Sonoco Products Co Q1 FY2022 Earnings Call

Thank you for standing by and welcome to the Sonoco Products' First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to hand the call over to Roger Schrum, Vice President of Investor Relations. Please go ahead.

Thank you, Latif, and good morning everyone and welcome to Sonoco's first quarter 2022 investor conference call. Joining me today are Howard Coker, President and Chief Executive Officer; Rodger Fuller, Chief Operating Officer; and Julie Albrecht, Chief Financial Officer. Also, I'm pleased to announce that Lisa Weeks has joined Sonoco and will be my successor as Head of Investor Relations. Lisa is on the call with us today, and I will be working with her on a transition during the next several months. We're glad to have Lisa as part of the Sonoco team and welcome aboard. 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 first quarter financial results, which was posted on the 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, our 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 a reconciliation of those measures to the most closely related GAAP measure is also available in the Investor Relations section of our website. Now, with that introduction, I'll turn it over to Julie.

Thanks, Roger. I'll begin on slide three, where you see that earlier this morning, we reported first quarter earnings per share on a GAAP basis of $1.17 and base earnings of $1.85 per share. This very strong result is $0.50 higher than the top end of our original guidance range of $1.25 to $1.35 per share, and $0.05 above the updated range that we provided on March 22nd of $1.70 to $1.80 per share. In addition, these results are $0.85 ahead of the $1 of base EPS that we delivered in the first quarter of last year, with our legacy businesses driving $0.50 per share of this increase. The balance comes from the addition of Sonoco Metal Packaging to our portfolio, reflecting strong operating results that are net of interest expense on the debt we issued to fund the acquisition. Related to the $0.68 per share difference between base and GAAP EPS, I'll first highlight that most of these non-base items are driven by the Metal Packaging acquisition and/or significant inflation and most notably, the dramatic increase in steel costs this year. The largest non-base item of $0.37 per share was for acquisition-related net costs driven by the Metal Packaging transaction. These were primarily from the partial write-off of purchase accounting step-up on the acquired inventory, as well as cash-based professional fees. Next, we had an add-back of $0.14 per share related to an acquisition intangibles amortization expense, which, as we announced in February, is a change in our base earnings definition starting this year. All of our prior year results have been recast to reflect amortization expense as non-base. The next item was a $0.14 per share increase in our LIFO reserve, driven by the significant steel inflation and on a go-forward basis, any changes in our LIFO reserve will be treated as non-base. And finally, we have $0.11 per share related to restructuring and asset impairment and an $0.08 per share net gain in other items. I'll note that these restructuring and impairment charges include $0.05 per share related to the write-down of the net assets in our small Russian operations. Howard will talk about our planned exit from Russia in a few minutes. So, moving to the base income statement on slide four and starting with the top line, you see that sales were $1.771 billion, up 31% from the prior year. I'll review more details about our key sales driver on the sales bridge in just a moment. Base gross profit was $416 million, $138 million above the prior year. This performance resulted in 23.5% base gross profit as a percent of sales, which was 300 basis points higher than the first quarter of last year. Our SG&A expenses of $155 million increased by $30 million year-over-year. The key drivers were higher expenses for employee compensation and benefits, strategic IT expenses, and the lack of non-recurring COVID incentives that we received last year. So, all this resulting in operating profit of $261 million, which is 72% above last year. I'll discuss the key drivers on the operating profit bridge in a few minutes. Net interest expense of $19 million was $1 million higher than last year due to the higher debt balances related to the Metal Packaging acquisition. Income tax expense of $61 million was $27 million above last year due to higher pretax profits, partially offset with a slightly lower tax rate. So, moving down to net income, our first quarter 2022 base earnings were $183 million compared to $101 million last year. Now, looking at the sales bridge, on slide five, you see that volume mix was higher by $27 million or 2% for the company as a whole. This increase was driven by our consumer segments and our all other business groups and was partially offset by lower volume in our Industrial segment. Consumer Packaging volume was up $24 million or about 4%, driven by strong demand growth in flexible packaging and in plastic food. For our Industrial Paper Packaging segment, volume mix was down $12 million or about 2%, reflecting among other things, severe winter weather, supply chain disruptions, and operational closures in China, stemming from COVID-19 restrictions. Volume declines were concentrated in Asia and Europe, tube and core operations, North America recycling, as well as fiber protective packaging. And finally, our all other groups saw an increase of $15 million or about 9%, and this was driven by stronger volume across almost all of these businesses. So, moving over to price, you see that selling prices were higher year-over-year by $275 million. Almost 60% of this increase was in the Industrial segment with about 35% in consumer and the balance in all other. Most of these price increases are driven by our continued work to recover escalating costs around the globe. Moving across the acquisitions and divestitures, you see a top-line positive impact of $141 million, mostly driven by the Metal Packaging acquisition, but also reflecting sales removed with last year's U.S. Display and Packaging divestiture. And finally, the sales impact from foreign exchange in other was negative by $25 million, mostly associated with foreign currency translation on a stronger