Good day. And thank you for standing by. Welcome to the Second Quarter 2021 Sonoco Earnings Conference Call. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Roger Schrum, Vice President of Investor Relations.

Thank you, Liz, and good morning, everyone, and welcome to Sonoco's second quarter investor conference call. Joining me today are Howard Coker, President and Chief Executive Officer; Rodger Fuller, Executive Vice President; and Julie Albrecht, Vice President and Chief Financial Officer. A news release reporting our financial results was issued before the market opened today and is available on the Investor Relations website at sonoco.com. In addition, we will reference a presentation on our second quarter results, which also was posted on our 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 section of our website. Now, let me turn it over to Julie.

Thanks, Rodger. I'll begin on Slide 3, where you see that earlier this morning, we reported a second quarter loss on a GAAP basis of $3.34 per share and base earnings of $0.84 per share, which is just shy of the midpoint of our guidance range of $0.82 to $0.88 per share. Despite strong volume growth in many of our businesses, our second quarter operational results were challenged by unparalleled raw material and other operating cost inflation that did outpace our significant price increases and solid productivity results across our portfolio. In terms of the $4.18 difference between base and GAAP EPS, by far, the largest item was the $4.4 non-cash charge related to the settlement of approximately $1.4 billion of U.S. pension liabilities, as our pension termination process substantially wrapped up in June. This charge was just below the estimates that we've been communicating for a while. The next largest item also relates to a unique transaction in the second quarter. In May, we completed a tender offer for a portion of our 5.75% bonds due in 2040, that resulted in a debt repayment of $63 million. This transaction also resulted in an after-tax loss on the early extinguishment of debt of $0.15 per share. Next, UCR adjustments for normal, non-operating pension costs at $0.06 per share, as well as $0.02 related to net, favorable restructuring and asset impairments. The last item, all other at $0.05 per share is mostly composed of a $0.03 foreign exchange hedge gain on our euro denominated loan repayment and another $0.03 cent gain on a favorable foreign VAT refund plus interest. So, moving to our base income statement on Slide 4, and starting with the top line, you see that sales were $1.383 billion, up $138 million or 11% from the prior year period. I'll review more details about key sales drivers on the sales bridge in just a moment. Gross profit was $263 million, $15 million above the prior year quarter. This performance resulted in a 19% growth profit as a percent of sales, which was 90 basis points below the second quarter of last year. SG&A expenses net of other income, were $134 million, an increase of $13 million year-over-year. This increase was expected and key drivers were higher expenses for normalized management incentives, increased group medical spend, and higher costs for property insurance premiums and strategic IT activities. All this resulting in second quarter 2021 operating profits of $129 million. And I'll discuss the key drivers on the operating profit bridge in a few minutes. Net interest expense of $17 million was $2 million lower than last year due to reduced debt balances and a more favorable mix of fixed and floating rate debt. Income tax expense of $30 million was $1 million higher than last year due to our higher pre-tax profits, somewhat reduced by a modestly lower effective tax rate. Our current quarter’s base effective tax rate was 26.4%. Moving down to net income, our second quarter 2021 base earnings were $85 million compared to $80 million last year. Now looking at the sales bridge on Slide 5, you see volume mix was higher by $95 million or 7.6% for the company as a whole, with our Industrial segment and all other businesses seeing widespread recovery from the pandemic, somewhat reduced by lower volumes as expected in our Consumer segment. Consumer Packaging volume was down $12 million or 2.1% as our global rigid paper containers demand declined almost 6%. This was partially offset by solid growth in our plastic food businesses, which were up nearly 5%, and modest recovery in our flexible volumes, which was partially offset by an unfavorable mix of sales. Moving to industrial paper packaging, volume mix was up $65 million or over 14% with a surge in post-COVID economic recovery across most of this business. Our global tubes and cores franchise rose over 13% and global paper grew by nearly 4%. In addition, our cones and protective fiber businesses saw outstanding rebounds in demand. And finally, our All Other group saw volume mixed growth of $42 million or 32% when excluding D&P, display and packaging, from 2020. This significant recovery was very broad across these businesses. Now, moving to price, you see that selling prices were higher year-over-year by $89 million as we increased prices to battle inflation globally. This was mostly driven by our Industrial segment as we work to recover escalating OCC, freight and energy costs. We are proactively increasing prices in our Consumer segment and all other group, but the timing of contractual price resets pushes some recovery of cost inflation into the third and fourth quarters. Moving to acquisitions and divestitures, you see a topline negative impact of $80 million, which is driven by the recent divestitures of our display and packaging, European and U.S. operations partially offset by the Can Packaging acquisition completed in August of last year. And finally, the sales impact from foreign exchange and other was positive by $34 million with the primary driver being foreign exchange translation associated with a weaker U.S. dollar year-over-year. Moving to the operating profit bridge on Slide 6 and starting with volume mix, our higher sales volume of $95 million combined with the impact of mix had a positive impact on operating profit of $28 million. Shifting to 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 second quarter, we had $26 million of unfavorable price cost with most of this impact falling in our Consumer Packaging segment. Within our consumer businesses, the inflation of resin pricing is much greater than expected and resulted in higher material cost of approximately $15 million in the second quarter. In our All Other business group, resin is also a key raw material, and this inflation drove almost $10 million of higher costs. In our Industrial segment, we were chasing higher OCC pricing during the second quarter, but were slightly positive at price cost due to sales price increases. As usual, there is a slide in the appendix that shows recent OCC price trends. And you'll see there that Southeast OCC official board market pricing started the quarter, or came into the quarter in March at $90 per ton, until market pressures caused