Sonoco Products Co Q4 FY2022 Earnings Call

Good day and thank you for standing by. Welcome to the Sonoco fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question during the session, you will need to press star-one-one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star-one-one again. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Lisa Weeks, Vice President, Investor Relations and Communications. Please go ahead.

Thank you Operator, and thanks to everyone for joining us today for Sonoco’s fourth quarter 2022 and full year 2022 earnings call. Joining me this morning are Howard Coker, President and CEO, Rob Dillard, Chief Financial Officer; and Rodger Fuller, Chief Operating Officer. Last evening, we issued a news release highlighting our financial performance for the fourth quarter and we’ve prepared a presentation that we will reference during this call. The supplements and presentation are available online under the Investor Relations section of our website at www.sonoco.com. As a reminder, during today’s call we will discuss a number of forward-looking statements based on current expectations, estimates, and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties, therefore actual results may differ materially. Please take a moment to review the forward-looking statements on Page 2 of the presentation. Additionally, today’s presentation includes the use of non-GAAP financial measures which management believes provides useful information to investors about the company’s financial condition and results of operations. Further information about the company’s use of non-GAAP financial measures, including definitions as well as reconciliations to GAAP measures, is available under the Investor Relations section of our website. For today’s call, Howard will begin by covering a summary of 2022 performance. Rob will then review our detailed financial results for the fourth quarter and the full year and, along with Rodger Fuller, will discuss our guidance update for the first quarter and full year of 2023. Howard will then provide closing comments, followed by a Q&A session. If you will please turn to Slide 4 in our presentation, I will now turn the call over to our CEO, Howard Coker.

Thank you Lisa, and thanks to all of you for joining our call this morning. We really look forward to sharing our transformational results for the past year and providing our outlook for 2023. As we look at 2022, it was a pivotal year for Sonoco where we made significant progress on a strategy to continue growth as a world-class packaging company with a portfolio of highly engineered and sustainable products to support our customers. When I took this role three years ago, we started on a journey to fundamentally change the trajectory of long-term profit for the company, and to do that, we had to take a pretty complex business and simplify both our portfolio and the way we run the company to drive improved growth and profitability. These changes were necessary for us to deploy capital more efficiently to our larger core business units and to better integrate acquisitions. In fact, the metal packaging acquisitions was the largest in the company’s history and performance and integration is well ahead of schedule. In parallel, we worked hard on commercial excellence to reposition pricing to less volatile indices while improving the timing of recovery for higher manufacturing costs. It’s taken several years, but the efforts of these programs are reflected in our 2022 results and we expect them to continue well into the future. In 2022, we saw strong year-over-year performance in which revenue grew 30% to $7.3 billion, base EBITDA grew 51% to $1.15 billion, and base earnings per share grew 65% to $6.48. These results obviously were a record in the 24-year history of this company. I couldn’t be more proud of the team for these results, which were achieved in another year that was nothing short of chaotic, all while staying true to the mission of Sonoco and further advancing our ESG and sustainability initiatives, which are intently aligned to the values of this company and a part of our everyday lives. With that, I’m going to turn it over to Rob to take you through the financial results and our forward guidance.