U.S. dollar year-over-year. Moving down to the operating profit bridge on slide six and starting with volume mix, the contribution to sales of $27 million had a $3 million positive impact on operating profit. This low drop-through was due to the negative impact of sales mix across numerous businesses. Now, 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 first quarter, we had $85 million of favorable price/cost with most of the spin benefit generated in our Industrial and Consumer segments. Approximately 45% occurred in our Consumer segment, which was driven by the timing of price/cost changes and recovered about half or just over half of the negative price/cost incurred by these businesses in 2021. We do expect our Consumer segment margins to normalize beginning in the second quarter. The balance of our first quarter price/cost benefit was mostly generated in our Industrial segment, typically driven by price increases to recover inflation, and supported by continued strong demand driving rising market indices. As usual, there's an OCC market pricing slide in the appendix that shows that southeast OCC averaged $160 per ton in the first quarter. While this was well above the $87 per ton average in the first quarter of last year, southeast OCC declined sequentially in the first quarter from an average of $183 per ton in the fourth quarter of 2021. Next on the bridge is the impact of total productivity. You see that our total productivity was $1 million year-over-year, with a favorable impact from our Consumer segments, partially offset by a negative impact in our Industrial segment, and all other group. At a high level, our productivity results were negatively impacted by supply chain weather issues and labor shortages across numerous businesses. Now, moving to acquisition and divestitures, you see the net addition of $49 million of operating profit from our Metal Packaging acquisition as well as the divestiture of our U.S. Display and Packaging business. Lastly, you see that the operating profit change and other was unfavorable by $30 million, with the main driver being higher SG&A expenses that I mentioned before. Moving to the segment analysis on slide seven, you see that our Consumer Packaging segment's sales were up nearly 50%, driven by the addition of Metal Packaging, higher selling prices, as well as increased demand. Consumer segment operating profits increased by 113%, driven by the Metal Packaging acquisition, favorable price/cost results, and the improved volumes. Our Consumer segment margin increased by 600 basis points to 20% versus the first quarter of last year, when the margin was 14%. Shifting to our Industrial segment, sales grew by almost 24%, mainly due to year-over-year price increases, mostly to cover inflation and raw materials as well as operating expenses. Industrial's operating profits increased by almost 39%, due to improved price/cost dynamics compared to last year. Our Industrial segment's operating profit margin was 10.4%, up by 120 basis points when compared to 9.2% last year. And finally, all other sales declined slightly, reflecting the sale of U.S. Display and Packaging, which was almost completely offset by strong volumes and year-over-year price increases, mostly to cover inflation. Operating profit decreased by 22.6% as the negative impacts from the D&P divestiture and productivity more than offset the positive impacts of price/cost and volume mix. And our all other margins decreased to 7.1% from the prior year quarter's 9.1%. For the total company, sales were up nearly 31% and operating profit increased by 71%, resulting in a company-wide operating margin of 14.7%. So, shifting to cash flow on slide eight, about halfway down the slide, you see that our first quarter operating cash flow was $1 million compared with $139 million last year. This decrease was almost entirely driven by an increase in cash consumed by working capital compared to the same period of 2021. Our higher working capital balances this year are driven by increased sales volumes, seasonal inventory build and of course, inflation. Our net CapEx spending in the first three months was $67 million compared to $39 million in the first quarter of last year. While spending did continue for Project Horizon, this year-over-year increase was largely driven by increased strategic investments in consumer growth and productivity projects. This takes us to free cash flow, which was a use of $66 million for the first quarter compared to free cash flow generation of $99 million last year. Finally, we paid cash dividends of $44 million in the first quarter of this year compared to $45 million in last year's first quarter. Our dividend was unchanged on a per-share basis, but this reduced cash payment was due to lower shares outstanding, driven by our share repurchase activity in 2021. On slide nine, you see that our balance sheet and our liquidity position remain strong and reflect the net assets and debt associated with a Metal Packaging acquisition. I'll note that we've completed our preliminary purchase price accounting work, and this is reflected in our first quarter balance sheet. Next on slide 10, you see our guidance for the second quarter and our updated guidance for the full year 2022. So, focusing first on our second quarter guidance, we're projecting a range of $1.20 to $1.30 base earnings per share with a midpoint of $1.25. This midpoint represents a strong 34% increase over the $0.93 of base EPS we delivered in the second quarter last year. This increase is driven by slightly higher volumes in our legacy businesses, continued favorable price/cost results, and of course, the addition of Metal Packaging. We're raising our full year base EPS guidance to $5.25 to $5.45 per share, reflecting our first quarter earnings beat as well as our solid outlook for the second quarter. This new full year midpoint is a 14% increase from the $4.70 per share midpoint of our original February guidance. In addition, we are increasing our full year EBITDA guidance to a range of $995 million to $1.045 billion. Both our operating and free cash flow guidance remain unchanged from prior guidance despite our outlook for stronger earnings due to inflation and increased business activity. We do remain cautious about our working capital balance trend. So, that concludes my comments, and I'll turn it over to Howard now.

