Sonoco Products Company

Good day and thank you for standing by. Welcome to the first quarter 2023 Sunoco Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lisa Weeks, Vice President of Investor Relations. Please go ahead.

Thank you, Operator, and thanks to everyone for joining us today for Sonequa's first quarter 2023 earnings call. Joining me this morning are Howard Coker, President and CEO, Rob Dillard, Chief Financial Officer, and Roger Fuller, Chief Operating Officer. Last evening, we issued a news release highlighting our financial performance for the first quarter, 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. 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 guaranteed to please take a moment to review the forward-looking statement on page two of the presentation. Additionally, today's presentation includes the use of non-GAAP financial measures, which management believes provides useful information to investors about the company's financial conditions 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 web. After management's prepared remarks, we will host a Q&A session. If you will please turn to slide four in our presentation, I will now turn the call over to our CEO, Howard Coker.

Howard Coker Thank you, Lisa, and thanks to all of you for joining us today. As our first quarter results show, we've had a good start to the year. productivity under 10, but we consider a strong Q1 performance. As I mentioned before, we are not immune to the secular headwinds around our customers and the economy in general, but this demonstrates our better portfolio management and business mix provides less volatile results than in previous business cycles. We have a backlog of growth and efficiency investments that are material to future earnings, While we navigate near-term macro volatility, we're going to invest in the businesses and place our investments on projects with the highest return for our shareholders. I would like to say to our Sunoco employees and our operations within our sales and engineering teams and all those that support the business around the world, thank you for what you do. And thank you for supporting our customers, Sunoco, and your focus on execution day in and day out. But before Rob takes you through the financial results and guidance, please turn to slide five. I want to highlight, we released our updated corporate responsibility report last week and provided the QR code in this presentation that you can scan to directly download the document. Now, at Sunoco, we report quarterly to our senior leadership team and our board on the ESG commitments we're making, including those highlighted in our refreshed document. We're excited to On the social side, we have updated our workplace diversity hiring progress as well as updates on our supplier diversity and spending programs. Lastly, we have many R&D efforts centered on developing new and innovative products to meet the sustainability goals of our customers. We are tremendously proud of our capabilities and the work on this front. We'll be right back.

at over 17%. Finally, earnings per share was $1.40. These results exceeded our initial guidance as we continue to execute our operating model to achieve price and productivity despite uneven end-market conditions. Next, we have the sales and operating profit bridges on slide 8. On the sales bridge, volume index was negative That's the operating profit. productivity once volumes normalized. Slide 9 has an overview of our segment performance for the quarter. Consumer sales grew 5% to $909 million due to acquisitions and strong price performance. Sales increased 3% sequentially. However, elevated customer inventory and normalizing supply chains continue to interrupt volumes across the consumer business, and our near-term volume outlook is less positive than it was consumer volumes declined 1%, including acquisitions from divestitures. Volumes in flexibles and paper containers were essentially flat. Metal packaging can volumes were down, as food growth was offset by low aerosol volumes due to high-cost ram and toy shovels. industrial volumes were down 13%. operational excellence efforts. Our weather operating profit increased 88% to $27 million due to strong price calls and productivity. Our weather is a notable example of the results of our disciplined operating model as we continue to operate these important businesses for optimal results. We beat our initial target. our businesses with agility. We are affirming our EBITDA guidance of $1.1 billion to $1.15 billion. Likewise, we are affirming our operating cash flow guidance of $925 million to $975 million. We anticipate continued benefits from networking capital management throughout 2023. Now, Roger will discuss the outlook on a segment basis.