Thanks Howard. I’ll begin on Slide 6 with a review of key financial results for the fourth quarter. Please note that all results discussed will be adjusted to base and all growth metrics will be on a year-over-year basis unless otherwise stated. The GAAP to non-GAAP EPS reconciliation can be found in the appendix to this presentation as well as in the press release. The fourth quarter and full year 2022 financial results again represent Sonoco’s ability to deliver strong results from our core market position despite challenging market conditions. Sales increased 16.5% to $1.7 billion in the fourth quarter. This sales growth was driven primarily by the Sonoco metal packaging acquisition and an 11.5% increase in price as strategic pricing efforts continue to both offset inflation and reflect the value we provide our customers. Volumes in the fourth quarter declined 8.5% due primarily to declining demand in the global URB and converted paper products markets and also due to soft consumer volumes, particularly in the last weeks of the quarter. Base operating profit increased 34% to $184 million and base operating profit margin increased 145 basis points to 11%. This strong performance was due to strategic pricing that offset inflation and a lack of operating leverage due to low volume. While metal packaging was important to these results, excluding metal packaging, operating profit would have grown 28% and operating profit margin would have been 12.2%. The base EBITDA increased 31% to $241 million and base EBITDA margin increased 160 basis points to 14.4%. This margin improvement has been strategic and is backed by ongoing portfolio management actions, footprint optimization activities, value enhancing capital investments, and structural transformation. These actions have enabled a reduction in SG&A as a percent of sales from 9.8% in 2020 and 8.8% in 2021 to 8% in 2022. Importantly, we have reduced this metric while also investing in our commercial, operational, and supply chain capabilities. Finally, base earnings per share increased 28% to $1.27. This increase in earnings was attributable to strong operating performance offset by $0.04 of negative FX and enabled by a lower tax rate of 21.3% in the quarter. The sales bridge on Slide 7 provides the primary drivers for growth in the quarter. Volume mix was negative $123 million or 8.5%. Consumer segment volumes were down primarily due to consumer inventory management and weather in the fresh food businesses. We view these effects as transitory and not a trend. We do not anticipate they will continue in the post quarter. Industrial segment volumes were also down in the quarter on continued declines in Europe and Asia. U.S. industrial volumes also declined, particularly due to the exiting of the corrugated medium market. Price was $166 million positive, up 11.5% in the fourth quarter. Our pricing performance continued to reflect strategic pricing efforts associated with our commercial excellence strategy, mainly selling to value and managing contracts to recover inflation. Acquisitions increased $239 million driven by metal packaging and our first month of Skjern. The integration of Skjern is ahead of schedule and we’re excited about both adding new team members in Europe and our expanded capability to serve consumer end markets. The base operating profit bridge illustrates our improving profitability in greater detail. Volume mix was negative $35 million, primarily due to lower volumes in industrials. Price cost was an $87 million benefit in the quarter. Consumer had strong price cost performance, generating $16 million of favorability primarily from RPC. We achieved $66 million of positive price cost in the industrial segment in the fourth quarter. This strong price cost performance was due to contractual pricing mechanisms and historically low OCC costs. OCC averaged $38 per ton in the quarter versus $123 per ton in the third quarter and $183 per ton in the fourth quarter of 2021. In 2022, we achieved a record $340 million of positive price cost. These figures exclude metal packaging, which was accounted for in the acquisitions. Acquisitions and divestitures generated $9 million of base operating profit in the quarter. As metal packaging continues to perform as expected, margins in this business were lower than previous quarters due to normal seasonality associated with food can volume and lower volumes in aerosols associated with inventory rebalancing. Other impacts on the quarter were negative $8 million due to higher depreciation and FX headwinds, which specifically impacted operating profit $5 million in the quarter. Slide 8 has an overview of our segment performance for the quarter. Consumer sales grew 49% to $879 million due to the metal packaging acquisition and strong price performance, only partially offset by negative volumes of 2.5%. Volumes would have been generally flat excluding the impact of weather and plastic foods and mix from exiting the ice cream segment in RPC Europe. Consumer operating profit grew 37% to $85 million in the quarter. Operating profit margin declined 83 basis points to 9.7%. Again, excluding metal packaging for comparison purposes, consumer operating profit margins would have been 11.9%, a 139 basis point improvement. Industrial sales declined 8.9% to $597 million due to a 15% decline in volumes. Volumes weakened throughout the quarter due to customer inventory management and lower end market demand in more economic sensitive regions and segments. Operating profit grew 34% to $79 million as price cost offset low utilization. Industrial pricing is holding as pricing mechanisms are now oriented to overall inflation recovery and value delivered, rather than OCC prices. Operating profit margin increased 422 basis points to 13.3%. All other sales increased 2.5% to $200 million and operating profit increased 24% to $20 million. Growth was driven by strategic pricing and overall stable volumes. Moving to Slide 9, we have our record full year 2022 financial summary. Revenue grew by 30% to $7.3 billion, driven by acquisitions, volume in consumer packaging, and strategic pricing. Base operating profit increased 63% to $920 million, driven primarily by positive price cost and acquisitions. Base EBITDA rose 51% to $1.15 billion and base EBITDA margins expanded to 15.8%. Last, our base EPS for 2022 grew by 65% to $6.48. We also announced the acquisition from Westrock of the remaining equity interest in RTS Packaging and one paper mill in Chattanooga, Tennessee. In light of the current status of the regulatory review process, we now expect the closing of the acquisition to occur in the second half of 2023. Turning to Slide 10, our capital allocation framework is aligned with our business strategy to drive value creation for our shareholders. Our priority is to allocate capital to high return investments in our core businesses to drive growth and improve efficiencies. From a free cash flow perspective, we remain focused on increasing the dividend, which at present is $0.49 per share on a quarterly basis or a greater than 3% average yield over the past 12 months. We paid $187 million in dividends in 2022. After capital investments and the dividend, we prioritize investments in accretive M&A transactions aligned with our long-term strategy. We prioritize our access to capital and retaining our investment grade credit rating. For the quarter, operating cash flow was $87 million and capital investments were $88 million. For the year, operating cash flow was $509 million and capital investments were $319 million. On Slide 11, we have our 2023 guidance. For the first quarter, our EPS guidance is $1.15 to $1.25. Our full year 2023 EPS guidance is $5.70 to $5.90. Our full year 2023 base EBITDA guidance is $1.1 billion to $1.15 billion. Our full year operating cash flow guidance is $925 million to $975 million. We anticipate net working capital will be a meaningful benefit to cash flow in 2023. Now Rodger will discuss our outlook on a segment basis.