Okay, well thanks, Julie, and good morning everyone. Let me start with some brief comments on our record first quarter performance. I'll bring you up to date on our capital spending plan and then provide some thoughts about market trends as we enter the second quarter. Now, our team delivered exceptional results during the first quarter, which exceeded the high end of our updated guidance provided towards the end of March. I've been with Sonoco for more than 35 years and this is the first time that I can remember both our Consumer Packaging and Industrial Packaging segments achieving record top and bottom-line performance in the same quarter. In addition, we welcome Metal Packaging to the Sonoco family on January 26th and we were very pleased with our better-than-expected first quarter results. We continue to make solid progress on our integration activities and look forward to the contributions the team will make to our future success. You may have read that we recently named Ernest Haynes President of Metal Packaging. Ernest will work alongside Jim Peterson to ensure a seamless transition. Ernest is a veteran can maker, having run our North American Paper Can and Closures business since 2018. I have complete confidence in him and our overall Metal Packaging team. I want to also thank Jim for his willingness to stick around over the coming months to help Ernest in this transition. In addition to building the Metal Packaging team, our integration process is well underway. We've identified and are implementing several synergy opportunities, including optimizing raw material purchases, leveraging our indirect spend, and coordinating our supply chain logistics. Combined, we believe we should easily meet our target of $20 million in cost savings by 2024. Another key element to our future success is our strategy to invest in ourselves, as illustrated by the nearly $325 million we plan to spend this year on capital projects to drive both growth and margin improvements in our core businesses. During the first quarter, capital spending almost doubled from spending in the same period last year, and we have recently approved several new important projects. One of which will have a spending just over $11 million to add a second paper can line to our newest operation in Brazil. This expansion will double our current capacity to produce stack chip cans and is necessary to meet growing customer demand. In total, we expect to invest approximately $60 million in paper can expansions and new technology upgrades over the next two years in the U.S., Brazil, Europe, Asia, inclusive obviously, Malaysia. We expect to spend about $25 million in capital on the Metal Packaging business this year, including increasing two-piece production in our Milwaukee, Wisconsin, and Chestnut Hill, Tennessee facilities. We're also in the process of spending approximately $60 million of new capital over the next two years on our flexible packaging operations. Our Flexible business achieved record sales in the first quarter, including 13% volume mix growth. We're focusing on growing in niche food markets and launching new products with new customers. Our latest investment is to add new pouch-making capacity into our Hickory, North Carolina operation to increase our production capabilities by about 45%. This addition will increase our competitive position in the growing pouch market. Finally, after recently starting up new fiber protective packaging lines in Poland and Tulsa, Oklahoma, we have now approved capital to build a new production facility in Turkey to serve one of the largest appliance makers in the region. Our durable and stackable Corner Posts packaging will be used to protect ovens, dishwashers, washing machines, dryers, and other consumer electronics. Demand for this unique paper-based protective packaging is primarily driven by our customers' request for more sustainable options, replacing resin-based materials. As Julie mentioned, we took an asset impairment charge in the first quarter reflecting our decision to exit our small industrial packaging presence in Russia. These operations generated approximately $25 million in annual revenue last year and we have about 60 employees primarily serving only in-country customers that meet all applicable laws. We're in the process of winding down our involvement in these operations and they are receiving no materials or investment from Sonoco at this time. Sonoco's broader business interests have very limited contacts with suppliers in Russia and what little we had sourced has now been transitioned to other vendors. The human toll overall about the war has been unthinkable and I want to thank our employees for all they have done donating funds, food, clothing, medical supplies, along with running boards and even blood to help the massive effort to provide relief for millions of refugees. Sonoco has donated $50,000 to the International Red Cross for refugee relief efforts and we'll continue to look for ways to support our people in the region. Looking forward, we're excited about our accelerated start to the year and combined with our expectation for continued solid business activity in the second quarter, we're confident about our outlook for strong 2022 performance. Because of the timing of certain one-time price benefits experienced in the first quarter, we anticipate the margins in our consumer segment will normalize in the second quarter. In addition, we expect to continue benefiting from the integration of the Metal Packaging acquisition as we move through the year. Due to supply chain challenges, which impacted our ability to obtain sophisticated electronics equipment, we have made the decision to delay the conversion of our Hartsville paper machine from corrugated medium to uncoated recycled paper board to the third quarter. This delay is expected to result in less downtime and should provide more favorable results in our Industrial segment in the second quarter. Despite the delay, we're very pleased with the progress we're making and we're already seeing the benefits from completed parts of the project including the new piping system, which is now operational, along with other infrastructure changes which are improving our overall logistics. We also expect modest improvements in all other segments as our teams continue to drive commercial and operational improvements. In our thermo-safe business, we successfully completed a $208 million order for COVID vaccine shippers in the first quarter and are continuing to provide logistics services. In addition to new product launches, we're seeing our base temperature share business improve. General medical activity is picking up while COVID cases decline. Within all of our businesses, we remain diligent and stay ahead of the price/cost and continue to press necessary price/cost increases to offset continued raw material, energy, freight, and other non-material inflation. Our teams are also continuing to wrestle with supply chain disruptions, particularly in specialty materials such as certain resins and other paper-making chemicals. As we mentioned at our December Analyst Meeting, we're pursuing a series of self-help actions over the next few years that we believe will drive significant EBITDA growth and margin improvement. These actions are tied to our efforts to simplify our operating structure to create a more effective organization. We also remain focused on managing our portfolio for fewer, but larger businesses. We have distinct competitive advantages. In closing, we remain committed to returning cash to shareholders and achieving our objectives to be the benchmark company for yield and stability in the packaging industry. Our 9% increase to our quarterly dividend is an illustration of that commitment and a reflection of our expected strong financial performance going forward. As a reminder, our $1.96 per share annualized dividend provides shareholders with approximately a 3% yield to our stock price and is more than double the dividend paid by the S&P 500. I'm not going to pay dividends for 388 consecutive quarters dating back to 1925, and we have increased the dividend for 40 consecutive years.

