Sonoco Products Company

Thanks to everyone for joining us today for Sunoco's second quarter 2022 earnings call. Joining me this morning are Howard Coker, President and CEO, Rob Dillard, Chief Financial Officer, and Roger Fuller, Chief Operating Officer. Earlier this morning, we issued a news release highlighting our financial performance for the second quarter of 2022, and we prepared a presentation that we will reference during this call. The press release and presentation are available online under the Investor Relations section of our website at www.sonoco.com. As a reminder, during today's call, we will discuss 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. Please take a moment to review the forward-looking statements on page two of the presentation. Additionally, today's presentation includes the use of non-GAAP financial measures, which management believes provide 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 to GAAP measures, is available under the investor relations section of our website. For today's call, Howard will begin by covering a summary of second quarter performance. Rob will then review our detailed financial results for the second quarter and discuss our guidance update for the third quarter and the full year of 2022. Howard will then provide a progress report on our strategic priorities, followed by a Q&A session joined by Roger Fuller. If you will please turn to slide four in our presentation, I will now turn the call over to our CEO, Howard Coker.

Thank you, Lisa, and thanks to everyone for joining our call today. Hopefully you've seen our press release and the strong financial results we delivered in the second quarter, which exceeded the high end of our recently raised guidance. We've made tremendous progress on our strategic priorities that enable the quarter's performance and our outstanding first half of 2022. Revenue for the quarter was up 38% over last year, and the $1.9 billion quarterly sales marked the highest in the history of Sunoco. Our revenue performance was driven by the continued benefits of our ongoing strategic pricing actions, great performance from the Sunoco metal packaging acquisition, relative stability and volume mix, and solid operational improvements. As you have no doubt heard repeatedly from companies across various industries, global supply challenges and inflationary issues persist. Despite this, we expanded our base EBITDA margins over 200 basis points to 16% compared to last year from strong profit performance across the entire portfolio. On the bottom line, we grew base earnings per share to $1.76, which was 89% above our result in Q2 of last year. Based on our first half results and third quarter outlook, we're again raising our full year base earnings and per share guidance to a range of $6.20 and $6.30. Our operational, commercial excellence, and supply chain teams have just done an outstanding job and I want to extend a special thanks to the entire Sunoco organization for delivering these results while continuing to support our customers. We've had great execution in the first half of the year and again these results are not by chance. We have been working very hard on a set of strategic priorities to make our great company even better. And later in the call, I'll provide further updates on this progress. Now to go over more details on our second quarter performance and our guidance, let me introduce you to our new CFO, Rob Diller. Rob has been with Sunoco since 2018, handling corporate strategy and M&A activities. Rob is a strategic leader of our company and brings extensive experience in corporate finance and accounting, operations, strategy, and corporate development from both Fortune 500 companies and investment banking. Rob has a deep understanding of Sunoco's culture and strategic opportunities to partner with our global business leaders to further drive performance improvements and shareholder value. Let me say congratulations, Rob, on your new role and I'll now turn the call over to you.