Thanks Rob. Please turn to Slide 13 for our view on segment performance and drivers for the first quarter and the full year of 2023, which supports our guidance. Across the consumer segment for the first quarter of 2023, we expect sequential volume growth in all products, including metal cans, rigid paper packaging, and flexibles. The only exception we expect is plastic packaging for fresh fruits and vegetables, which continues to be hampered by weather issues. On a year-over-year basis for Q1, we expect to see positive volume driven primarily by the one extra month of metal packaging sales as we closed the acquisition at the end of January in 2022. For first quarter earnings, we have projected headwinds in our guidance from lower steel prices and are managing through other raw material costs and availability issues with energy, adhesives, and laminates. For consumer, during the first full year of 2023, we see volume increases year-over-year across the portfolio, including mid-single digit volume increases in our metal can business. We’ll continue to invest for growth and productivity led by the increasing demand for sustainable packaging in our rigid and flexible packaging businesses. In our industrial segment, we see continued softness in volumes globally in our converting and trade paper sales in the first quarter. In North America, protective packaging for appliances and household goods remains weak and we expect little near-term recovery for products that support residential homebuilding and construction markets. We’re monitoring the Europe and Asia demand recovery carefully as this will be critical to the overall volume outlook in industrial for the full year, which at present we believe will be down low single digits versus 2022 levels. Like Howard mentioned, we’ve transitioned our contracts to more stable indices, putting in better cost recovery mechanisms and current lower input costs on OCC. Our pricing in industrials remains stable. Even with the most recent modest decline of $20 a ton for URB on the RISI index and some expectations of modestly higher OCC costs in 2023, we expect positive price cost benefits this year in industrial. With planned downtime in our global paper operations, we continue to maintain reasonable backlog levels and are ramping up all paper grades on our number 10 machine in Hartsville. In our all other businesses, we continue to have net stable volume demand across this collection of businesses with improved productivity and favorable pricing actions. We expect slight increases in profitability for the all other segment this year. As we look to 2023, we have a keen focus on all forms of productivity as we see the benefits of fewer supply chain and labor disruptions. Over the past several years, we’ve taken decisive actions to help offset inflation and build resiliency in our operating model. At the same time, we’ve invested capital in our core consumer and industrial businesses to position us for long-term growth and profitability. With that, I’ll turn it back to Howard.

Okay, thanks Rodger. If you would, turn to Slide 15. The base earnings per share view demonstrated visually here clearly shows the step change in profit improvements for Sonoco. Our full year results include the benefit of metal pricing over the life of the company, which was approximately $0.53. Without this benefit, you would still see a very strong roughly $6 per share earnings for the period. Since 2022, the high return investments we’ve made, while reshaping the portfolio and improving the operating model, have also resulted in an expected 15% CAGR in earnings per share for 2023, based on the midpoint of our 2023 annual guidance. While 2022 was a year of progress, we are only just beginning. We intend to grow profits through organic and M&A investments, as well as better efficiency in how we run the business day in and day out. In closing, if you turn to Slide 16, we carry sustained momentum from our strategy and operating model into the new year, which we believe positions us well to navigate near-term volatility. We expect stable operating performance in the coming year where the midpoint of our base EBITDA guidance is essentially the same as last year; but let me be clear, the operating environment does remain very tough right now, but our expected performance reflects our better portfolio and business mix that is expected to be less volatile through business cycles. We expect the first quarter to be the low water mark for the year based on our customer forecasts, with improvements in the second and third quarter and then concluding the year with a more seasonal Q4. With improvements in working capital, we expect free cash flow for the year to be at the midpoint, around $600 million. We also remain focused on $180 million of incremental base EBITDA improvements through 2026 based on additional actions planned to further improve our core businesses and refine our operating model. As always, for Sonoco, capital allocation remains a cornerstone of our strategy and we intend to continue increasing dividends while maintaining an investment grade balance sheet. In 2023 and beyond, we’re focused on improving returns on invested capital through organic investments in core accretive acquisitions and through further portfolio rationalizations. I have never been more positive about the long-term outlook for Sonoco. At this time, we would be pleased to take any questions that you may have.