Our first question comes from the line of Mark Weintraub of Seaport Research. Your line is open.

Thank you. Congratulations first, obviously, a fantastic quarter. Question for you just as we don't get ahead of ourselves, you did reference the one-time cost price benefit in the first quarter. And I do see that you raised guidance for the next three quarters. So, certainly, the underlying earnings power seems to indeed be stronger. But could you bracket how significant what you would define as one-time cost benefits in the first quarter were?

Sure Mark. Basically, what we've seen in the first quarter is a net of between $0.30 to $0.35 and really materializing in the consumer sector. So, that is what we are viewing as the one-time benefit in the quarter. But what I do want to do is walk you back. And so if you net that out, and as you know that the underlying performance of the business, you net that out and we're about $1.50 against last year's $1 per share performance. So, we are absolutely thrilled with how the businesses are performing, how they're proceeding. Julie talked about price/cost, $85 million in the quarter alone, with that being split between Industrial and Consumer, we've got select margin improvements that we talked about. And of course, we had a base contribution from the acquisition as well. So, about not $0.30 to $0.35 as one-off and just a real positive outlook on a go-forward basis.

Super. And one follow-up. As you're thinking about the rest of the year, what type of inflation expectations are you building in? Is it sort of more of the same more inflation? And are you beginning to see any signs of flattening out? For instance, there have been some commentary that maybe freight is starting to ease a little bit. Are you seeing any of that or is that still to be hoped for, but not apparent yet?

Hey, Mark, this is Rodger. Good question. Yes, we are anticipating higher inflation than we did when we last spoke in February. The most notable increase is in resin. We mentioned an 8 to 10% increase in resin back then, but now it's around 18 to 20%. So, it's almost doubled. Additionally, we're seeing price increases in some of the laminations we purchase for our flexible business. As for paper packaging materials and freight, those are remaining stable and similar to what we indicated in February. Regarding your questions about freight, we've noticed some easing in the spot market, which is a positive sign, but the contract market remains strong. We are experiencing solid volumes there. While the spot market has softened a bit, it's uncertain whether this is a temporary change or a sign of a slowdown. At this point, it's too early to determine if it's a significant shift.

Yes, Mark I might add is if you look at our go-forward guidance, we don't know what's going to really happen. But I think what module will kind of cover it is how we're viewing to the end of the year. So, that's our expectations.

Super, appreciate it.

Thank you. Our next question comes from Adam Josephson of KeyBanc. Please go ahead.

Thanks. Good morning, everyone, and Lisa, welcome.

Thank you.

Good morning, Adam.

Good morning, Howard. A couple clarification questions from me as well. Of the EBITDA guidance increase of $85 million, can you help me with how much was price/cost? And just also help me with what your updated price/cost expectation for the year is in terms of millions of dollars compared to what it was before?

Yes, certainly. Hey, Adam, it's Julie. I would say that the majority of the EBITDA increase comes from price versus cost. This has been quite broad across the business, and as Howard mentioned, the strong performance in Q1 is a significant factor. As we reassess our full year outlook regarding key drivers and bridge items, we have certainly raised our expectations for contributions from price versus cost. Currently, we are looking at operating profit closer to approximately $125 million from positive price versus cost. If we achieve $85 million like we did in the first quarter, we anticipate that it may normalize somewhat in the upcoming quarters, but the outlook remains at upwards of $125 million.

Thanks Julie. Just related to that, I think Ball Metalpack EBITDA last year was about $110 million if memory serves and I think you were previously expecting EBITDA of about $130 million this year. Forgive me if I'm off, but what is your current expectation along those lines compared to what the business' EBITDA was last year?

Yes. Thanks, Adam. You're correct. And last year and what our go-forward expectations were, and we had pretty clear visibility of that $130 million, $135 million type range. As we come out of the blocks, continue to see just great performance, as I talked to when we first announced the acquisition with the new, almost $200 million of capital spent in that business over the course of two years. And frankly, it played into our valuation as well that we were going to see increased productivity coming off of lines that literally we're starting off in November, December, and these were major capital investments. So, we made our best guess at about $130 million, $135 million, and if we look into the go-forward, we're probably going to be north of that in the $160 million-ish range. So, again, very, very pleased with how the business is moving forward.