a jump to $125 by June resulting in an average of $107 per ton in the second quarter. This represents a $7 increase relative to the second quarter of last year, and importantly, a $20 sequential increase over this year's first quarter. Next is the impact of productivity, which includes all results from our productivity actions, including manufacturing, procurement, and fixed cost. You see that our total productivity was a solid $22 million year-over-year with a favorable impact across all three segments. Our productivity actions remain a very important focus area across our business as we work to overcome inflation and protect our margins. Moving to acquisitions and divestitures, the $6 million decrease in operating profit is the net impact from the display and packaging divestitures and the Can Packaging acquisition. And finally, the operating profit change in foreign exchange and other was unfavorable by $16 million with various moving pieces but mostly within SG&A expenses. Moving to the segment analysis on Slide 7, you see that Consumer Packaging sales were up over 4% driven by higher selling prices, positive foreign exchange translation, and the addition of Can Packaging somewhat reduced by lower volumes as COVID eat-at-home behaviors have moderated from the pandemic-driven highs of last year. Consumer segment operating profit fell by 29%, driven by significantly unfavorable price cost and the softer demand. Our Consumer segment margins declined to 10% versus the second quarter of last year when the margin was a very strong 14.7%. Our Industrial segment’s sales grew by almost 34% due to year-over-year price increases, strong recovering demand, as well as the impact from positive foreign exchange translation. Industrial’s operating profit surged by 74%, driven by the significant global turnaround in demand and the associated leveraging impact on manufacturing productivity. The segment’s earnings were also lifted by favorable price cost and procurement productivity. Our Industrial segment’s operating profit was 9.5%, a strong 220 basis point increase when compared to 7.3% in the second quarter of last year. And finally, all other sales declined by nearly 19%, driven by the sale of our display and packaging businesses but significantly offset by the great demand across this segment’s businesses. Despite the sale of display and packaging, operating profit increased by 23% due to the strong demand and the associated positive impact on productivity. Operating margins improved to 6.2%, 210 basis points higher than the prior year’s 4.1%. For the total company, sales were up 11% and operating profits improved by 1.6%, resulting in a company-wide operating profit margin of 9.3%. Moving to cash flow on Slide 8, in the middle of this slide, you see that our year-to-date second quarter operating cash flow was $102 million, compared with $282 million last year, a decrease of $180 million. The primary driver to these lower cash flows was our contribution in the second quarter of $133 million related to our pension settlement and termination process. In addition, we consumed $19 million more cash in our networking capital balances, which was driven by both inflation and increased level of business activity. Overall, our management of networking capital remains very strong. So back to the top of this slide, we had year-to-date GAAP net loss of $262 million, compared to a profit of $135 million in the prior year period. Most of this decrease was the $406 million after-tax non-cash settlement charge related to our pension and termination process. Moving down to our year-to-date CapEx spend. Our net spend was $93 million so far this year, compared to $72 million for year-to-date at second quarter 2020. This $21 million increase is mostly due to spending on project horizon. We do expect our CapEx spend will ramp up over the balance of this year as we progress on project horizon and other important projects. Howard will be providing additional comments about project horizon in a few minutes. So this takes us to free cash flow of $9 million compared with $210 million for the same period of last year. Again, mostly driven by the pension termination process, increased working capital, and higher CapEx spend. Finally, we paid cash dividends of $90 million year-to-date this year compared to $86 million for the same period last year. On Slide 9, you see that our balance sheet and our liquidity position remained very strong and reflect several strategic actions executed during the second quarter. Our second quarter 2021 consolidated cash balance was $264 million, a $301 million decrease from year end 2020. This decrease was driven by significant deployments of cash, which included the accelerated share repurchase of $150 million. The tender offer for our 2040 bonds which retired $63 million of principal. The repayment of our maturing $100 million – $180 million euro-denominated debt and finally the $133 million of pension contributions. These cash usages were somewhat offset by the display and packaging U.S. gross proceeds of approximately $80 million and operating cash generated by our businesses. Our consolidated debt at the end of the second quarter was approximately $1.6 billion, a decrease of $102 million from year end. This decrease was driven by the debt repayments that I just mentioned partially offset by our return to the commercial paper market. Finally, on Slide 10, for your reference, we've included our quarterly earnings history for the last two years at the top. You can note that the now divested display and packaging businesses contributed $0.08 and $0.09 of EPS in 2019 and 2020 respectively. But focusing on this year in our third quarter guidance, you see that our range for Q3 base EPS is $0.87 to $0.93 per share. As Howard will describe further in his comments, this guidance assumes continued solid demand for our products, but also continued inflation headwinds. I'll highlight that our base earnings effective tax rate in the third quarter is estimated at approximately 21.5%. Embedded in this assumption are an approximate 26% tax rate on base earnings and the positive impact from a unique one-time $5.5 million release of a reserve for uncertain tax positions. Specific to our expected full year effective tax rate, we continue to assume a rate of approximately 25%. This is unchanged since our original guidance in February, and has always included the impact of this $5.5 million benefit. We were previously uncertain of the timing, but now have visibility for the third quarter. You also see on the slide that we are not changing our full year base earnings per share guidance range of $3 to $3.60 – I'm sorry, $3.50 to $3.60. And we're also not changing our full year free cash flow guidance of $270 million to $300 million, which does exclude the $133 million of pension contributions made in the second quarter to fund our U.S. consumer liability settlement. So this concludes my review of our second quarter results and our outlook for the third quarter and full year. So I'll turn it over to Howard.