Thanks, Ross. Please turn to slide 13 for our viewpoints. across consumer for the second quarter of 2023 we expect sequential volume growth across the segments including metal cans. We see increasing demand for sustainable packing solutions and new products and we're closely monitoring any potential softening based on consumer spending. In Q2 as Rob noted we'll work through the remaining inventory impacted by metal price overlap which will not continue in the second half of the year. Beyond this year we'll continue to invest In our industrial segment, we see continued softness in volumes globally and are converting in trade paper sales in the second quarter. We're monitoring Europe and Asia demand recovery carefully, as that will be critical to the overall volume outlook for the full year. While some inflationary impacts are lessening, labor and related costs continue to increase. Our global uncoated recycled paper mill operations in the second quarter, we will maintain reasonable backhaul levels by region. In North America for the second quarter, there is no planned lack of business downtime, with normal levels of scheduled maintenance downtime, similar to the first quarter, as we've seen the North American URB network supply and demand stabilize in the last month. We will continue to take periodic lack of business downtime in Europe and Asia at similar levels to the first quarter until demand improves. In our other businesses, we continue to have net stable volume demand across this collection of businesses. With improving productivity and favorable pricing actions, we expect continued increases in profitability this year. Overall, we had a good start to productivity in the consumer and all other businesses, and we expect to see the benefits in industrials when volume growth returns. We're seeing the positive impact of our increased capital spending in the last few years focused on productivity and a fairly significant easing of supply chain constraints on our materials and labor. With improvements across the breadth of our excellence programs and just really executing well, we're continuing to build resiliency in our operating model. With that, back to you, Howard. Okay. Well, thank you, Roger. If you would, turn to slide 14. I want to end our discussion as we look ahead to 2023 and beyond. First, Sunoco is a global leader in high-value sustainable packaging. Our funnel of packaging solution designs provides Sunoco with a long runway for its opportunities across our businesses. We are continuing to transform this great company through portfolio management and strategic M&A. We have spent the last 18 months transformation to solidify our base. In the future, you're going to see increased efforts to further focus the portfolio. We will exit some business and expand others, all with the right timing to maximize value, and we will keep you informed, obviously, as we progress through this journey. We're in the early stages of leveraging our operating model to expand margins. Our operating model is solid. It's sound. Through our excellence programs, footprint optimizations, enterprise standardization, how we operate the business will only get better through time and is reflective of our solid performance in uncertain times as we live in today. As Rob covered very well earlier, we remain disciplined in capital allocation and we expect And lastly and importantly, we are committed to improving the lives of our team members, our customers, and the communities in which we live and work. Our recent CRR report only scratches the surface of the great things happening within Sunoco to fulfill these commitments. We look forward to keeping you informed along the way of all the improvements we're undertaking. And with that, operator, we are pleased to open up the questions.

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile our Q&A roster. Our first question comes from the line of Gunsham Panjabi with Baird. Your line is open. Please go ahead.

Yeah, thank you. Good morning, everybody. I guess first off, could you just give us some more granularity on the first quarter volumes across the various consumer verticals? If you covered some of this, I apologize. We had some audio issues on our end during the prepared comments.

Yeah, we can talk about the different consumer verticals in Q1. So, you know, from a volume perspective or from an OP perspective?

Volume would be helpful.

Okay. drivers there.

Gotcha. And then in terms of productivity, you know, you hit the first quarter was around 20 million plus. How should we think about the rest of 2023? And then also on price cause, you said you expected the full year to be positive. Just expand on that in terms of sequencing for the full year. Thanks.

Yeah, on productivity, gotcha, Mr. Roger. I think you should expect pretty similar levels by quarter. As I said, we're seeing supply chain constraints He's up, labor, he's up to some degree. And the team executing extremely well on the capital that we put in place over the last few years, focused on productivity, footprint optimization, as Howard already mentioned, and the supply chain team working extremely well with the businesses. So I think you should see somewhere levels going forward.

And on price-cost?

Yeah, on price-cost, I'd say...

Thanks so much.

Thank you. And one moment for our next question.

And our next question comes from the line of Anthony Pentaneri with Citi.

Your line is open. Please go ahead.

Good morning. I was wondering if you could talk a little bit more about maybe customer inventory positions, maybe starting with consumer. Where are we in sort of the stocking cycle in metal composite food cans versus aerosol versus flexibles? And then on the industrial side, are there any sort of trends you'd flag in North America versus rest of the world in terms of customer inventories in that stocking cycle and where we are?