And Howard if you consider that kind of a normalized number, or do you think there are some one-time benefits in there and perhaps we shouldn't think of that as kind of a run rate level of profitability for the business?

I like to think of it as a run rate, go-forward as the synergy starts kicking in and the productivity continues. So, from the visibility I have today, if we go into 2023 and beyond, I would say that, yeah, that's what we hope and expect will happen.

Got it. Wow. Can you share what you're observing in April regarding demand, especially in comparison to the first quarter, considering the significant price increases implemented across the board? When do you anticipate seeing some demand elasticity? Your consumer volume was up 4%, and while CPG food volumes have declined, your volume showed a positive trend. How are you approaching the topic of demand elasticity as we move through the year?

Yes, I'm going to ask Rodger to speak really more granularly. But what I'd say is that as we enter April, we're seeing more of the same in terms of overall demand. We've got softness in select markets, obviously, China, that, you know, we feel really, really good about the visibility we have right now. So, Rodger, if you don't mind, just talk through what we're really seeing around the world.

Yes, Adam, I think Industrial would be the one to look at, if you're talking about demand elasticity, but we actually expect Industrial volumes to be better in the second quarter than the first. If you look at our first quarter, we had a number of one-time events like winter storms in North America, which took 10,000 tons of ERB out of our system, disrupted a number of our converting plants. One-time issues in Europe we had a plan, three-week downtown at one of our large paper mills in Europe with its footprint consolidation in Europe. So, the market itself in the Americas and in Europe held up extremely well in the first quarter. And we're seeing that continue into April, maybe we'll see some impacts from the issues in Ukraine in the second quarter in Europe. But so far, we've not really seen anything that would raise concern other than the actions we're taking in Russia, which Howard has already talked about. Asia is the challenge primarily in China, for example, our cone volume in China was down 30% in the first quarter versus the first quarter last year. Our tube and core business was down 16.5% in Asia versus last year all in on China, about the Southeast Asia held up fairly well. So, I guess the point is, we feel like Industrial volumes will hold up well into the second quarter, which I think is a good sign for the economy overall. And we're not seeing any pullback from what you said around price increases. In fact, our global ERP system continues to be sold out; we continue to have customers on allocation and we're seeing no letup in demand. And the all other segments are really recovering from all the COVID issues. That segment was most hit by COVID. We're seeing recovery in our medical business, we're seeing recovery in our retail security business, and of course, the ThermoSafe business continues to be strong and growth. So far, as Howard said, nothing major changing. And in the second quarter, and again, we actually expect Industrial to be slightly better.

And Adam I would add more to your question. Where's the macroeconomic situation? There's a lot of concern about what the economy's going to look like during the second half of the year. And I'll just remind you that we participate in 80% of our consumer businesses and what I would call staple food items, and we perform extremely well as we see consumer activity slow down. I hate to say the word recession, but that's been floated around that we've always really driven well through that. And that's the way we expect it to play out.

Got it. Thanks a lot Howard.

Thank you. Our next question comes from George Staphos of Bank of America. Your question please.

Sure. Hi, everyone. Good morning. Thank you for all the details. Lisa, congratulations; we look forward to working with you, as you have big shoes to fill. Roger, thank you for everything you've done, and we anticipate collaborating with you during the transition. I wanted to revisit the update on Ball Metal that Adam mentioned. When I examine the EBIT bridge, there was about $49 million in benefits, net of divestitures. If I take a straightforward approach, that suggests you might be running around $200 million annually from Ball Metal if I project that for the entire year. Howard, why is the new run rate set at only $160 million? Also, when you provided the updated guidance, what factors influenced the productivity changes? It's quite a leap from $130 million and $135 million to $160 million. I have a couple of questions regarding Ball Metal and acquisitions.

Sure George. I noted first comments, we do see that there's about $0.30 to $0.35 that are in the consumer sector that is related to what we would call one-off hikes. And that in turn is catching up in terms of productivity. Now, within that, I will say that is across the consumer sector, not just in D&P or S&P now. And in terms of the productivity items, I talked about the real and it's just what we model out in terms of better performance on these capital investments. On top of that, the centers, which is a big part of the pull-down from an annualized in one quarter, which I noticed there's going to be a bit of a fall-off, and we're going to see normalization. But at the same time, we're going to see some ramp-up as it relates to productivity and incentive fees coming into light.

Okay, I appreciate that, Howard. And if we could talk a little bit about what was actually one-off in the quarter within consumer in terms of those price/cost benefits, if there's a way to sort of parse that? And then if I do some simplistic math on that, take the $0.30, $0.35, multiply by shares, gross it up for tax, it kind of suggests that consumer may be over-earned by 4% to 5% margin. Would that be fair? So parse that, and then is that a decent adjustment factor for the margin in terms of where you should be 2Q, 3Q in Consumer?

