Sonoco Products Company (NYSE:SON) Q4 2022 Earnings Call Transcript

Sonoco Products Company (NYSE:SON) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Good day and thank you for standing by. Welcome to the Sonoco fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question during the session, you will need to press star-one-one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star-one-one 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, Investor Relations and Communications. Please go ahead.

Lisa Weeks: Thank you Operator, and thanks to everyone for joining us today for Sonoco’s fourth quarter 2022 and full year 2022 earnings call. Joining me this morning are Howard Coker, President and CEO, Rob Dillard, Chief Financial Officer; and Rodger Fuller, Chief Operating Officer. Last evening, we issued a news release highlighting our financial performance for the fourth quarter and we’ve prepared a presentation that we will reference during this call. The supplements 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 uncertainties, therefore actual results may differ materially. Please take a moment to review the forward-looking statements on Page 2 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 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 2022 performance.

Rob will then review our detailed financial results for the fourth quarter and the full year and, along with Rodger Fuller, will discuss our guidance update for the first quarter and full year of 2023. Howard will then provide closing comments, followed by a Q&A session. If you will please turn to Slide 4 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 our call this morning. We really look forward to sharing our transformational results for the past year and provide our outlook for 2023. As we look at 2022, it was a pivotal year for Sonoco where we made significant progress on a strategy to continue growth as a world-class packaging company with a portfolio of highly engineered and sustainable products to support our customers. When I took this role three years ago, we started on a journey to fundamentally change the trajectory of long term profit for the company, and to do that, we had to take a pretty complex business and simplify both our portfolio and the way we run the company to drive improved growth and profitability.

These changes were necessary for us to deploy capital more efficiently to our larger core business units and to better integrate acquisitions. In fact, the metal packaging acquisitions was the largest in the company’s history and performance and integration are well ahead of schedule. In parallel, we worked hard on commercial excellence to reposition pricing to less volatile indices while improving the timing of recovery for higher manufacturing costs. It’s taken several years, but the efforts of these programs are reflected in our 2022 results and we expect them to continue well into the future. In 2022, we saw strong year-over-year performance in which revenue grew 30% to $7.3 billion, base EBITDA grew 51% to $1.15 billion, and base earnings per share grew 65% to $6.48.

These results obviously were a record in the 24-year history of this company. I couldn’t be more proud of the team for these results, which were achieved in another year which was nothing short of chaotic, all while staying true to the mission of Sonoco and further advancing our ESG and sustainability initiatives, which are intently aligned to the values of this company and a part of our everyday lives. With that, I’m going to turn it over to Rob to take you through the financial results and our forward guidance.

Rob Dillard: Thanks Howard. I’ll begin on Slide 6 with a review of key financial results for the fourth quarter. Please note that all results discussed will be adjusted to base and all growth metrics will be on a year-over-year basis unless otherwise stated. The GAAP to non-GAAP EPS reconciliation can be found in the appendix to this presentation as well as in the press release. The fourth quarter and full year 2022 financial results again represented Sonoco’s ability to deliver strong results from our core market position despite challenging market conditions. Sales increased 16.5% to $1.7 billion in the fourth quarter. This sales growth was driven primarily by the Sonoco metal packaging acquisition and an 11.5% increase in price as strategic pricing efforts continue to both offset inflation and reflect the value we provide our customers.

Volumes in the fourth quarter declined 8.5% due primarily to declining demand in the global URB and converted paper products markets and also due to soft consumer volumes, particularly in the last weeks of the quarter. Base operating profit increased 34% to $184 million and base operating profit margin increased 145 basis points to 11%. This strong performance was due to strategic pricing that offset inflation and a lack of operating leverage due to low volume. While metal packaging was important to these results, excluding metal packaging, operating profit would have grown 28% and operating profit margin would have been 12.2%. The base EBITDA increased 31% to $241 million and base EBITDA margin increased 160 basis points to 14.4%. This margin improvement has been strategic and is backed by ongoing portfolio management actions, footprint optimization activities, value enhancing capital investments, and structural transformation.

