was down $12 million, or about 2%, reflecting, among other things, severe winter weather, supply chain disruptions, and operational closures in China stemming from COVID-19 restrictions. Volume declines were concentrated in Asia and Europe, tube and core operations, North America recycling, as well as fiber protective packaging. And finally, our all-other group saw an increase of $15 million, or about 9%, and this was driven by stronger volume across almost all of these businesses. So moving over to price, you see that selling prices were higher year over year by $275 million. Almost 60% of this increase was in the industrial segment with about 35% in consumer and the balance in all other. Most of these price increases are driven by our continued work to recover escalating costs around the globe. Moving across to acquisitions and divestitures, you see a top line positive impact of $141 million, mostly driven by the metal packaging acquisition, but also reflecting sales removed with last year's U.S. display and packaging divestiture. And finally, the sales impact from foreign exchange and other was negative by $25 million, mostly associated with foreign currency translation on a stronger U.S. dollar year over year. Moving now to the operating profit bridge on slide six and starting with volume mix. The contribution to sales of $27 million had a $3 million positive impact on operating profit. This low drop through was due to the negative impact of sales mix across numerous businesses. Now 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 first quarter, we had $85 million of favorable price cost with most of this benefit generated in our industrial and consumer segments. Approximately 45% occurred in our consumer segment, which was driven by the timing of price cost changes and recovered about half or just over half of the negative price cost incurred by these businesses in 2021. we do expect our consumer segment margins to normalize beginning in the second quarter. The balance of our first quarter price-cost benefit was mostly generated in our industrial segment, driven by price increases to recover inflation and supported by continued strong demand driving rising market indices like tan bending chip. As usual, there is an OCC market pricing slide in the appendix that shows that Southeast OCC averaged $160 per ton in the first quarter. While this is well above the 87 per ton average in the first quarter of last year, Southeast OCC declined sequentially in the first quarter from an average of $183 per ton in the fourth quarter of 2021. Next on the bridge is the impact of total productivity. you see that our total productivity was $1 million year over year with a favorable impact from our consumer segment, partially offset by a negative impact in our industrial segment and all other group. At a high level, our productivity results were negatively impacted by supply chain, weather issues, and labor shortages across numerous businesses. Now moving to acquisitions and divestitures, you see the net addition of $49 million of operating profit from our metal packaging acquisition, as well as the divestiture of our US display and packaging business. Lastly, you see that the operating profit change and other was unfavorable by $30 million, with the main driver being the higher SG&A expenses that I mentioned before. Moving to the segment analysis on slide seven, you see that our consumer packaging segment sales were up nearly 50%, driven by the addition of metal packaging, higher selling prices, as well as increased demand. Consumer segment operating profits increased by 113%, driven by the metal packaging acquisition, favorable price-cost results, and the improved volumes. Our consumer segment margin increased by 600 basis points, to 20% versus the first quarter of last year when the margin was 14%. Shifting to our industrial segment, sales grew by almost 24%, mainly due to year-over-year price increases, mostly to cover inflation in raw materials as well as operating expenses. Industrial operating profit increased by almost 39% due to improved price-cost dynamics compared to last year. Our industrial segment's operating profit margin was 10.4%, up by 120 basis points, when compared to 9.2% last year. And finally, all other sales declined slightly, reflecting the sale of U.S. display and packaging, which was almost completely offset by strong volumes and year-over-year price increases, mostly to cover inflation. Operating profit decreased by 22.6% as the negative impacts from the D&P divestiture and productivity more than offset the positive impacts of price-cost and volume mix. And our all-other margins decreased to 7.1% from the prior year quarters, 9.1%. For the total company, sales were up nearly 31%, and operating profit increased by 71%, resulting in a company-wide operating margin of 14.7%. So shifting to cash flow on slide eight, about halfway down this slide, you see that our first quarter operating cash flow was $1 million compared with $139 million last year. This decrease was almost entirely driven by an increase in cash consumed by working capital compared to the same period of 2021. Our higher working capital balances this year are driven by increased sales volumes, seasonal inventory build, and, of course, inflation. Our net CapEx spending in the first three months was $67 million, compared to $39 million in the first quarter of last year. While spending did continue for Project Horizon, this year-over-year increase was largely driven by increased strategic investments in consumer growth and productivity projects. This takes us to free cash flow, which was a use of $66 million for the first quarter compared to free cash flow generation of $99 million last year. Finally, we paid cash dividends of $44 million in the first quarter of this year compared to $45 million in last year's first quarter. Our dividend was unchanged on a per share basis, but this reduced reduced cash payment was due to lower shares outstanding driven by our share repurchase activity in 2021. On slide nine, you see that our balance sheet and our liquidity position remain strong and reflect the net assets and debt associated with a metal packaging acquisition. I'll note that we've completed our preliminary purchase price accounting work, and this is reflected in our first quarter balance sheet. Next on slide 10, you see our guidance for the second quarter and our updated guidance for the full year 2022. So focusing first on our second quarter guidance, we're projecting a range of $1.20 to $1.30 base earnings per share with a midpoint of $1.25. This midpoint represents a strong 34% increase over the 93 cents of base EPS we delivered in the second quarter last year. This increase is driven by slightly higher volumes in our legacy businesses, continued favorable price-cost results, and, of course, the addition of metal packaging. We're raising our full-year base EPS guidance to $5.25 to $5.45 per share, reflecting our first quarter earnings beat as well as our solid outlook for the second quarter. This new full-year midpoint is a 14% increase from the $4.70 per share midpoint of our original February guidance. In addition, we are increasing our full-year EBITDA guidance to a range of $995 million to $1,045,000. Both our operating and free cash flow guidance remain unchanged from prior guidance despite our outlook for stronger earnings. Due to inflation and increased business activity, we do remain cautious about our working capital balance trend. So that concludes my comments, and I'll turn it over to Howard now.