Thank you, Julie, and good morning, everyone. Let me provide you with my thoughts on our second quarter performance. Also give you a brief update on project horizon and our new sustainability commitments. I'll close with what we see entering the second half of the year. Our balanced portfolio of consumer and industrial businesses did well in the second quarter as we were well within our guidance range, despite unprecedented inflation and some lingering effects of COVID-19, where there remain lockdowns in parts of Asia, Europe, and Latin America, as all hotspots here in North America. Our industrial segment and all other groups of businesses experienced double-digit volume growth during the second quarter with demand returning to near pandemic levels. As we anticipated, consumer volumes normalized from the pantry stocking record set during the second quarter of last year, although demand remains above pre-pandemic levels. As Julie mentioned, our biggest challenge in the second quarter, and frankly, the rest of 2021 is battling significant raw material and non-material inflation. In our consumer business, we have seen some resin prices nearly doubled from last year's level, while film, metals, paper packaging and freight are up mid single to double digits. Old corrugated containers, our largest raw material, have moved up from $85 a ton in January to $145 a ton in July. We now expect our external expenses, excluding OCC and label, to rise an additional 2.5% over our prior estimate made just last quarter. This means our cost globally will increase approximately 8%. In addition, as Julie noted, we've seen SG&A expenses increase due to higher property insurance, more normal medical and incentive cost, and additional PT costs. Having said that, I'm extremely proud of how our global team has worked to pull all levers to cover these costs, including driving productivity, controlling expenses, and implementing necessary price increases to fully recover all commodities and other costs increases. The fundamentals of our business are in good shape: volume, productivity, working capital, cash management, all are exceeding expectations. Inflation is the issue. Now let me switch gears and give you a brief update on project horizon. The $115 million conversion of our number 10 corrugated medium machine to a state-of-the-art uncoated recycled board machine with approximately 180,000 tons of annual capacity. We now expect the conversion to be completed by the end of the second quarter of 2022. There are a number of significant construction projects underway that will modernize the infrastructure of the entire complex and allow for more efficient handling of raw materials and finished goods. The key element of project horizon is construction of a new stock prep system to provide approximately 650 tons per day of recycled fiber to the rebuilt number 10 machine and other Hartsville cylinder machines. The new stock prep system will allow for increased consumption of lower-cost mixed vapor along with OCC. We expect this system to be operational by the end of October. As previously announced, we expect to exit the corrugated medium market by early 2022 to allow time for the conversion. Our strategy is to keep our URB capacity neutral at approximately 1.2 million tons. As a result, we recently announced that we expect to permanently shut down our Hartsville number one and number nine machines, which will reduce annual capacity by approximately 70,000 tons. The exact timing of these closures will depend on market conditions as well as the startup of the converted number 10 machine. As a reminder, last year, we permanently shut down a 30,000-ton machine in Hartsville and our 95,000 tons per year, Trent Valley, Ontario paper mill, which that particular machine produced both recycled liner board and URB. Project horizon expected to drive approximately $30 million in annual cost savings by 2023, ensure the long-term viability of the Hartsville paper mill complex and place our U.S. and Canada mill system into the top quartile performance from a cost perspective. More and more investors are asking us about sustainability, so I thought I would provide some update regarding new commitments we've made to reduce our environmental footprint. I think we can all agree that packaging plays a fundamental role in providing sustainable, safe, and hygienic delivery systems for food, medicines, and other essential products around the world. As a top recycler in the U.S. and the global leader in the production of recycled paperboard, along with providing a diverse mix of consumer, industrial healthcare, and protective packaging, we believe it's our responsibility to address environmental challenges such as climate change based on data-driven scientific criteria. While we have reduced our normalized greenhouse gas emissions by approximately 25% since 2009, we're committed to doing more. After much research and planning, we have set ambitious new targets to reduce our global greenhouse gas emissions in line with the Paris Climate Agreement to limit global temperatures to warming to well-below 2 degrees Celsius above pre-industrial levels. Specifically, we've committed to reduce absolute scope one and two greenhouse gas emissions by 25% by 2030 from a 2020 baseline. We have also committed to reduce absolute scope three greenhouse gas emissions by 13.5%. In addition, we are actively studying necessary operational changes, technology developments, and market changes that would be required to achieve net-zero greenhouse gas emissions by 2050. I am pleased that our targets have been reviewed and validated by the science-based targets initiative. To drive compliance with our goals, we'll begin incorporating our sustainability and environmental metrics into each of our business units' plans and management incentives. To help our customers achieve their sustainability targets, we continue to expand our EnviroSense line of more sustainable packaging that incorporates increased recycle contents and improved recyclability. EnviroSense is represented across our portfolio from rigid plastics to flexibles to our iconic type of containers. In fact, we're working with customers in Europe to transition their products into EnviroCan type of containers today. We expect this trend to continue. We will be providing more detailed information on all our environmental, social, and governance activities, both from a commercial and corporate perspective next week when we publish our annual corporate responsibility report. We hope you'll take some time to download and better understand our commitments to our purpose, our people, and our plan, which happens to be the title of our new report. Let me close by going over some of the things we're seeing heading into the second half of the year. And said that the only thing we know about the future is that it's going to be different. Clearly, what we were expecting just six months ago around inflation is different than what we're seeing now. As we enter the third quarter, we remain confident that our business will continue to benefit from the post-pandemic economic recovery. In our consumer-related businesses, we expect volumes to remain above pre-pandemic levels, despite more normalized demand for food packaging, as consumers moderate their at-home eating patterns. However, we also expect certain COVID-impacted markets, such as confectionery, food service, and even construction products should continue to benefit. We also expect further recovery in our industrial markets as illustrated by the historically high backlogs for paperboard globally. Demand for global tubes, cores, and cones are strengthening to pre-pandemic levels. Our biggest challenge will continue to be managing and recovering escalating raw materials and non-material inflation. We believe prices from most resins are at a peak and prices could begin to ease into the fourth quarter. Recovered paper prices, on the other hand, may still rise this quarter due to strong domestic demand. That said, we still believe OCC prices will follow historic patterns and likely decline in the fourth quarter as collections improve and demand should slow. We're currently behind the price cost curve in several of our businesses. However, our price recovery mechanisms including announced price increases should allow us to fully recover these costs over time. We believe Sonoco is well positioned given our resiliency over the last year and improving trends in our primary served markets. Our strong financial position supports our value creation strategy to invest in ourselves to drive growth and margin improvement while consistently returning cash to shareholders. Now, with that operator, we would be pleased to review any questions.