Thanks, Howard. On slide five, we start our financial review with GAAP EPS and the reconciliation of GAAP EPS to base EPS. GAAP EPS was $1.33 for the quarter, a meaningful increase from the same period in 2021. As Howard said, this strong performance was due to continued strategic pricing performance, a relatively stable demand environment, strong performance in metal packaging, and improved productivity. This improved profitability resulted in base EPS of $1.76, an 89% increase from the same period in 2021. The reconciliation from GAAP EPS to base EPS has 43 cents of adjustments, primarily related to the amortization expense, the metal packaging acquisition, increase in lifeblood reserves, and the exit of our rushing operations, which impacted restructuring. Slide 6 has our base P&L summary for the period. These exceptional results illustrate the power of our positions in stable and defensive end markets where we differentiate ourselves as a supplier of toys. We achieved value for this differentiation through strategic pricing performance that greatly contributed to our net sales growth of 38% to $1.9 billion in the quarter. Furthermore, this price is translating into strong operating leverage. This is best exhibited by our 62% increase in base EBITDA and our 78% increase in base operating profit in the quarter. Base EBITDA was $306 million and base operating profit was $250 million in the quarter. We increased base EBITDA margin 230 basis points to 16% and base operating profit margin 290 basis points to 13.1% in the quarter. This focus on margin improvement is strategic. and is backed by portfolio management actions, footprint optimization activities, value-enhancing capital investments, and ongoing strategic self-help programs. Turning to page 7, net sales grew $531 million versus the same period in 2021. This strong performance was driven by several key factors. First, volume mix was negative 1% in the quarter. was largely an indicator of relatively stable demand conditions in our increasingly defensive consumer-oriented market profile, best exhibited by our market-leading global rigid paper cans business, which achieved 1% volume mix growth. This growth and growth in our other core U.S. businesses was offset by strategic actions that led to volume declines, as well as market weakness in consumer durable markets and international industrial markets. Pricing performance in the quarter was particularly strong, with net price of $297 million contributing 21% to growth in the period. This figure excludes the pricing performance of metal packaging, which was also strong. This exceptional pricing performance was both contractual and strategic in nature and is the product of our commercial excellence strategy. Acquisitions and divestitures generated $290 million of sales in the quarter as metal packaging continues at strong performance. Excluding the impact of acquisitions, net sales growth was still 17% in the quarter. Finally, FX and others was negative 44 million in the quarter. It's important to note that approximately 72% of our net sales are generated in the U.S. As shown on slide 8, base operating profit increased 109 million, or 78% from the same period in 2021. As previously stated, the primary drivers for this growth were strong price cost and performance acquisitions and divestitures, and improved productivity. Metal packaging was largely responsible for the acquisition growth. This business achieved 21% operating profit margin in the quarter due to strong price-cost performance and the benefits of integration. Slide 9 has our segment analysis and base figures. This analysis illustrates the strong performance across the breadth of our diverse and improving portfolio of businesses. Consumer net sales grew 66% to $990 million in the quarter. Consumer volume mix was essentially flat during the second quarter, as strong international rigid paper can volume mix and 4% flexibles volume growth was offset by mix and flexibles and strategic volume reductions in our perimeter store business. Consumer operating profit grew 114% to $139 million, a 320 basis point increase in operating profit margin to 14.1% due to strong price costs and productivity. Industrial paper net sales increased 20% to $727 million, the eighth consecutive quarter of record net sales. Industrial paper volume has declined approximately 2% in the quarter due to disrupted demand in international markets and the impact of a tight URB market in the U.S. This URB market conditions are moderating in Europe, as our U.K. paper mill is again operational after a capital project. We anticipate that the U.S. URB market will be in balance once Project Horizon is completed. Industrial paper operating profit grew 57% to $94 million, a 310 basis point increase in operating profit margin to 13%, due primarily to price cost. Turning to slide 10, year-to-date operating cash flow was $184 million. This strong performance was despite a $258 million increase in networking capital in the first half of 2022. This increase in networking capital was primarily associated with the effects of inflation, metal packaging seasonality, the elevated levels of inventories associated with buffering disrupted supply chains, and to better serve our customers. Capital expenditures were $144 million in the first half of 2022, We're maintaining our guidance of $325 million in capital expenditures for 2022. Finally, we paid $92 million in dividends in the period in support of our mission to provide an ongoing return to shareholders and support a market-leading yield. Slide 11 has our balance sheet as of July 3rd, 2022. Our balance sheet is largely reflective of our strong performance and conservative capital structure. At the completion of 2022, we anticipate our net debt as a multiple of base EBITDA will be well below three times. We intend to manage our capital structure appropriately to maintain our strong investment-grade credit rating. Next, slide 12 has our guidance update. Our strategy is gaining traction, and this enables us to raise our third quarter and full-year guidance. We are raising our third quarter base EPS guidance to $1.35 to $1.45. Additionally, we're raising our full year base EPS guidance to $6.20 to $6.30. We're also increasing our full year base EBITDA guidance to $1.125 billion to $1.15 billion. We're not raising our cash flow guidance despite our expected strong operating performance. due to uncertainty in supply chains and the impact of inflation on networking capital. Of note, our updated guidance reflects the shutdown of our number 10 paper machine for Project Horizon. We anticipate that this will have a 10 to 15 million impact on base operating profit in the third quarter and the full year. Production will resume in the fourth quarter, and we expect the full benefit of the project in 2024. Now, Howard will conclude our prepared remarks.