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

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

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

Got it, so sorry, are you saying it’s a sequential uplift of mid single digits, and it’s not year-over-year?

Well, year-over-year, yes.

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

For the full year last year, it was a detriment of $0.54. This year, due to a decline of about 10% in tin plate, there will also be detriment from the overlap of metal prices from the inventory we've retained. I anticipate that will add an incremental $0.20 to $0.30.

Got it, thank you. I’ll turn it over.

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

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

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

Yes.

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

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

That’s very helpful, guys. Can you discuss the benefits we should expect for Sonoco from commercial excellence this year and other self-help measures, acknowledging that it’s a moving target based on market evolution and inputs? Also, what is our progress in realizing the targets for both of those during the transformation?

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

George, let me expand on that. I want to discuss our year-to-year journey. I know many participants on the call are eager to ask or are considering how we are slowing down, especially since we operate in a paper business and have historically performed well, even in recessionary times. I want to highlight the significant focus and energy we've dedicated over the last four years to enhancing our performance in the industrial sector. You can see this reflected in our sequential returns. If you consider the current profile of the company, particularly with the number 10 machine, we have made considerable strides, such as establishing the lowest cost URB mill in North America, which is also competitive globally. This productivity is driving efficiency and attracting volume away from our higher cost mills, and we’re already experiencing the benefits of that shift. Moreover, the importance of controlling what we can to minimize variability in our business shouldn't be overlooked. Exiting the corrugated medium market has notably mitigated the volatility we faced, especially given that our machine was small and not vertically integrated over the past eight to nine years. Additionally, our global consolidation efforts are ensuring that we right-size our operations and invest in automation specifically for our industrial segment. I’ve mentioned before that while it feels like we are in a recession in the industrial sector, we are in a stronger position than ever and do not anticipate the same level of variability we encountered before implementing these strategies. I apologize for the lengthy response, but I anticipate questions on this topic. It's frustrating to see a focus solely on short-term quarter-to-quarter performance without acknowledging the long-term efforts our global team has executed to achieve appropriate margins that reflect the value we provide to the market and our customers.

Howard, we appreciate that. My last quick one is a great segue to that. Within industrial, within paperboard, you talked about the change in the contracts to commercial excellence and productivity. Can you give us some guardrails, i.e. if prices drop in the published indices by X or OCC goes up by Y, what that might mean to the business on a going forward basis, so that we also are managing our forecasts with less volatility or more accuracy? Thanks, and I’ll turn it over.

Yes, thank you, George. I can say that we expect prices to moderate by a certain amount and costs to increase by another amount, and this is factored into our expectations for this year. That's about as specific as I can be, but it’s a valid question, and I understand. I want everyone to know that we anticipate some moderate pressure on prices and that OCC cannot remain at 35, so we have incorporated an upward adjustment in our future planning models.

All right, I’ll turn it over to the other folks. Thanks.

Thank you. Our next question comes from the line of Cleve Rueckert with UBS. Your line is now open.

Good morning. Thank you for taking our questions. I wanted to follow up on the industrial business. I’m curious about your visibility into the industrial backlog and whether you see potential for any volume growth in 2023 or have insights on a longer-term basis. Howard, you mentioned some transitions in that business. Could you provide some clarity on what you expect for overall volume growth in the plan? That would be helpful.

Yes, on the backlog question - this is Rodger - industrially, if you look at the fourth quarter, our capacity utilization across our paper business was in line with the published numbers of the industry, and as I said in my opening comments, we did take some lack of business downtime in our global paper system, more in Asia and Europe than in the U.S., and some maintenance downtime to match market demand, and we’re seeing that continue at about the same levels in January. As far as we can see, we think we’ve reached the bottom there and we’re starting to see some slight change to that in the right direction, but again, in our guidance we’re projecting year-over-year down a couple percentage points for industrial, based on what we saw. If you remember, our first two quarters of 2022 were down around 2% year-over-year, so the real deceleration happened in the second half of the year. We expect it to turn the other way. Our toughest volume quarter should be the first quarter, and then we expect some recovery.

Yes, I think what we’re seeing around the world, it looks like we’re bouncing around at bottom, at least first part of January, so expecting to see a bit of a turn. Cleve, can you explain deeper of what you mean by transition beyond what I shared earlier? I don’t want to repeat what I’d shared under George.