Our first question comes from George Staphos with Bank of America.

Hi, everyone. Good morning.

Good morning, George.

Thanks for taking my question. Thanks for the details. Just a quick question, maybe to start for the third quarter, Howard and Julie, could you give us your rough approximation of what you think price cost will be either in millions of dollars or just from an EPS standpoint, and related to that, just for comparison purposes, I think you said the net displaying packaging divestiture domestic businesses were something like $0.08 or $0.09 a quarter if I heard you correctly, would that be fair as an adjustment factor we should look at for the third quarter as well, or let me know what should be the case there, so that to start.

Yes, I think you're right on the D&P side that’s based on specificity, I will pass on to Julie.

Thanks, Howard, and hi, George. Yes, so, yes, you're right. The divestiture of D&P, with a little bit of offset from the Can Packaging acquisition, so call it all of our M&A there is about $0.08 of kind of a headwind, a pullout from Q3 of last year. And from a price cost perspective, I'd say we are expecting that to continue to be slightly negative in the third quarter as we obviously in Howard and Rodger can provide more color, obviously a lot of dynamics going around contract resets, timing around price increases as well as just open market price increases. But I think nonetheless with the inflation, we continue to expect still slightly negative year-over-year.

Okay. But that implies that you'll see some fairly good improvement sequentially in price cost 2Q to 3Q. And should we assume that both industrial and consumer are slightly negative on price cost or can industrial keep its net positive as it was in 2Q on a price cost basis in 3Q?

Yes, we are expecting industrial to stay slightly positive price cost. Although, I mean, there's – it could be neutral again, the OCC headwinds, Rodger and Howard can talk a little bit more about that obviously, kind of uncertain there, but upward price increases. And so it's, I think puts and takes quite frankly across the segments. It really is going to depend on the continued inflation in resins and OCC especially, but I don't know if Rodger you want to add any more color on that.

Well, on the consumer side, George, as you would expect a fairly significant price increases going through in July. Most of our major CPGs and the consumer business, we have quarterly price change mechanisms where we recover the resins three months in arrears. So for instance, in July, we're implementing March, April – March, April May increases, we calculate in June. We put that enforce in July. So we saw more increases in June and July. So we will still see some negative price costs and consumer around resin. In the third quarter, we expect to start catching that up. We will catch that up in the fourth quarter.

Okay. Thanks, Rodger. My last one, I'll turn it over. Can you reflect on what you've learned about your consumer packaging businesses, and kind of the top two or three ones as we look out the next several years, right. Paper can, composite cans had a surge, and now they're normalizing, obviously there's a lot of margin that business flexibles, has remained somewhat pressure from a volume standpoint. Although a lot of that is, the convenience angle and confectionary, and you're seeing growth in consumer, what do you think is the right growth outlook for those businesses looking out the next couple of years and how much do you think the consumer has maybe readopted, what increment to growth normalized do you think you've gained in that business relative to what would have been the case pre-COVID? Thank you very much and good luck in the quarter.