Hey George, it's Julie. I want to ensure we clarify everything related to your earlier question about the operating profit bridge and the acquisition divestiture impact on operating profit. Howard mentioned EBITDA, so I wanted to confirm you have all that information. When we consider the key elements, there are several one-time items affecting the $0.30 to $0.35 range, including some positive price versus cost adjustments. Additionally, we have discussed higher SG&A due to unique circumstances in the first quarter, including some spending on IT and benefits, which we expect to normalize as we move into 2023. There are some positives regarding price and cost adjustments and timing, but we've also seen challenges in the SG&A area. I want to emphasize that much of the benefit we saw in Q1 within consumer price versus costs was actually a recovery from the negative impacts we faced last year, and we haven't fully recovered yet. We anticipate seeing more of this recovery timing in the second quarter. So overall, we're focused on how price versus cost, particularly in consumer, will trend through the quarters in 2022. The first quarter was a nice rebound from last year's negative timing, and we expect this to stabilize as we progress. Regarding consumer margins for Q2, I think your estimate may be a bit low. The range of around 11% seems more accurate for what we are aiming for in the second quarter for consumer.

Okay. And I appreciate that, Julie, and I'll turn it over after this question. And I don't want to belabor it. Again, you had a great quarter and congratulations to you starting the year off on such a strong footing. What I heard you saying though is basically comparisons were easy, right? You were running negative price/costs last year, you caught up a lot of your contracts allow for the catch up in January. So, yes, you had a very strong price/cost in consumer, but I'm still not sure why that's kind of a one-time and why it doesn't continue going forward. Other than your comps get tougher, but your margin shouldn't drop. So, help me understand if there's anything else that I need to be mindful of? Thanks and I'll turn it over and good luck in the quarter.

So, George, last year in the first quarter, we saw about a 14% increase in consumer, despite facing significant negative challenges for the year. I can reference my earlier comments about the $0.30 to $0.35 net positive impact we experienced previously. We have seen an increase in margins, and there are still opportunities to capitalize on since we haven't finalized all our contracts yet. The pricing adjustments from these contracts won't take effect until the second quarter. Additionally, on the paper side of the business, we saw minimal recovery in the second half of last year due to disruptions. To summarize, I'm estimating a range of 11% to 13% as we look ahead to the second quarter and we'll assess how things unfold for the second half of the year.

All right. Thanks very much, Howard.

Thank you. Our next question comes from Anojja Shah of BMO Capital Markets. Please go ahead.

Hi, good morning, everyone.

Good morning.

Good morning.

Morning. I just wanted to ask about the healthcare portion of all other. In your comments at the beginning of this call, we heard a very positive mention of COVID vaccine shippers, I think you said 28 million and pickup in medical spending. But then the release has mentioned lower healthcare packaging demand. Can you just clarify that a bit?

Not quite sure. You'd like to answer the question?

I think this is great. The ThermoSafe business performed very well. However, our 2Q medical thermoform containers experienced lower demand in the first quarter, which was the only segment of that business group facing reduced demand. That’s the outlier in this situation. We have two medical businesses that operate in very different markets.

That's right. That's right Julie. This is Rodger. Yes, that was specifically the ThermoScan probe covers for air thermometers that really took off during the pandemic and have now settled back to actually lower levels than normal as they built up a lot of inventory. But that's a very specific issue and that medical business, but across that, we're seeing a pickup in elective surgeries, and all the operating room products are coming back. So, it is playing out like we thought, but it was really negative on that one product, which is fairly significant for that business.

Got you. Thank you very much for that. And then the other question I wanted to ask about was the labor shortage. I know this has been going on for a while, and certainly not just you guys. But what actions can you take or what have you been taking? And is this sort of accelerating your plans around automation?

Absolutely, yes. This is Rodger again. If you asked that question six months ago, I would have said we were about 10% short of staff on average in our U.S. plants. That has eased somewhat to around 5% to 7%. So, there is still a shortage. However, we have a very comprehensive automation strategy. Last year, we discussed partnering with Sonoco, one of the top integrators in the country, and we have a detailed plan in place. We are primarily focusing on the four large businesses that Howard mentioned earlier, where we can enhance efficiency by standardizing our high-light converting and packing operations. This will take time, of course, but as you pointed out, addressing entry-level positions, especially during off shifts, is crucial. We believe that our automation strategy will yield positive results in the coming years.

Great. Thank you very much.

Thank you. Our next question comes from Ghansham Panjabi of Baird. Your line is open.

Thanks operator. Good morning everybody. So, I was hoping you'd get a little bit more of a bridge on the Industrial segment. Just kind of reconcile your comments about $85 million in price/cost, and roughly half of that came from that segment, so that's, let's say $40 plus million, and the operating profit only being up $20 million. If you could just give us some of the offsets there.