These actions have enabled a reduction in SG&A as a percent of sales from 9.8% in 2020 and 8.8% in 2021, to 8% in 2022. Importantly, we have reduced this metric while also investing in our commercial, operational and supply chain capabilities. Finally, base earnings per share increased 28% to $1.27. This increase in earnings was attributable to strong operating performance offset by $0.04 of negative FX and enabled by a lower tax rate of 21.3% in the quarter. The sales bridge on Slide 7 provides the primary drivers for growth in the quarter. Volume mix was negative $123 million or 8.5%. Consumer segment volumes were down primarily due to consumer inventory management and weather in the fresh food businesses. We view these effects as transitory and not a trend.

We do not anticipate they will continue in the post quarter. Industrial segment volumes were also down in the quarter on continued declines in Europe and Asia. U.S. industrial volumes also declined, particularly due to the exiting of the corrugated medium market. Price was $166 million positive, up 11.5% in the fourth quarter. Our pricing performance continued to reflect strategic pricing efforts associated with our commercial excellence strategy, mainly selling to value and managing contracts to recover inflation. Acquisitions increased $239 million driven by metal packaging and our first month of Skjern. The integration of Skjern is ahead of schedule and we’re excited about both adding new team members in Europe and our expanded capability to serve consumer end markets.

The base operating profit bridge illustrates our improving profitability in greater detail. Volume mix was negative $35 million, primarily due to lower volumes in industrials. Price cost was an $87 million benefit in the quarter. Consumer had strong price cost performance, generating $16 million of favorability primarily from RPC. We achieved $66 million of positive price cost in the industrial segment in the fourth quarter. This strong price cost performance was due to contractual pricing mechanisms and historically low OCC costs. OCC averaged $38 per ton in the quarter versus $123 per ton in the third quarter and $183 per ton in the fourth quarter of 2021. In 2022, we achieved a record $340 million of positive price cost. These figures exclude metal packaging, which was accounted for in the acquisitions.

Acquisitions and divestitures generated $9 million of base operating profit in the quarter. As metal packaging continues to perform as expected, margins in this business were lower than previous quarters due to normal seasonality associated with food can volume and lower volumes in aerosols associated with inventory rebalancing. Other impacts on the quarter were negative $8 million due to higher depreciation and FX headwinds, which specifically impacted operating profit $5 million in the quarter. Slide 8 has an overview of our segment performance for the quarter. Consumer sales grew 49% to $879 million due to the metal packaging acquisition and strong price performance, only partially offset by negative volumes of 2.5%. Volumes would have been generally flat excluding the impact of weather and plastic foods and mix from exiting the ice cream segment in RPC Europe.

Consumer operating profit grew 37% to $85 million in the quarter. Operating profit margin declined 83 basis points to 9.7%. Again, excluding metal packaging for comparison purposes, consumer operating profit margins would have been 11.9%, a 139 basis point improvement. Industrial sales declined 8.9% to $597 million due to a 15% decline in volumes. Volumes weakened throughout the quarter due to customer inventory management and lower end market demand in more economic sensitive regions and segments. Operating profit grew 34% to $79 million as price cost offset low utilization. Industrial pricing is holding as pricing mechanisms are now oriented to overall inflation recovery and value delivered, rather than OCC prices. Operating profit margin increased 422 basis points to 13.3%.

All other sales increased 2.5% to $200 million and operating profit increased 24% to $20 million. Growth was driven by strategic pricing and overall stable volumes. Moving to Slide 9, we have our record full year 2022 financial summary. Revenue grew by 30% to $7.3 billion, driven by acquisitions, volume in consumer packaging, and strategic pricing. Base operating profit increased 63% to $920 million, driven primarily by positive price cost and acquisitions. Base EBITDA rose 51% to $1.15 billion and base EBITDA margins expanded to 15.8%. Last, our base EPS for 2022 grew by 65% to $6.48. We also announced the acquisition from Westrock of the remaining equity interest in RTS Packaging and one paper mill in Chattanooga, Tennessee. In light of the current status of the regulatory review process, we now expect the closing of the acquisition to occur in the second half of 2023.