Thanks, George. I'm not going to probably forecast the exact percentage, but just talking generally, if you talk about our paper can business, we know that volumes are ahead of 2019 levels. We do think there's been continued adoption here in North America. Some of the categories that's really exciting at this point in time is what we're seeing on an international perspective. The sustainability efforts are really building, and we’re seeing a trend where our funnel is continuing to build and drop through in terms of folks wanting to switch over from another substrate to paper containers. It is an exciting opportunity. If we look at on can side with Asia, we've seen double-digit growth just quarter-over-quarter for a number of years now, and we expect that to continue as well. Flexible trays, the plastic tray business, we're really happy with how that business is being managed right now, relatively flat in the quarter, but we saw good productivity throughout the business. We're going to see pickup. I think as we head into the future where we saw softness and confectionery and other convenience and holiday related products, it was actually a bit of a drag on that business. So we expect that to be on a positive slant as we move forward. And I noted quickly about our plastic food frozen sector. That's the one that's really interesting; the volume has actually tracked ahead of last year during the pantry stock. I think that one's carrying probably more long-term new consumer activity than any other. Work from home is settling down, but there will be more people working from home than ever. I think that just because these consumers have been driven to the market for pantry stocking, they're finding the product is good. There'll be working from home; there'll be grabbing frozen meals out of their freezer. So really bullish about the consumer sector as a whole, not just through the end of this year but into the future.

Thank you very much.

Our next question comes from Josh Spector with UBS.

Yes. Hey guys. Thanks for taking my question. Maybe just to follow up on some of the sequential bridging. I guess if I listen to what you're saying about volumes being consistently strong, and you're talking about things getting better, you're getting pricing in the second half, but your updated guidance kind of implies flattish operating income in 3Q and maybe similar for 4Q. So what are the incremental negative factors in the second half, which hold back you from perhaps lifting guidance versus prior expectations?

Josh really, it's just the continuation and lag of recovery of this hyperinflation period that we're in right now. Rodger did a good job in explaining particularly resin; I mean, that's the one that has escalated the most. We have solid recovery mechanisms. It's just timing. As we look at Q2 inflation that we saw in June is going to carry into Q3, and we still are expecting to see inflation in early Q3 with that moderating as we end that quarter and go into Q4, and that's how we're expecting things to play out.

So just so I understand that GAAP doesn't get any better sequentially. It still remains similar to what it was in 2Q and 3Q because of that catch-up.

Yes. That's exactly the point.

Okay. I appreciate that. And just one other question, just on the rigid plastics side, we're reading more about some challenging growing conditions for certain fruit, vegetables, and specialty crops in the West Coast and North America specifically, is that something that you are seeing have an impact on your rigid plastics demand or could have an impact, and is anything from that perspective baked into your guidance for the second half?

Josh, it’s Rodger. We are seeing some impact on the crops primarily in the northwest of the United States. We built that headwind into our sales forecast for the second half of the year. The same story is there; PT, since the first of the year is up about 30%ish. We're moving prices in that business as well, but any headwinds from weather events, fires and all that, we have built that into our forecast. But the answer is yes, for some specific crops in the northwest we have seen some impact.

Okay. Thank you.

Our next question comes from Mark Wilde with Bank of Montreal.

Great. Good morning, Howard. Good morning, Julie, Rodger.

Hey, Mark.

Good morning.

I wanted just to start out; you've done a good job of kind of walking us through some of the legs in some plastic packaging. Anything you can do to help us with just the cadence of kind of price costs catch up in other parts of the portfolio?

I turn it over to Rodger. But what I would say the headline here is related to resin. When you refer to other parts of the portfolio, if you look across where you see that resin influence really hit us hard and the all other category, which is effectively a resin-based business. Of course, as we've just said on the consumer side. Rodger, any further thoughts?

No, I think that's right. If you look at the other categories, freight inflation, packaging, you name it, Mark, as you know, they're all escalating faster than expected. We're out on a regular basis with increases in those areas outside of our normal price change mechanisms. So that's happening. I'm sure we'll come on to OCC and our industrial side in a minute. But as you're aware, we've announced our fourth $50 increase for URB, which went into effect July 15th; that went well. The thought with the 6% to 7% tube and core increase, which has gone well. So we're trying to stay out in front of industrial. That's part of the reason we announced that when we did. We are expecting more headwinds in OCC in the second quarter with an upward bias to OCC prices throughout this quarter.

Okay. That's helpful. And is there any difference, Rodger, in sort of the both the order of magnitude of the cost increases on OCC and your European business versus North America and also any timing difference between kind of North America, Europe and the other markets?

Well, Europe runs faster. If you convert the European Euro metric ton to U.S. short ton, they're up to about $175 a ton on average. But the team there has done a really nice job of staying out in front of that. I'd say their run-up happened in front of the U.S. I'm not sure that tells us exactly where the U.S. is going, but that's the comparison. Our team has done a good job there of recovering so far.

Okay. And the other question I have is, I guess, probably for Julie. I'm just curious if I heard you correctly; it sounds like you're going to stop medium production at Hartsville at the end of the fourth quarter, but the ramp-up on the URB is not until the end of the second quarter next year. Looking at the corrugating medium market this year, I'd assume that that machine has to be quite profitable this year. I'm curious if you can give us any help as we think about next year, the move into next year and what the earnings impact of the phase-out of corrugating medium and the ramp-up of URB might be on a year-over-year basis?

Yes. Good question, Mark. In fact, it's probably going to go down in the later part of the first quarter of next year. We'll be down for six to seven weeks as we make that conversion. We're not at a point at this time where we have even sat down and looked at the overall impact and how that would be reflected in our 2022 assumptions. So it'll be coming, but it won't be this year. It'll be a latter part of the first quarter and into the second quarter of next year.