Yes, when we look at the Industrial segment, there was a strong contribution from price and costs. However, the drop-through to operating profit was slightly negative, which posed a small challenge. Additionally, productivity was also slightly negative. While these factors weren't significantly material, the overall lower demand in the industrial sector and the dip in productivity acted as a slight headwind to the benefits from price and costs. The remaining issues fall into a category we refer to as "other," which includes higher selling, general, and administrative expenses. This is not limited to the industrial segment but spans the entire company. We are facing inflation and compensation pressures, yet we are making significant progress in our IT strategy, with a focus on automation and investments in digital-oriented cybersecurity projects. Overall, the negative impact on operating profit largely comes from this other category.

Ghansham let me just add as well. We talk about the negative volume in industrial that really have isolated to Europe and our Asian operations. Of course, Russia, but we had our single largest core customer has not operated due to strikes. They have union activities they've had since the beginning of the year. I'm not even sure are they operational yet.

Not yet.

Still aren't operational. And of course, Rodger has already talked to the impact in China. On the productivity side, particularly as it relates to Western Europe and here in the United States, demand is so strong in our European network that just simply drives negative productivity, certainly drives price and price/cost improvements, that we've well noted that lots of changeovers and other supply chain issues that have caused us to miss our productivity targets, but soon as things normalize, our expectation is that the tight market, we should continue with a solid price/cost scenario in industrial, and we'll start seeing our productivity start ramping up accordingly.

Okay. Thanks for that Howard. On the consumer side, I mean, you know, so the volumes were very, very strong at plus 4%, yet a relatively healthy comparison from a year ago also. As I look at my model, I mean, the fourth quarter was down in that segment. So, do you sort of see that as just normalization between two quarters from a buying standpoint? Or do you see actual underlying strength? And then second, as it relates to all other also very strong volume quarter, but we're seeing a lot of headlines associated with auto production moderation, given all the various iterations of issues that continue. So, should we expect that segment to start moderating as well from a volume standpoint as the year unfolds? Thanks.

Yes, thank you, Ghansham. In the fourth quarter, we experienced supply chain disruptions from our customers. One of our largest customers in North America was out of operation for about two and a half weeks due to the inability to source necessary raw materials. This situation has contributed to the recovery we're observing as we enter the first quarter of this year. Overall, the candidness was roughly flat globally. It's important to note that this is in comparison to a 4% increase in the first quarter of last year, which was driven by a COVID-related high demand environment. We're pleased to have maintained that level of volume. Additionally, we are seeing a consistent increase in the plastics segment of the business, particularly in trays, frozen foods, and ready-made meals. This area continues to show improvement. Rodger, do you want to add anything?

Yes, I would just add that the flexible business continues to show strong growth, notably with segments like confectionery increasing by about 25%. The team is doing an excellent job of securing new business and products with new customers, while also gaining share from existing accounts. The flexible segment performed well in the quarter and we anticipate this trend will continue into the second quarter. The main challenge is sourcing the materials necessary for production. We expect some moderation in ThermoSafe due to a decline in COVID vaccine package demand compared to the first quarter; however, other aspects of our business, including retail security and medical, remain positive. I believe overall performance in the second quarter will resemble that of the first quarter, with volumes holding steady. You mentioned the automotive sector, which is part of our protective business and saw weakness in the first quarter, so we anticipate similar performance in the second quarter. Overall, I expect solid volumes across all sectors in the second quarter, mirroring first quarter results.

Okay. Thanks so much.

Thank you. Our next question comes from Joshua Spector of UBS. Please go ahead.

Hi, this is Lucas Beaumont on for Josh. Good morning. I was just wondering if we could talk a little bit more about Metalpack volumes. Could you tell us what the growth was a year-on-year? And how you see the demand progressing sequentially?

Yes, we don't have a strong comparison for volumes since we didn't have them last year. My understanding is that they are slightly down, mainly due to some COVID-related factors on the aerosol side, particularly with products that were in high demand. However, I wouldn't say it's a significant drop. We anticipate a busy season starting now, as we begin to build inventories for tax season and the following quarters. At this point, we have no concerns regarding future volumes in the business.

Great. Thanks. And then just on the paper side, or if you guys could just update us on your outlook for OCC and up from here. So, and the spreads at the moment are kind of pretty much at record labels. So, sort of just wondering how you guys are thinking about the sustainability of that as we move through the year?

Yes, Lucas, I think your question is around OCC? Yes, OCC and URB and with the spreads kind of being at record levels currently. So, how you kind of see the outlook for both there through the year and whether you think the spreads are sustainable from here or not? Thanks. Yes. First, I think we currently have about 150 in South Asia. I anticipate a slight decline for the second quarter. However, as demand normalizes in the latter half of the year, with new volume or capacity being added, we expect to see figures between $160 and $165 during that period. We anticipate a pickup in the second half of the year, but we don't expect the current spread to be maintained as the URB market remains tight. We are still on allocations and are looking forward to the completion of the number 10 machine's conversion so we can meet our full supply requirements. I would describe the current situation as a bifurcation of price and cost, which we expect to continue as market dynamics indicate ongoing support for this trend in the future. Overall, I remain optimistic that regardless of OCC's performance, the spreads we are experiencing now will persist into the foreseeable future.

Great. Thank you.

Thank you. Our next question comes from Kyle White of Deutsche Bank. Your question please.