I’m just wondering how much headwind you have coming out of container board and whether there are some other businesses that are growing. I’m just wondering what that balance is, but if you can’t share anymore, that’s fine.

That's a great question, Cleve. We certainly examine all the different end markets, and we sell into several of them as well as into final end markets. We've conducted a thorough analysis to understand where the URB product or products made with URB are distributed. Many of these markets are more consumer-oriented and stable than one might expect, particularly those involving container board or tissue and towel, which play a significant role in our strategy. This is part of the reason we acquired RTS and are in the process of acquiring it, along with our interest in Skjern. These moves allow us to leverage the utility and sustainability advantages of URB in new markets, which we believe hold significant growth and long-term potential.

Cleve, that's one of the things the team is currently focusing on. We keep discussing industrial aspects, which often imply a purely industrial perspective. However, when you look closer, there’s a significant consumer connection, and approximately 30% of our URB is directed towards the trade sale tissue and towel sector. That wouldn’t typically be classified as industrial, so we owe it to you all. I know Lisa and the team are dedicated to helping you understand the true nature of cyclicality associated with an industrial slowdown.

That makes a lot of sense and is very helpful. It sounds like you are aiming for a more stable and less volatile run rate as we move forward.

That’s the strategic direction that we are continuing to focus on, yes.

I apologize if I missed it earlier, but I wanted to get a higher-level recap on the guidance. You've indicated that in two of the three segments, volumes are either flat or increasing, and it seems that price cost is generally expected to be positive. However, margins and earnings are decreasing year-over-year, so I'm curious if you could outline what the challenges or headwinds are. I don’t want to dwell on the negative aspects of the guidance, but it would be helpful to understand the factors at play.

Yes, I can provide that insight, Cleve. We're really excited about consumer volumes this year, which are expected to grow in the mid-single digits across all businesses. Each of these businesses has strong consumer-focused strategies. However, we anticipate a significant negative impact from price costs in the consumer segment due to the overlap with last year's metal prices and ongoing deflation in tin plate. This will result in a notable negative price cost impact. Additionally, we expect resin prices to decline during the year, which will contribute to price cost challenges for consumers. Overall, this negative price cost will be a major factor in the transition from 2022 to 2023. For industrial volumes, we foresee a decline in the low single digits due to pricing, but not at a level that will create a significant price cost headwind for the year. The other business is quite diverse, and we believe that normalizing end market trends and reducing costs will lead to substantial improvements in operating profit. There will also be typical headwinds from non-operational factors, such as an increase in depreciation and amortization by $32 million, rising interest, and tax rates normalizing to the levels we project.

Thank you very much. That’s it for me.

Thank you. Our next question comes from the line of Mark Weintraub with Seaport Research Partners. Your line is now open.

Thank you. Just to clarify, I think you’ve stated it, but if the metal pack business overlay benefit was $0.54 last year and you’re looking at $0.20 to $0.30, are you expecting a negative $0.74 to $0.84 comparison from metal pack overlay ’23 versus ’22? Is that the way to understand it, or are we just giving up $0.20 of $0.30 of the $0.54?

Yes, it's not solely about the metal pack. We also had a significant tin plate business in RPC. The impact we see is primarily from the positive contributions diminishing and the negative factors coming into play.

So regarding that $6.48, we can actually reduce it by $0.74 to $0.84 as we move toward the guidance, making that a significant part of the apparent difference. Am I understanding that correctly?

When we normalize it, I believe there is an opportunity from normal operating conditions rather than viewing it as entirely one-time.

Well, would we just add back the $0.20 to $0.30 to get to normal, or is there something above then or different from that?

I don’t think we’ve modeled it that finely, but we definitely have a lot of productivity in that business.

Okay, and thanks for the explanation in the last question. Regarding M&A with RTS, while it might not be significant, how much do you think M&A and self-help will influence the comparison between 2023 and 2022?

RTS is not in our forward-looking numbers at this point in time. I think Rodger said, or maybe Rob earlier, that we hope to have that closed by midyear, second half of the year, but we haven’t built that in. Only Skjern, of course, closed late last year and it’s nominal.

Okay, super. That is helpful. I guess one last try, and understand that there’s sensitivity, but on the URB, can you share, are the contracts still tied directly or indirectly to indexes or is that not even how your product is getting priced anymore?

It’s Rodger. Yes, if you look at in general at our total URB tons, about 60% or so is tied to the RISI index, 20% or so is still tied to OCC moves, and the final 20% is open market.

Super, that’s very helpful. Thanks so much.