Turning to Slide 10, our capital allocation framework is aligned with our business strategy to drive value creation for our shareholders. Our priority is to allocate capital to high return investments in our core businesses to drive growth and improve efficiencies. From a free cash flow perspective, we remain focused on increasing the dividend, which at present is $0.49 per share on a quarterly basis or a greater than 3% average yield over the past 12 months. We paid $187 million in dividends in 2022. After capital investments and the dividend, we prioritize investments in accretive M&A transactions aligned with our long term strategy. We prioritize our access to capital and retaining our investment grade credit rating. For the quarter, operating cash flow was $87 million and capital investments were $88 million.

For the year, operating cash flow was $509 million and capital investments were $319 million. On Slide 11, we have our 2023 guidance. For the first quarter, our EPS guidance is $1.15 to $1.25. Our full year 2023 EPS guidance is $5.70 to $5.90. Our full year 2023 base EBITDA guidance is $1.1 billion to $1.15 billion. Our full year operating cash flow guidance is $925 million to $975 million. We anticipate net working capital will be a meaningful benefit to cash flow in 2023. Now Rodger will discuss our outlook on a segment basis.

Rodger Fuller: Thanks Rob. Please turn to Slide 13 for our view on segment performance and drivers for the first quarter and the full year of 2023, which supports our guidance. Across the consumer segment for the first quarter of 2023, we expect sequential volume growth in all products, including metal cans, rigid paper packaging and flexibles. The only exception we expect is plastic packaging for fresh fruits and vegetables, which continues to be hampered by weather issues. On a year-over-year basis for Q1, we expect to see positive volume driven primarily by the one extra month of metal packaging sales as we closed the acquisition at the end of January in 2022. For first quarter earnings, we have projected headwinds in our guidance from lower steel prices and are managing through other raw material costs and availability issues with energy, adhesives and laminates.

For consumer, during the first full year of 2023, we see volume increases year-over-year across the portfolio, including mid-single digit volume increases in our metal can business. We’ll continue to invest for growth and productivity led by the increasing demand for sustainable packaging in our rigid and flexible packaging businesses. In our industrial segment, we see continued softness in volumes globally in our converting and trade paper sales in the first quarter. In North America, protective packaging for appliances and household goods remains weak and we expect little near term recovery for products that support residential homebuilding and construction markets. We’re monitoring the Europe and Asia demand recovery carefully as this will be critical to the overall volume outlook in industrial for the full year, which at present we believe will be down low single digits versus 2022 levels.

Like Howard mentioned, we’ve transitioned our contracts to more stable indices, putting in better cost recovery mechanisms and current lower input costs on OCC. Our pricing in industrials remains stable. Even with the most recent modest decline of $20 a ton for URB on the RISI index and some expectations of modestly higher OCC costs in 2023, we expect positive price cost benefits this year in industrial. With planned downtime in our global paper operations, we continue to maintain reasonable backlog levels and are ramping up all paper grades on our number 10 machine in Hartsville. In our all other businesses, we continue to have net stable volume demand across this collection of businesses with improved productivity and favorable pricing actions.

We expect slight increases in profitability for the all other segment this year. As we look to 2023, we have a keen focus on all forms of productivity as we see the benefits of fewer supply chain and labor disruptions. Over the past several years, we’ve taken decisive actions to help offset inflation and build resiliency in our operating model. At the same time, we’ve invested capital in our core consumer and industrial businesses to position us for long term growth and profitability. With that, I’ll turn it back to Howard.

