Sonoco Products Company (NYSE:SON) Q3 2023 Earnings Call Transcript
Sonoco Products Company (NYSE:SON) Q3 2023 Earnings Call Transcript November 1, 2023
Operator: Good day, and thank you for standing by. Welcome to the Q3 2023 Sonoco Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker, Lisa Weeks, Vice President of Investor Relations. Please go ahead.
Lisa Weeks: Thank you, operator, and thanks to everyone for joining us today for Sonoco's Third Quarter 2023 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 third 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 at 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, we will have prepared remarks regarding our results for the quarter and outlook for the fourth quarter, followed by a Q&A session. If you will turn to Slide 4 in our presentation, I will now turn the call over to our CEO, Howard Coker.
Robert Coker: Okay. Well, thank you, Lisa. Good morning, everyone, and thank you for joining our third quarter 2023 earnings call. Let me begin with highlights of the quarter. For Sonoco, we executed well, even with the ongoing market uncertainty. Sales came in at $1.71 billion, adjusted EBITDA was $280 million and adjusted earnings per share was $1.46. Sales were flat sequentially and generally in line with expectations. In the industrial sector, demand remains muted and volumes low. In consumer, volumes were sequentially higher in most businesses, while metal aerosol can volumes continue to underperform driven by lower end market demand and ongoing customer destocking. Our profit results were better than expected from strong productivity and effective cost management by our teams.
Our productivity results are benefiting from the capital investments we are making across our plant network including automation, process improvements and energy cost reductions. We expanded adjusted EBITDA margins to over 16% and delivered strong cash flow during the quarter. We achieved these results even while we continue to invest in long-term value-adding projects and R&D initiatives throughout the portfolio. Overall, I'm pleased with how these results reflect our continued ability to execute simplification, transformation and operational excellence initiatives to build a more resilient company with strong performance through the cycles. We were also pleased to close the RTS Packaging and Chattanooga Paper mill acquisition in September.
These acquisitions is well aligned with Sonoco's long-term strategy to focus on our core integrated businesses and expand our sustainable consumer packaging portfolio, serving food, beverage and beauty markets. The integration process is well underway, and we are delighted to welcome our new colleagues to Sonoco. And with that, I will turn it over to Rob for more details on the quarter. Rob?
Robert Dillard: Thanks, Howard. I'll begin on Slide 6 with a review of key financial results for the third quarter. Please note that all results are on an adjusted basis and all growth metrics are on a year-over-year basis, unless otherwise stated. The GAAP to non-GAAP EPS reconciliation is in the appendix of this presentation and in the press release. As Howard said, third quarter financial results reflect Sonoco's continued ability to deliver strong results in a low volume environment. We generated sequential growth in sales and adjusted EBITDA and improved the adjusted EBITDA margin to 16.4%. Furthermore, we exceeded our expectations and achieved adjusted EPS of $1.46. This strong profitability was broad-based as impactful cost controls and improved productivity drove near-record profitability in both flexibles and rigid paper containers in the Consumer segment and strong profitability in the Industrial segment.
In the third quarter, consolidated sales decreased to $1.7 billion. Sales decreased due to low volumes and index-based price decreases in both Consumer and Industrial. Adjusted operating profit decreased to $213 million and adjusted EBITDA decreased to $280 million. We maintained an above 16% adjusted EBITDA margin due to improved productivity and long-term cost controls associated with our ongoing business transformation program. Adjusted EPS of $1.46 was driven by strong operating performance as well as favorable tax and FX. Adjusted EPS increased sequentially from the second quarter due to modest volume improvement, positive productivity and positive nonoperating factors despite negative price/cost. The sales bridge on Slide 7 explains the year-over-year change in sales in the quarter.
Volume/mix was negative $145 million or negative 7.7%. This volume decrease was anticipated and was the product of weakening consumer demand due to the impact of inflationary pricing and destocking at retail and continued low industrial demand. We continue to take steps to improve demand visibility, and we are managing the business to mitigate the impact of low volumes. Price was negative $58 million. Our pricing performance was driven by index-based price decreases, primarily in resin and metals-based businesses. FX and other had a positive impact of $23 million with FX contributing $17 million. The adjusted operating profit bridge explains the year-over-year change in adjusted operating profit in the quarter. Volume/mix was negative $31 million as low volumes impacted profitability.
Price/cost was negative $10 million as index-based prices declined more than overall inputs declined on a year-over-year basis. We continue to experience inflation in fixed costs and variable inputs like labor, while market-oriented inputs that drive index-based pricing such as metal and most resins declined on a year-over-year basis. Productivity was $30 million,due to restructuring activities targeting fixed cost and favorable manufacturing and purchasing performance. Slide 8 has an overview of our segment performance for the quarter. Consumer sales decreased to $938 million. Consumer volumes decreased 8.1% due to inflationary pricing and continued destocking at retail. Customers of our Consumer Packaging remain cautious. We believe that our solutions are winning share.
Rigid Paper Container Sales were flat as continued global growth, especially in Europe and Latin America, was offset by weakness in North America. Flexible sales decreased high single digits as low volume with legacy customers offset share gains with new customers. Metal Packaging sales decreased due to template-based pricing decreases and lower volume in both food and aerosol. Demand from our core customers has stabilized and indications are that destocking with these customers has moderated. Consumer operating profit decreased to $112 million as strong productivity was offset by lower volume/mix and negative price/cost. Consumer operating profit margin increased to 11.9%. Flexibles and rigid paper containers both had near record operating profit due to strong productivity.