Howard, without trying to lead you too far on this, but would it be reasonable to assume that you might take a little bit of an earnings hit in 2022 just because you're going to give up very profitable medium production this year, and you're going to have not only a period where the machine is not running but you're going to have kind of a startup curve after the rebuilt?

Sure. That's a fair assumption, but you've got, I guess, where I'm coming from. We'll have to see what the entire corporate roll-up looks like and the material that is going to be. But anytime, yes, you're starting up a new process, a new plant, new equipment. You've got to walk through that.

Okay. Last one real quickly for me; how's the Halloween season looking in the flexible packaging business.

Actually, you need to get your trick or treat stuff ready because the CPGs are acting as business as normal.

Our next question comes from Ghansham Panjabi with Baird.

Hi, good morning. This is actually Matt Krieger, sitting in for Ghansham. How are you doing today?

Hi, Matt.

Good morning.

Great. Great. So I was hoping that we could touch on volumes for the back half of the year. So what are your embedded volume assumptions on a segment basis for the second half of 2021? And what type of underlying market environment are you kind of projecting within these assumptions? If you could provide any detail by region or by product line kind of the major product basis that would be really helpful?

To share with it from a macro perspective, it might help to talk about where we thought we were going to be this year, which is about a 2% growth rate for the year. We've seen Q1 up 4%. Q2 is up 8%. Our forecast now for Q3 is just over 5% with the bulk of that. Our consumer side slightly up 1% to 1.5%. The industrial side continuing to try upwards 7.5% to 8% or so. The all other category showing the biggest ramp-up in this particular quarter to about 12%. I don't know if we're prepared to really talk about each individual business within the sectors that we do expect to see volume to be very positive going forward.

Great. That's helpful. And then I guess I just wanted to touch on maybe see if you could talk about how inventory levels are trending across the various end markets in which you play, have you incurred any incremental costs to service customers in and out of pattern manner from a freight or supply perspective? And if you had any challenges in gaining access to raw materials in any specific markets or instances?

Yes, Matt. Yes, so all of the above inventories are tight, particularly in the mill system where it's driving more changeovers which does impact productivity. But then again across the company, I'm pleased with how we've managed productivity, but it certainly has been a very dynamic situation for us on an income and raw material perspective. Yes, it's tight. We're managing literally particularly resin base that's resin, that's adhesive. We're having to manage that almost on a day-to-day basis, if not on a seven days a week type situation. Outbound freight, similarly we're working weekends to make sure that we've got trucks that can come in and make the shipments that we've committed to our customers. So it is a very interesting dynamic situation right now. But again, I can't tell you how pleased I am with how well our team is managing through this.

Understood, understood. That's very helpful. Just one follow-up and then I'll drop off. Is there any timeline for normalization there that you could feel as reasonable or is it just kind of a day-to-day assessment?

It's a macro issue; it's not a Sonoco issue, this throughout North America. We're managing on a day-to-day basis. I really couldn't forecast what we're saying here. These types of costs and issues that we're facing are going to continue for some time to come; our biggest labor challenge that we're going to be able to pull with all of the headwinds that we're facing is getting this material cost recovery from our customers and just managing the rest of it the best we can.

Great. That's it for me. Thanks.

Our next question comes from Adam Josephson with KeyBanc.

Howard, Rodger, good morning. Hope you're well.

Good morning.

Yes, good morning, Adam.

Good morning, Howard. Howard or Rodger, can you just on resin and OCC, just a little more clarification if you don't mind. As of last quarter, I think you were expecting 10% resin costs inflation for the year, would be interested in knowing what that expectation is now. On OCC, I think the last call you were thinking OCC would go up to 120 by June and you nailed it. And I went up by another 20 in July, and I think Julie or Rodger said, you expect further upward pressure. Can you just put a little more meat on that bone? And lastly, on freight, just can you remind me what your expectations were for the year-end or now?

Hi Adam. It’s Rodger. I'll give it a shot and then Howard or Julie can add to this. But on resin, if you look at the expected increase now for the calendar year of 2021, and this is expecting some moderation and potentially slight reductions at the end of the year, we're expecting a 30% increase for the year. As you know, in many cases, as I think Julie said, resins have doubled, polypropylenes up 140%. So we buy a basket of resins. We bought about 120 million pounds a quarter; over half that's P based, about 30% is polypropylene and then a bunch of all others. We're looking at a 30% increase now, but again, that's assuming we get moderation in the back of the year of 2021. OCC, as you know, has already moved to 145 in the month of July. What I said earlier is there's an upward bias. The container mills are still pulling very heavily. We're seeing premiums in the marketplace. I wouldn't tell you exactly what it's going to do in the coming months. But there is an upward bias, and that's the way we're looking at it today. On freight, I believe we stated a 6% to 7% increase for the year. At the end of the first quarter, we're now at nine to ten which is not a significant move, but the comments Howard made for me are even more important. It's the availability of trucks, trailers, and drivers and the added cost of changing schedules that has been a bigger headwind for us, but that's more color if you need more, we can answer it.

No. Thanks, Roger. Just one follow-up on the cost issue, which is, I think you mentioned in Europe. OCC is up, the U.S. equivalent of 175 bucks. I forget over what timeframe you were talking about, but in the U.S., year-to-date Southeast prices are up 60, I believe. So are you – would that lead you to think that there's a lot more to go in the U.S. or how are you thinking about that relationship between Europe and the U.S. in terms of the year-to-date inflation?