Thank you. Our next question comes from the line of Adam Josephson with Keybanc Capital Markets. Your line is now open.

Thanks, good morning everyone. I hope you’re well. Rob, I have a couple of clarification questions to start. The mid-single-digit consumer volume growth you’re expecting, is that organic? It just seems like I don’t recall the last time consumer volumes were up mid-single digits in a year. I think that would represent a multi-year high growth rate given the current weak conditions, so I’m trying to understand that volume expectation a bit better in the consumer sector.

Hey Adam, I’d like to provide a broad overview of that and then let Rob elaborate further. Over the last few years, as reflected in our capital spending, we have invested a significant amount in growth, particularly on the consumer side. We currently have a national launch happening, including a new line in Chicago. I actually saw the CFO of the company discussing a new product on Squawk Box this morning, which highlights the active developments within our established businesses and gives us strong optimism regarding our forecasts. Considering the major impact we experienced at the end of the fourth quarter, along with the projected 4 to 4.5 in terms of new organic growth opportunities and our global capital investments, coupled with a slight slowdown towards the end of the fourth quarter, we feel very confident. Rob?

Yes Adam, it’s a significant focus of the business to develop effective strategies and invest in them. We demonstrated this with the flexible business, which experienced mid single-digit growth throughout last year, even in December despite challenging market conditions. We have new leadership in the global can business and a unified strategy. Most regions are experiencing high single-digit growth, and Asia is seeing double-digit growth in paper cans. We are excited about introducing innovation in that segment and supporting our customers in launching new products. We have also made significant investments in plastics, which are now beginning to grow. Each of these segments has mid-single-digit growth potential, and we expect that to materialize this year.

Wow, just to clarify, what is your overall volume expectation for the year? I assume you’re expecting an increase, even with the decline in industrial.

Yes, up 1% to 2%.

One to two - okay. One other clarification, Rob - on the working capital, you said that you’re expecting a meaningful benefit. Can you be any more specific than that?

Well, I think that we’re targeting at least $100 million of improvement, and mainly through inventory management.

Got it, lower inventories. Howard, you mentioned feeling some frustration about the questions you're receiving. From our perspective, it's evident that all paper-based packagers experienced historical price cost benefits last year, leading to significant margin expansion, including your company. This makes it challenging for us to distinguish between the overall market conditions and the specific operational initiatives within your company. Can you provide more clarity on how you see these factors playing out this year and beyond?

Yes, first, Adam, I sincerely apologize if I came across as frustrated. I genuinely look forward to these calls every quarter, as well as our meetings throughout the quarter. However, it can be challenging when I try to provide insights. Not too many years ago, 50% of our company was focused on the paper industry, and now that has dropped to around 30% to 35%, which in itself is a significant change. I can't answer your question directly but if there's any frustration, it's that the paper company is trying to convey more about how we view our segment within the industry and our efforts to reduce the volatility we've historically encountered through various self-help measures I've mentioned. Overall, we anticipate price moderation and cost inflation, as the price of OCC won't remain at its current level indefinitely. However, we have taken steps over the years to lessen our vulnerability, whether through pricing strategies or productivity controls. I'm easing back a bit, Adam.

No, it’s helpful to hear you because it really is difficult for us to gauge how much of a rising tide is lifting all boats, since we don’t have the visibility that you do. One last thing, Rob, regarding the volume for a moment, if you don’t mind. Compared to the 1% to 2% increase for the year, what are your expectations for the first quarter? I’m trying to understand how much the expected volume growth is weighted towards the second half.

Yes, that’s a good question. Quarter to quarter, I’d say consumer volume growth is coming through now on a year-over-year basis and sequentially. For industrial, we expect to be flat sequentially with some improvement later on, and our base scenario for that business anticipates a flat recession or a soft landing followed by recovery in the second half of the year, which aligns with consensus. The other businesses are also anticipated to perform well, and we are seeing a good start to the year that should continue throughout the full year.

Thanks very much.

Thanks Adam.

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

Hi everybody, this is Matt Krueger sitting in for Ghansham. Thanks for taking my questions. You highlighted customer inventory destocking on the consumer side of the business late into the fourth quarter, but it doesn’t sound like there’s any expectation for lingering impact or carryover in the first quarter. Are you seeing real-time improvement here already, and it seems like a quick inventory destock cycle, can you just talk through some of the dynamics that you’ve seen in that business and why the confidence on such a quick improvement in the first quarter here?