Howard Coker: Okay, thanks Rodger. If you would, turn to Slide 15. The base earnings per share view demonstrated visually here clearly shows the step change in profit improvements for Sonoco. Our full year results include the benefit of metal pricing over the life of the company, which was approximately $0.53. Without this benefit, you would still see a very strong roughly $6 per share earnings for the period. Since 2022, the high return investments we’ve made, while reshaping the portfolio and improving the operating model, have also resulted in an expected 15% CAGR in earnings per share for 2023, based on the midpoint of our 2023 annual guidance. While 2022 was a year of progress, we are only just beginning. We intend to grow profits through organic and M&A investments, as well as better efficiency in how we run the business day in and day out.

In closing, if you turn to Slide 16, we carry sustained momentum from our strategy and operating model into the new year, which we believe positions us well to navigate near term volatility. We expect stable operating performance in the coming year where the midpoint of our base EBITDA guidance is essentially the same as last year; but let me be clear, the operating environment does remain very tough right now, but our expected performance reflects our better portfolio and business mix that is expected to be less volatile through business cycles. We expect the first quarter to be the low water mark for the year based on our customer forecasts, with improvements in the second and third quarter and then concluding the year with a more seasonal Q4.

With improvements in working capital, we expect free cash flow for the year to be at the midpoint, around $600 million. We also remain focused on $180 million of incremental base EBITDA improvements through 2026 based on additional actions planned to further improve our core businesses and refine our operating model. As always, for Sonoco capital allocation remains a cornerstone of our strategy and we intend to continue increasing dividends while maintaining an investment grade balance sheet. In 2023 and beyond, we’re focused on improving returns on invested capital through organic investments in core accretive acquisitions and through further portfolio rationalizations. I have never been more positive about the long term outlook for Sonoco.

At this time, we would be pleased to take any questions that you may have.

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Q&A Session

Operator: Thank you. Our first question comes from the line of Kyle White with Deutsche Bank. Your line is now open.

Kyle White: Hey, good morning. Thanks for taking the question. Correct me if I’m wrong, but I think the food can business, I think you said you expect mid-single digit volume increases for this year. What gives you this confidence? I’m curious what is driving that just as we look at some of the industry data that shipments have been, frankly, a little bit weaker than that.

Howard Coker: Thanks Kyle, it’s Howard. Yes, if we’re talking from a sequential perspective, and we just have visibility of that through our conversations with our customers, their expectations. A bit of a share lift, but that’s exactly what our customers are reflecting to us and that’s what we’re building into our models.

Kyle White: Got it, so sorry, was that–you’re saying it’s a sequential uplift of mid single digits, it’s not year-over-year?

Howard Coker: Well, year-over-year, yes.

Kyle White: Okay. Within that business, just to follow up, can you remind us what the impact was from the sell-through of lower priced steel inventory last year, and then maybe what you’re projecting as a headwind in 1Q and possibly 2Q from that impact?

Rob Dillard: Yes, for the full year last year, it was $0.54 of detriment. There’s actually–because tin plate is declining this year 10% or so, there’s actually going to be detriment as well this year from metal price overlap from the inventory we’ve carried over. I think that will be an incremental $0.20 to $0.30.

Kyle White: Got it, thank you. I’ll turn it over.

Operator: Thank you. Our next question comes from the line of George Staphos from Bank of America. Your line is now open.

George Staphos: Hi everyone, good morning. Thanks for the details. Congratulations on the progress in ’22. I wanted to hit on consumer trends that you’re seeing – you know, you talked about some inventory management by your customers at the end of the quarter. Can you talk about what they’re saying and what you’re seeing as you’re entering 1Q across some of your key, either end markets and product lines, and if you would, kind of differentiate in the center of store paper versus plastic, we get that plastic for fresh is having its issues, but center store, what are you seeing in terms of your paperboard consumer packaging versus your plastic-based packaging?

Howard Coker: George, let me try to hit on that, and Rodger, if you’ve got any follow-up. It wasn’t just on the consumer side, it was across the entire portfolio that we just saw tremendous brakes hit towards the latter part of last quarter, and I think that’s across all industry, actually.