Yes, I'll just say the equivalent price of what we're paying today in Europe short tons would be $175 at the time.

I’m sorry.

So that was the point. I’m not saying we're going to go to $175, but that just shows you the demand globally. Again, containerboard mills are pulling heavily. So, we do see upward bias in the quarter.

Yes, Adam, I am not so sure you can totally create a correlation between the Europe situation and the U.S. to make an assumption that whatever levels they are, we may be heading to. I don't think we've seen that historically. It's basically independent market dynamics.

Yes. Thanks, Howard and Rodger. And on demand by region, can you just talk about what you are seeing? Obviously, U.S., Brazil have been exceptionally strong all year. Europe has gotten better, China is getting worse depending on what you read markedly worse. So can you just talk about what you're seeing by region; what you think is going on in China, obviously Southeast Asia is having COVID problems. China is having other problems; just what you are seeing by region and your expectations along those lines as embedded in your guidance?

Yes, I think you covered it pretty well, actually. I don't know if you look at Latin America on the Industrial side, it’s very strong. Same dynamics, we're seeing here, order backlogs, et cetera, in our mill system; South America is also very strong. Just as a footnote, I mean, we're actually having to do and this is part of our challenges here in North America in terms of mill capacity, but we're actually shipping board out of the U.S. to supplement our mills in South America. So really, and in fact, it's rolled into the bottom line as well, the South American businesses performed exceptionally on both sides, Industrial, Consumer. You talked about Europe, Europe is somewhat similar to here. Very, very strong; our mills are full. Demand on the tube and core side is where we would hope it would be. On the Consumer side, which is mostly our paper cam business, I made comments earlier to George's question that there is very, very solid current demand and pending new orders. Asia as we look is relatively small for us in the full scheme. From COVID a year ago to the day we're extremely pleased with the turnaround. Take our cone business, as an example, is about 97% of 2019, that was dropping from about 40% this time last year. So, we're still somewhat enjoying the recovery, but no doubt about it we're seeing that we expect when things settle down, that there is going to be more pressure regarding just the overall macroeconomic conditions in China. And I guess lastly, I just point to Southeast Asia; COVID is a real issue for us. It's showing in Indonesia where we have our fairly large paper complex, but probably the biggest hit has been our Consumer business, where we've got our largest Asian paper can facility that has been down for weeks due to government mandates and new lockdowns and that continues. This is the first quarter that I can remember when we see in double digits, just quarter after quarter in Asia was actually flat because of that reason that we had a major complex down for the period.

Terrific. Thanks so much, Howard.

Our next question comes from Kyle White with Deutsche Bank.

Hey, good morning. Thanks for taking the question. Wanted to go to rigid paper containers and food packaging. Are you able to provide any kind of cadence or details on how volumes trended throughout the quarter on a month-to-month basis and into July here, just trying to understand what impact you are seeing as markets reopen and the kind of at-home consumption trend weakens here a bit?

Yes, not within the quarter. I think we noted that in total we were down about 5%, but we were above where we were in 2019. Julie, I really don't have that data in front of me.

Yes, not as much from a monthly perspective. I think, basically volume trends during the quarter were relatively steady and I don't think anything unusual on a month-to-month basis during the quarter. As Howard just mentioned, I think maybe you're talking about global cans being down about 6%. But again, it was a really tough comp, again the plastics food business had very solid growth, again a year-over-year growth after a very strong second quarter of 2020. So that volume growth continues to be very solid. But I'd say, I don't think there's anything terribly unusual monthly during the second quarter.

Got it. And then going to All Other, what are you seeing or expecting in terms of the flu season this year for that business? And what are you hearing from your customers in terms of how sustainable some of the vaccine demand will be going forward?

Yes, hi, it's Rodger. Flu season, we're expecting a good flu season. We typically capture over half of that volume, $15 million to $20 million. One thing we are seeing is the main customers are pulling early, pulling it earlier with some concerns about supply constraints as we get into the fall. So, we saw some of that volume come in, in the second quarter, we'll see the balance in the third quarter. We're expecting a normally pretty solid flu season. From a COVID vaccine standpoint, it's playing out almost like we talked about last quarter to the point of we see this turning into more of a vaccine type similar to the flu season. As we get in now to booster shots, as we get into some of these shots for younger children, five to eleven, what we're hearing from our customers is going to turn into more of a standard ThermoSafe package or temperature-controlled package. We expect about $15 million to $25 million impact on an annual basis for COVID vaccine. So, really no change to the guidance from the last quarter.

Got it. Thank you. And good luck for the balance of the year.

Thanks.

Our next question comes from Salvator Tiano with Seaport Research Partners.

Yes, hi. Thanks for taking my questions. Firstly, I know you mentioned that tough comps in rigid paper containers globally, but as we look at kind of the end market demand, can you tell us a little bit about the trends? Why are you seeing essentially the deviation with the rigid plastics specifically, even though both benefited from pantry loading?

Sal to make sure I understand your question, you are asking why plastics have outperformed the rigid paper containers this quarter?

Essentially, why plastics have outperformed the rigid paper containers this quarter?