Turning to Industrial. Industrial sales decreased to $580 million. Industrial volumes decreased 7.5% due to lower demand in all key markets and geographies. We believe these declines are not share related as indications are that we continue to gain share based on quality and service. Operating profit decreased to $75 million due to lower volumes and negative price/cost. We generated positive productivity due to our focus on improving paper mill utilization and reducing fixed cost and SG&A. Recent capital investments such as Project Horizon have enabled us to focus on the right markets with the right assets. We are operating with agility and continue to evaluate system improvements to maximize profitability. Operating profit margin remained at a a historically strong 12.9% and meaningful improvement from previous economic lows.
All other sales decreased to $192 million due to low volumes. Operating profit increased 66% to $26 million due to strong price cost and productivity. Moving to Slide 9. Our capital allocation framework aligns with our business strategy to drive value creation through earnings growth and higher margins. Our priority is to dynamically allocate capital to long-term strategies to improve growth and profitability in our core businesses. We remain focused on increasing the dividend, which at present is $0.51 per share on a quarterly basis or an approximate 4% annualized yield based on our current share price. After capital investments in the dividend, we prioritize investments in accretive and strategic M&A, balanced against our priority of maintaining strong liquidity and access to capital.
In the third quarter, we increased the size of our revolving credit facility and refinanced our term loans to extend maturities and reduced average interest rates, while also funding the RTS acquisition. We began the fourth quarter with record liquidity and the ability to continue to pay down debt with cash from operations. In the third quarter, we generated operating cash flow of $268 million and invested $93 million in capital expenditures. On Slide 10, we have our guidance update. We are increasing our full year 2023 EPS guidance to $5.25 to $5.40, raising the lower end of the range to reflect our year-to-date performance, but maintaining the top end of the range to reflect the current market instability, especially considering recent weak demand trends in December.
We're also increasing our full year 2023 adjusted EBITDA guidance to $1.05 billion to $1.08 billion. To reflect these changes and to reflect our expectation of maintaining higher receivables and lower payables than anticipated, we are revising our full year 2023 operating cash flow guidance to $850 million to $900 million. We are managing capital expenditures appropriately and expect to invest between $300 million and $325 million in 2023. Now Rodger will discuss the fourth quarter outlook.
Rodger Fuller: Thanks, Rob. If you please turn to Slide 11 for our view on the segment performance drivers for the fourth quarter of 2023. First, in the Consumer segment for the fourth quarter, we expect stable volume performance versus last year and down slightly sequentially to the third quarter due to seasonality, primarily in our flexible and rigid plastics businesses. In our Global Rigid Paper Containers business, softness in some legacy products is being offset by new products using our proprietary sustainable paper solutions. We're excited to continue the global expansion of our rigid paper containers as we utilize the new capacity added in our existing operations in Brazil, Malaysia and Poland. These operations are utilizing our state-of-the-art equipment and automation technologies with plans for more investments in 2024 in emerging markets for paper cans.
In our Flexible Packaging business, we expect seasonally lower volumes after the third quarter holiday pack, but we should see continued solid productivity in flexibles as a result of recent investments in new technology. In metal cans, we expect seasonally lower food can volumes after the peak pack season in the third quarter, and metal aerosol volumes are expected to remain soft in the fourth quarter. We expect positive productivity in metal to continue in the fourth quarter due to capital investments. Turning to the Industrial segment. As we expected for the second half of 2023, global demand for our paper and converted products remains soft. In the fourth quarter, global industrial volumes will be slightly lower versus last year. We have seen some slight demand improvement in our North American paper and converted products business with Europe and Asia remaining quite weak.
Also in the fourth quarter, price/cost benefits will be lower in industrial due to index-based pricing and cost inputs. With the lower volumes in Industrial, productivity improvements remain challenging, but we will continue to aggressively manage variable expenses as a countermeasure to minimize the impacts from volume deleveraging. And finally, in all other businesses, we expect slightly lower volumes from seasonality. So in conclusion for the fourth quarter, the team is focused on cost control, footprint optimization in all forms of productivity will be critical until we see a sustained improvement in customer demand. And with that, back to you, Howard.
Robert Coker: All Right. Thanks, Rodger. In closing, I just want to state that despite all the external demand uncertainty this year, our team is performing extremely well. And we have continued to solidify the foundation of Sonoco and make progress on our strategic initiatives. Speaking further on behalf of Sonoco's management team, I would like to recognize the dedication and hard work demonstrated through the quarter and year at this point, and thank all of you for the work you've done. While transformation is well underway, there is still more to be done, and I know our teams are up to the challenge. And just to further touch on these strategic initiatives, which I've been covering through the year, I'll remind you that we're only midway through reshaping our portfolio, and we look forward to completing our noncore divestitures when we can maximize value in the marketplace.
On the operating model side, Sonoco is becoming a more focused, agile and operationally efficient company. The continued optimization of our mix and factory footprint, combined with driving productivity and value-added capital projects will sustain and drive margin expansion in the future. Our balance sheet remains strong, and we continue to generate cash and allocate capital in a disciplined and efficient management. And lastly, our commitment to ESG and sustainability initiatives are unwavering and remain wholly aligned to the core values of the company. There are a lot of great things going on in Sonoco and the team, and I generally look forward providing more in-depth updates on our progress during our planned Sonoco Investor Day, which is scheduled for February 22 of next year at 75 Rockefella Plaza in New York City.
We will be sharing key updates on our segments, our markets and our fantastic technology innovations, and we look forward to seeing you there. At this time, operator, we would be happy to answer any questions that folks may have.
Operator: [Operator Instructions]. Our first question will be coming from George Staphos of Bank of America.
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