George Staphos: Yes.

Howard Coker: You know, on the consumer side, we were being told that that really is a reflection of inventory draw-downs, etc. As we’ve entered the quarter, we have not finished out and closed out our January, but looking at the top line, we’re pretty impressed with the comeback that we’re seeing across the board. The plastics side, the real issue there is the weather events both in Florida with the freeze and in California with the floods and the impact on the fresh produce. We’re seeing really solid signs and reflects, I think, this year somewhere in the neighborhood of a 4% to 5% type lift year-over-year on the consumer side. But coming out of the gate, we’re pretty impressed with what we’re seeing right now. Rodger, you got anything to add?

Rodger Fuller: No, you hit it, Howard. I think the modest declines in the rigid paper cans in the fourth quarter, George, as Howard said, seeing a nice recovery in January. Really another nice quarter by flexibles – 4% growth in the fourth quarter, budgeting something 5% for the year and expect more of the same as we head into next year, so the pressure really was from our plastics business.

George Staphos: Understood, that’s very helpful, guys. Secondly, can you talk to what benefit–realizing it’s a moving target, it’s going to be based on the evolution of the market, evolution of your inputs, but what benefit we should expect for Sonoco from commercial excellence this year and other self-help measures, and where we stand in terms of ultimately realizing the targets you would have on both of those during the transformation.

Rodger Fuller: Yes George, it’s Rodger again. Commercial excellence – I mean, you see the results from last year on price cost, and frankly that’s from a couple of years of really hard work around commercial excellence. We’ve talked about what we see in the guidance for the next year from a price cost standpoint, so those efforts continue and continue to pay off. You can see it in our operating margins. On the self-help side, it’s really all about productivity. As you look at 2023, we expect our productivity results to return to more historical levels and then probably plus some with the easing of supply chain and labor issues. George, you know our historical levels of productivity as well as anyone – we expect to get back to those levels and beyond, so the self-help, the structural transformation we did this year is paying off from the operating margin standpoint, so I think across the board we’re still confident in that $180 million over the next several years.

Howard Coker: George, let me just add onto that. I’d just talk year-to-year and the journey that we’ve been on. I know there’s a lot of folks on the call that are pent-up to either ask or are thinking about, okay, we’re slowing down, you are in a paper business, you guys have performed extremely well or well at all historically in recessionary type environments. I just want to touch on–you can call it self-help, whatever you want to call it, but the amount of focus and energy that we’ve put over the last four or so years in terms of improving our performance in our industrial sector, and I think you can see that sequentially in terms of the returns that we’ve demonstrated over the periods. But if you look at the profile of the company now and you take–you know, number 10 machine is one, that’s an interesting conversation, and of course we’ve spent a lot of time talking about it, but creating the lowest cost URB mill in North America, certainly within our network on a global basis, and the productivity that’s going to drive and how that is going to be attracting volume from our higher cost mills, and then we’re seeing that happening now, so the benefit from that.

But the unseen benefit that we haven’t spent a lot of time talking about is controlling what we can control to reduce the amount of variability within this business. Getting out of corrugated medium, I cannot tell you how volatile being in that market with such a small machine non-vertically integrated that has been for us over the course of the last, call it eight to nine years within the company. Then you add to it the amount of effort on a global basis in terms of consolidations, again focusing only solely on industrial right now, really right-sizing our locations, the investments we’ve made in automation, and I’ve said it before and I’ll repeat it, it feels like we are in a recession from our perspective on industrial, that we are in a much better position today than we have ever been and we do not expect to see the type of variability that we saw pre-engaging in the activities this global team has put forth.

So sorry for the dissertation, but I know there’s going to be questions about that. But you know, it kind of gets frustrating when you just look at quarter to quarter and what’d you do yesterday versus tomorrow, and not look at the runway of efforts that this global team has put in place to create the appropriate level of margins that we deserve for the value we generate for the market and our customers.