Yes, I understand. I think it's just the nature of the products that we're starving back to my earlier point with the frozen, QSR opening up with fast food that's certainly been a benefit. But equally so is that the acceptance of the consumer of frozen meals that some consumers were re-introduced to for the first time through COVID and are continuing to go back and continue. We're actually seeing that the frozen side is slightly up over the peak of last year. If you look at the Can business, a lot of that is related to snacks and other items, refrigerated. We just saw a bit of a pullback here in North America. Again, Europe was in good shape, actually just slightly up; and then I've already talked about the scenario in Asia as it relates to the shutdown that we had there.

Okay, great. I wonder if you can also elaborate a little bit on the margin differential between the two, because I think when we think about the $15 million negative price cost for the Consumer Packaging business that you mentioned, that leaves a pretty steep operating income decline year-over-year, given the just 2% volume. I imagine the rigid paper cans have a much higher margin. Was that the reason for the, I guess, the incremental margins being so high?

Julie?

It's interesting, the dynamics among – between those kinds of two – there are really several parts of our Consumer business, you've got different dynamics and productivity and labor challenges as well as the different inflation, whether it's very resin oriented in the plastic food business and flexibles versus other types of inflation being more prevalent in the cans business. So, I think, there's no simple answer; quite frankly, the dynamics around, again, the different raw materials across our Consumer businesses, labor challenges, I mean, we have a broad footprint across all these businesses and depending on COVID impact, labor availability, et cetera, obviously, impacts productivity. So just lots of moving pieces that really we won't be able to provide any more granularity about that with the dynamics of the margins in the different key parts of our Consumer sector.

Yes, I'd say Sal, just in summary, the inflation that we're seeing is really, as we’ve said, in our resin-based businesses, and so we're getting hit hard, even though the volumes were up on the plastic tray side. We're back to this whole price cost capturing that raise in inflation.

Okay, perfect. And just quickly, can you provide a little bit more color on the inflation of the cost differential between what you are seeing in the Consumer Packaging business and the other businesses? Obviously at $10 million price cost headwind for other it's super substantial for such a small segment. Can you elaborate on the differential in terms of costs and resins that you use in the other segments versus Consumer Packaging?

It is exactly that; it's back to the resins. All Other is almost 100% resin-based businesses embedded in there. So, it's just as simple as that really that's what's driving that large number.

Okay, great. Thank you very much.

Our next question comes from Gabe Hajde with Wells Fargo.

Howard, Julie, Rodger, good afternoon, I guess. Thanks for taking the question, late in the call. I was curious there has been a lot of, sort of exogenous factors influencing OCC let's say over the past 18 months in terms of China's actions obviously the COVID impact, and then what we're seeing right now in terms of, I think, lower operating rates and stuff like that. But I'm curious if there's anything that you would view as instructive in terms of kind of what the new normal might look like for OCC? The genesis or the what's behind the question is, I'm looking at a list of 25 to 30 recycled pulp projects across the globe, and it seems like China kind of has reached the upper limit in terms of what they can maybe collect domestically. And obviously we know they're not going to be importing OCC, but potentially, obviously recycled pulp. So just curious if there's potential for OCC to remain, I don’t know, above a $100 a ton or something like that in the foreseeable future?

The potential is certainly there. If it does, it's really about stability. Right now we've seen nine consecutive months of increase in OCC. It will reach its plateau and hopefully get back to a more normal trending. If it's $100, then it plateaus there; we have caught up, and price has been passed through, and we are back to a normalized situation. The issue today is just that; it's month after month after month, it’s the chase. In terms of how the global market is going to settle, it's really hard to say.

Okay. Just curious, I know it's difficult in terms of visibility, but I guess from some of the work that we've done, it appears as if your customers’ inventories are starting to normalize where before it felt like they were living kind of hand-to-mouth a little bit. Any visibility there in terms of where customer inventories are at? And then real quick on CapEx, I think you talked about incurring most of Project Horizon spend this year, call it a $100 million such that $15 million would fall in the next year. I know you are not giving guidance for next year. But directionally, in that $200 million of CapEx spend, knowing what we know today?

That's what we've modeled out as an incremental finishing up on our free cash flow guidance. I think you can go to the bridge that Julie provided that we're assuming that we will have spent to that 300 level. I can tell you that with the delays we've seen associated with COVID, that could push out into next year. It's too early right now for us to make that call. I think by the time we're together in October, we will be able to have pure visibility in terms of how much of this CapEx is going to fall into this year, or maybe even bleed into the next year. On the other end, yes, on price you are right on the customer side, as you said on the food side, their inventories have stabilized. So, we're not seeing anything there. Just like us they are struggling with some raw materials, but I would say on average, they are back to more normal levels. Any customer that's dealing with appliances and automotive, the chip shortage, we're seeing, in both cases our sales to those customers were up significantly over the second quarter. Last year, we could have sold more and our customers could have sold more appliances. Appliance sales were up 23% year-over-year, but they could have been up higher. Automotive sales, you all know the story there. So, I think anything to do with housing or anything to do with chip, the chip shortage, our customers still have plenty of upside from a sales standpoint, which means upside to us.

Okay. Thank you. And good luck.

Showing no further questions in the queue at this time.

Thank you, Liz, and thank you everyone for joining us today. We certainly appreciate your interest in the company. As always, if you have further questions, please don't hesitate to contact us. We'll be glad to talk further. Thanks for the call today.