This is Rob. I wouldn’t necessarily call it a quick improvement, but as Rodger mentioned, our global rigid paper can business is showing strength as we approach January. This positive trend is largely attributed to our investments in expanding capacity and introducing new products, so we expect a strong performance in the paper can business for the first quarter, with our results so far aligning with expectations. Similarly, the flexible segment continues to experience robust growth, just like in the fourth quarter, and we anticipate another solid year from this area, with incoming volumes and new products enhancing our performance in the first quarter. We did not have the metal can business last January, but we’ve observed a recovery, particularly in our metal food can sector, which we believe was previously affected by inventory reductions at the end of last year. Regarding aerosols, last year we were heavily reliant on certain segments like disinfectants and spray paints, which had increased inventory during COVID, and we've seen that inventory worked off last year, leading to some recovery. The only exception is our Primrose Store plastics business for fresh fruits and vegetables, which remains quite weak. Overall, however, the start to the year in the consumer segment looks promising in terms of volume.

Okay, great. That’s helpful. Then switching over to the cost side of things, what do you expect from cost inflation overall for 2023? What do you expect from cost inflation for the raw material basket specifically, and then can you talk through some of the key constituents and the dynamics there for the upcoming year? Thanks.

Yes, we have our base case assumptions for what we think is going to happen for cost. I can tell you kind of discretely with a couple segments, resin we’re anticipating that down with a front-end orientation really kind of driven by a broad basket that we buy. It’s a meaningfully broad basket that we buy, we anticipate that that’s going to be down high single digits to double digits. OCC, obviously less important than it has historically been because it’s not really driving price, but as a cost factor, we talked about kind of a meaningful deflation that we saw at the end of last year. We think that that will somewhat recover just to a normal level because the handling cost around OCC is probably $60 to $80 a ton, and so we think that it has to go up to that kind of level in order to just have some stasis. Otherwise, things that you should know is just employee variable labor has definitely gone up and we’re anticipating it to go up, and that will be an inflation headwind through the year. Other costs like fixed and depreciation will also be going up.

Got it, so what is that too for the overall inflation budget for Sonoco?

We evaluate our business on a case-by-case basis and consider factors like pricing and productivity recovery, so I don't have a specific figure at the moment, but we can certainly provide that information later.

Okay, great. That’s it for me. I’ll turn it over, thank you.

Thank you. As a reminder, to ask a question at this time, please press star-one-one on your touchtone telephone. Our next question comes from the line of Anthony Pettinari with Citi. Your line is now open.

Good morning. Just a couple follow-ups. I guess on the industrial segment and the volume guidance for industrial volumes down low single digits for the full year, apologies if I missed this, but is there a specific view on volumes for 1Q on a year-over-year basis?

It’s going to be flat sequentially, which is kind of about the same magnitude down as it was in fourth quarter.

Okay, and on RTS, there was some discussion of synergies, and I’m just wondering, you’ve been kind of minority owner of that for a number of years, if you could talk to maybe sources of synergies or maybe just more broadly how you can run that business differently, now that you’re the full owner.

We’re not the full owner yet and we expect to close it in the second half of the year. We’re very excited about this project and believe that the synergies will justify the transaction.

Okay, that’s helpful. I’ll turn it over.

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

Howard, Rodger, good morning. I’ll leave the Plato references out, I guess, but just from a philosophical standpoint, you guys did a really good job in 2022, you were able to beat and raise over the course of the year. Given the economic backdrop uncertainty and some of the headwinds that you’re facing in tin plate, I guess what some of us are trying to struggle with is why be aggressive seemingly out of the gate, again when Q1 is a little bit below, and/or what gives you the confidence? I mean, you mentioned conversations with customers but just from our vantage point, there is a lot of uncertainty. And then from a geographic perspective in industrial, maybe there’s a knock-on effect from trying to reopen and that’s why you’re feeling better about the second half? Just anything from a geographic standpoint that you could talk about.

Sure Gabe, this is Howard. I’m going to let Rob answer most of the question, but I want to highlight that as we develop our budgets, we conduct a very thorough process with all our business units to understand the various factors affecting their individual businesses and markets. We stress-test our assumptions so that when we have discussions and make forecasts based on current information, these targets feel realistic for the coming years. Rob can provide more detail on this, but we put substantial effort during the fourth quarter to assess insights from our teams, macroeconomic perspectives, and customer feedback right up until the announcement. Rob, do you have anything more to add?