Hey, good morning. Thanks for taking the question and congrats on a pretty strong quarter. Just focus on the Hartsville and the conversion there, are you able to give us kind of the negative impact that you're expecting related to the downtime that you're going to take the third quarter as you convert that machine? And then any kind of thoughts about maybe even potentially prolonging that just given some of the price increases that we're seeing over on medium and the benefits you're getting from that as well?

So, for number 10, third quarter impacts, what are some around $10 million spread between the third and the fourth. Third and fourth quarter. And the second part of the question? I'm sorry, Kyle.

Yes, the second part was whether you have considered extending or delaying that conversion due to the strong medium market and the recent price increases impacting that market.

Yes, thanks. Interesting question. So, the first part of that is certainly the delays of not purchasing. But no, we think that whoever just said we're sure right now in terms of meeting the overall demand on URB, the price call spread is very attractive right now. So, all of the original economic assumptions we made from the beginning remain true that yes, the line of board or medium is strong right now, but URB is equally as strong. So, and with pent-up demand to help load the machine up as it starts. So, all good.

Sounds good. And then for my second question just on M&A. I mean, clearly you're in deleveraging mode following the Metalpack acquisition right now. But you can't always time when deals and assets come to market. So, I'm curious if you would have any appetite from an operational and a financial standpoint, in the event that an asset comes to market in the food and aerosol cans space?

Right now, Kyle, we're really focused on the integration of the business. There are a lot of balls in the air around the globe. Our focus, again, is this; this is nail this integration with deliver on the promise that we've made to our shareholders on this one. And we'll see what happens, depending on opportunities that may or may not come into play.

Sounds good. I'll hand it over and good luck with the balance of the year.

Thank you.

Thanks.

Thank you. Our next question comes from Gabe Hajde of Wells Fargo Securities. Your line is open.

Howard, Julie, Rodger, Lisa, good morning.

Good morning.

Good morning.

I hate to belabor the point here, but I guess maybe just for posterity sake and to make sure maybe I understand. Can you tell us EBITDA contribution from the Metalpack acquisition in the first quarter?

We really have never talked about individual business unit results. We've always focused on the fragment.

Yes, I mean, you can look at the operating profit bridge. And obviously, there's some net there of the contribution to operating profit of against Metalpack addition versus the Display and Packaging. U.S. divestiture last first quarter, albeit, as you're aware, DMP us was a relatively small decline year-over-year because it just the nature of the size of that business. So yes, I think we probably can leave it at that from operating profit, kind of, contribution from really that net M&A activity.

Okay, maybe a point of clarification, Howard, on the $0.5 million of spending in Metal Packaging, is that return capital i.e. incremental above and beyond? I think what you identified as the $20 million to $25 million of sort of maintenance capex that was required for that business, and then post adding some of this two-piece capacity, is that in fact replacing existing three-piece capacity? Or is it adding incremental two-piece capacity, if that makes sense? And then how much after the fact will be remaining that three-piece?

Yes. Gabe, it is primarily value-added capital that we allocated. It's not new base investments; the expansion of two-piece lines to boost productivity is a significant part of that. The rest is also focused on enhancing productivity across various operations within the business. I'm not suggesting that it wasn't well-capitalized from the start, as we had state-of-the-art equipment. The team and I all agreed that we could enhance those initial investments, improving on the decrementals. I'm considering part of the largest of the 25; there are a couple of five million and then a tapering off from there. Ultimately, it’s about how we can become even stronger than we are today.

Okay, last one for me. Maybe Julie, can you help me get back into the range regarding the connection between EBITDA and operating cash flow, with working capital using $75 million to $100 million. Is there anything else to consider? Does that number resonate with you and is there anything else we should be aware of?

Yes, I think on a full year basis, you're spot on. And I will tell you, it's tough in this environment to forecast full year change in working capital. But our teams are very focused, I'll just add this on, you know, collecting receivables on time, managing our inventories appropriately. And then we're just looking at all kinds of ways. And especially even with Metalpak, bringing the Sonoco balance sheet to Metalpack actually is helping us better manage their working capital. So, just a little color on ways we're trying to offset pressures of inflation and other things on upwards of working capital, but I think your range is as good as ours, kind of that $70 million to $80 million higher working capital year-over-year, is what we've got penciled in. So, you're I think you're in pretty good shape there. Otherwise, there's nothing else really terribly unusual and especially that's changed much since our initial cash flow guidance and the assumptions we made early in the year.

Thank you. Good luck.

Thanks.

Thanks.

Thank you. At this time, I'd like to turn the call back over to Roger Schrum for closing remarks. Sir?

Thank you again, Latif. In closing, let me simply say it's been my pleasure working with each of you over the past 16 years. I think this is my 66th earnings call with Sonoco, so I've certainly enjoyed each and every one of them. I look forward to introducing Lisa to each of you over the next few months. And as always, thank you for your interest in the company and just give us a call with any other questions you might have. Thanks again.

This concludes today's conference call. Thank you for participating. You may now disconnect.