Anthony, this is Howard. You know, as Rob said, and we noted when we updated our guidance at the end of the first quarter, when we came out in January, it really felt true in terms of the deep stocking activities on the consumer side, particularly in our legacy businesses. And we came out of the box really, really strong January, early February. And I don't think it's unique to Sunoco that we started But we did see some backing down there. So I would suggest to you that on our legacy side of the business that there's still question marks in terms of the full value chain from retailer to supplier of folks like us, basic raw materials, but not as a concern as what we had first expected and how we came out of the block. On the metal side, the results are relatively consistent with what you've heard from others as well at CMI. Up on the food can side, down on the aerosol side, in our case, we've got a couple of customers that the destocking activities have extended longer than they and or we expected. that we're looking at secular improvements quarter to quarter and getting assurances that they should be working through their situations, let's call it, through the mid to the end of this year. So unique one-off situation on the aerosol side, and we'll just have to ride that out.

And at the industrial, Mr. Rodger, we modeled

And that's really driven by Europe and Asia, this continued weakness there. Someone else, the textile business out of Turkey with the impact of the earthquake has a pretty significant impact. As I said earlier, the North American market, we've seen it stabilize. We're not modeling any growth there, but we've seen it stabilize over the last month, and that's what we're expecting for the second quarter. So really the watch out is Europe and Asia as far as the second half of the year. Yeah, and that's what I'd say, you know, I'm going back to my prepared remarks and to this team and frankly the activities we've undertaken over the last, I said 18 months, but two, three years in terms of transforming how we manage the day-to-days of the business, the operations side. I just cannot be prouder of a relatively... weak volume scenarios and posting the type of productivity numbers that we're posting. And I tell you, it just gives me a nice, warm feeling that volume, as it will return over time, that we're in an extremely solid position to leverage that productivity in a more material way. So I guess thanks to Roger and the team and what they're doing on the operations side and others.

Okay, that's very helpful. And maybe just one follow-up on productivity. You know, all other, obviously a smaller part of the business, but the margins there were quite strong in the quarter, certainly versus historical levels. I'm just wondering if you could talk about maybe some of the internal improvements you've made in those businesses, maybe the sustainability of that kind of margin and just how you're thinking about that segment strategically.

You know, to start with, Anthony, If we go back a year or two ago, we restructured not only how we report out from a segment perspective, but how we manage the businesses. As you recall, we created, in the all-orbit category, a more entrepreneurial-type environment, allowing them to operate within the guidelines of the unique businesses that they support. And from that, we're seeing the results. And again, pockets and across the rest of the company, similarly, you're seeing. How we're looking at it for the long term, these are good businesses, many of which are one or number two in the market segments. And we're going to continue to operate them to their full capability and continue to drive through. While they operate independent, we're still driving through the productivity and other other transformational type programs that we have in place for them. So they really set up well to show you in a snapshot of what we're seeing across the company. We'll be evaluating businesses over time and I think I did mention it in my prepared remarks that when time is right, there's some businesses that may belong better off with others and from an acquisition perspective, we see the over the amount of value that our shareholders expect. And they're very resonant, as you know, Anthony, and they manage price costs extremely well in the first quarter, and we'll do the same in the second.

Okay, that's very helpful. I'll turn it over.

Thank you, and one moment for our next question. And our next question comes from the line of George Stappos with

Bank of America Securities. Your line is open. Please go ahead.

Thanks a lot. Hi, everyone. Good morning. Thanks for the details. I guess the first question I had, if you had already mentioned it, I apologize, but can you provide the lack of order downtime by region in the first quarter?

I can, George, Roger. About right at 10% in North America, closer to 20%

pretty significant okay and if you Roger if you could help us just in terms of tons what would that look like I mean we can go back into it but just you know while I have you quickly if you don't have it go ahead okay that's fine perfect perfect I guess the next question I had, and you're right, other companies saw a deceleration as the quarter went on, and March was in some ways year-on-year weaker for many companies than was the beginning of the quarter. Given the number of consumer companies you talked to, the breadth of your product line and therefore the input that you get back. In a couple senses, not solving for world peace here, but what do you think happened? Because your businesses are relatively stable. Going into the quarter, I think you were looking for mid-single growth in food cans. I think pretty similar growth in flexibles. volumes don't swing around that much. So what you're hearing from your customers, what happened to the consumer that they went into the bunker to such a degree? And maybe it's just that, but what are your thoughts there?

Yeah, George, this is Roger. From our large consumers, I mean, you can see in their results that they're taking significant price in the marketplace.

Yeah.

And some of our customers' products are very – That came in about where we expected.