Yes, we are very satisfied with the budget and the guidance. We believe it is well-balanced. While there are certainly opportunities we pursue regularly, we have also encountered risks in the past two to three years that are unprecedented. Regarding Q1 and the entire year, a significant factor is the impact of metal prices, which have experienced unusual inflation and now deflation, leading to substantial effects on our bottom line. For Q1, the total impact from metal is projected to be between $0.50 and $0.60, and without that impact, we would nearly be at the $1.85 we achieved last year. Although industrial factors also play a role, we expect a strong year in terms of productivity and performance. If we consider the removal of the metal price impact and look ahead, we anticipate that the most significant effects will be felt in Q1, with some carryover into Q2, but diminishing completely by Q3 and Q4. You can evaluate our projections accordingly and arrive at the numbers in a straightforward manner.

Yes, I think just finally, Gabe, Slide 14, I spoke to at the end of my prepared remarks. That’s the point here, is that we are on the appropriate trajectory without one-time benefits, and an unbelievable trajectory without the one-time benefits. Look, I won’t belabor the point, we’re really bullish about the long term of the company and the actions that the global teams have been taking over the years that are getting us to this point.

Understood, all right. One last one, I don’t think we’ve mentioned it or it has been mentioned - capex being 325 to 375. I thought we were sort of thinking about a step down post Project Horizon, so maybe you guys found some other discrete projects in there that you’re spending on?

Yes, it's a significant aspect of our strategy. We have been focused on identifying as many promising projects as possible, and we are currently in a strong position with a number of excellent projects that we are effectively managing. We are also identifying the best projects that align with our strategy. I believe that number reflects our status as a larger company than ever before. As a percentage of sales, it remains consistent with our targets, and it allows us to continually enhance value through those expenditures, improving our return on investment.

Okay, thank you.

Thank you. Our next question is a follow-up from Adam Josephson with Keybanc Capital Markets. Your line is now open.

Howard, I have one follow-up question. Thanks for taking it. George inquired about the trends you are observing in the center of the store regarding plastic versus paper board. Are you witnessing any shifts between the two? Given your unique position to answer this, could you address that question?

Sure Adam. It predominantly comes down to the comparison between paper and plastic, with Europe currently leading the way and presenting numerous opportunities. We are in the process of converting products that were previously packaged in plastic to our all-paper containers. We have just begun to launch these all-paper solutions, which we developed internally and through our acquisition of Can Packaging a few years ago when COVID emerged. We have some resources being introduced in North America, but we do not have the same demand here in the U.S. While there is some focus on consumer packaged goods, in Europe, there is a strong push for transitioning from materials like plastic to all-paper or primarily paper products. We expect this trend to strengthen here in the United States as well. We are also observing a similar urgency in Asia and South America, comparable to that in Europe.

I appreciate that. I read that the European Commission was classifying any paperboard packaging with poly coating as technically a single-use plastic, which was limiting its appeal to some consumer packaged goods companies in Europe. Do you have any thoughts on that issue in Europe and the United States?

Yes, I don’t know if I have a good answer for that because it’s a moving target and it’s by member country in the EC. But there it is required, and we’ve been really focused on paper content percentages, and so we’ve got solutions out there in the market today that are 95% paper, that are able to be recycled in the paper stream. Different countries in the EU, there will be different states that take on different positions here, but the reality is you do need some type of barrier and our focus, again, is to create solutions that have are easily managed through the recycling systems and programs, so we’re actually seeing a positive reaction in countries like the U.K., France, etc. with the products that we’re putting out in the market today.

Thanks very much. Best of luck.

Thank you. Our next follow-up comes from George Staphos with Bank of America. Your line is now open.

Hi guys. Just given that Adam segued that for us, just one quick one then. Why are you comfortable, or are you, that North America won’t see kind of a similar impact as you’re seeing in Europe in terms of your customers trying to get out of plastic to go to paper? Is it from their research or yours, the consumer here cares less, or is there more confidence about the sustainability merit of the plastic packages you and others are bringing to the market and maybe it’s something else? Thanks, and good luck in the quarter. Thanks for taking the last one quick.

I’m going to wait and see if the U.S. trends align with those in Europe, but the environment is quite different right now, and I’m not sure how to respond. Currently, we are not experiencing much pressure, but we have well-suited solutions. We have ample space and opportunities to recycle or explore other waste stream options. I would suggest monitoring the situation over time. Generally, we tend to follow the developments happening in Europe.

Yes, hopefully EPRs have a good benefit, too. All right, guys, I’ll turn it over. Thank you so much.

Thank you, and I’m showing no further questions at this time. I’d like to hand the call back over to Lisa Weeks for closing remarks.

Thank you all for joining our call today, and if you have any follow-up questions regarding our results, please let us know. We look forward to giving you an update on our Q1 results in May and thank you all again, and have a wonderful day.

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