Earnings Call Transcript - SON Q1 2026

Operator, Operator

Thank you for standing by, and welcome to the Sonoco First Quarter 2026 Earnings Conference Call. I'd now like to turn the call over to Roger Schrum, Head of Investor Relations and Global Marketing Communications. You may begin.

Roger Schrum, Head of Investor Relations and Global Marketing Communications

Thank you, Rob, and good morning to everyone. Last evening, we issued a news release and posted an investor presentation that reviews Sonoco's First Quarter 2026 financial results. Both are posted on the Investor Relations section of our website at sonoco.com. A replay of today's conference call will be available on our website later today and we'll post a transcript later this week. If you would turn to Slide 2, I would remind you that 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. 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 operation. 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. Joining me today are Howard Coker, President and CEO; and Paul Joachimczyk, Chief Financial Officer. For today's call, we will provide prepared remarks, followed by your questions. If you'll turn to Slide 4 in our presentation. I'll now turn the call over to Howard.

Howard Coker, President and Chief Executive Officer

Thanks, Roger, and good morning, everyone. During our February Investor Day, we set up a framework for our focused strategy over the next three years, which is linked to our three priorities of sustainable growth, margin improvement driven by our profitability performance plan and efficient capital allocation, which is focused on investing in our sales, debt reduction and returning value to our shareholders. We made strides in each of these priorities in the first quarter while achieving a solid start to the year despite some significant headwinds. Paul will go through the numbers in more detail, but as shown on Slide 5, our adjusted earnings for the first quarter of $1.20 beat consensus estimates. This performance was primarily driven by strong productivity savings, a favorable price/cost environment and a successful start to our profitability performance plan despite lower volume and mix. I was really proud of our team's performance in the first quarter despite severe winter weather, which temporarily closed some of our customers and operations with facility shutdowns, some lasting over a week. February was a much better month from a volume perspective. But with the onset of the Middle East conflict, we began experiencing rapid input cost inflation in March. And as I mentioned, an unfortunate fire in our Greenville facility on March 24. Thankfully, no one was hurt, but it did lead to a one-time cost of $2 million within the quarter. As you would expect, we're not standing still in the face of these macroeconomic challenges. If you turn to Slide 6, I'll talk further about the steps we're taking to mitigate rising costs and ensure supply for our customers in this challenging inflationary environment. Energy and freight and other petrochemical-related input costs such as resins, coatings and other chemicals represent approximately 10% of our annual sales. While the impact on the first quarter was under a few million dollars, based on current estimates, we believe this inflation could add between $8 million to $10 million in additional costs in the second quarter. We are leveraging our global sourcing and supply assurance team to do all we can to help offset these rising costs. That said, we must recover this inflation and have implemented a number of necessary price increases, including a $70 per ton uncoated recycled paperboard increase in the U.S. and an EUR 80 per ton increase in Europe, along with other pricing actions. These actions are showing traction in the market. Fastmarkets reported an initial $60 per ton increase in U.S. URB prices by Friday. Given our current backlogs and solid mill utilization rates entering April, we feel confident about the sustainability of our actions. As shown on Slide 7, we have purposefully shifted our mix to more resilient consumer-focused businesses where today two-thirds of our sales are generated by our leadership positions in paper and metal cans. We're focused on affordable center-of-the-store safe food categories, which have historically remained resilient during periods of economic stress for us. I'm happy that our recent portfolio work has substantially reduced our exposure to resin-based packaging. In 2023, we used approximately 240 million pounds of petroleum-based resins. While today, we use only about 75 million pounds primarily in our industrial plastics business and our plastic cartridges for adhesives and sealants, where we do have recovery mechanisms in place. As it relates to our growth pillar, we recently opened a new paper can plant in Nong Yai, Thailand. As shown on Slide 8, Paul and I had the opportunity to participate in the grand opening with our team in Asia in March. This highly automated operation is expected to annually produce approximately 200 million units for the growing snack chip markets in Asia and is one of the reasons we saw a 6% lift in paper can volume in the region in the first quarter. This plant was built to accommodate future capacity expansion, and we believe it could eventually become one of the largest global paper can operations over the next several years. In our industrial business, we are investing $20 million to add a new automated nailed wood reel production line at our Hartselle, Alabama facility. As shown on Slide 9, when this new line opens at the end of the second quarter, we expect it will increase our capacity by 15% and enable us to meet the needs of the fast-growing wire and cable industry, as it supplies the booming power infrastructure demand for AI data center build-out. I'll add that sales in our reels business were up 13% in the quarter. In addition to funding our growth, our disciplined capital allocation strategy remains focused on reducing debt and returning capital to shareholders. As shown on Slide 10, last week, our Board of Directors authorized the 43rd consecutive annual increase of dividends to shareholders, raising the payout to $2.16 per share which provides an annual yield of about 3.8%. Sonoco is one of only a few public companies that has paid dividends consecutively for more than 100 years. In summary, we had a good start to the year despite challenges, and we remain confident in our portfolio, our strategy and our ability to execute through economic cycles. With that, I'll turn it over to Paul.

Paul Joachimczyk, Chief Financial Officer

Thank you, Howard. I'll walk you through our first quarter financial performance, starting on Slide 11. With our portfolio transformation complete, we're entering the next phase defined by sustainable growth, margin improvement driven by our profitability performance plan and efficient capital allocation, which is focused on investing in ourselves, debt reduction and returning value to our shareholders. Today, I'll cover our first quarter results and our early progress against the profitability performance plan we laid out at Investor Day in February. Before I review the quarter, a quick note on comparability and some nuances related to the accounting treatment for our divestitures in 2025. TFP was divested on April 1, 2025, and is reported as discontinued operations in last year's first quarter. ThermoSafe was divested on November 3, 2025, and was included in continuing operations in that same period. In 2026, neither TFP nor ThermoSafe are part of continuing operations. As a result, all year-over-year comparisons I discuss for continuing operations will have ThermoSafe included in the 2025 figures, and I'll highlight the differences where applicable. Net sales from continuing operations were $1.7 billion, down 2% year-over-year. Results reflect lower-than-expected volumes, weather impacts as well as macroeconomic and geopolitical pressures which impacted both our supply chain and our customers. Those headwinds were partially offset by pricing actions and a foreign currency benefit primarily from the euro. Also in the year-over-year comparison is ThermoSafe, which contributed $55 million of sales in the first quarter of 2025. Excluding ThermoSafe, our sales increased by approximately 1% versus the prior year. Adjusted EBITDA was $277 million, down 4% year-over-year and margin was down approximately 35 basis points. The decline was driven by lower volumes and the absence of operating profit from the divested ThermoSafe business. These impacts were partially offset by productivity initiatives, strong pricing realizations, early savings from our multiyear profitability programs and favorable foreign exchange rates. Excluding ThermoSafe, adjusted EBITDA would have been flat, reflecting strong cost containment from our profitability programs despite softer volumes. Overall, we're encouraged by how our continuing operations performed following last year's reorganization. On a consistent comparison basis, our key metrics are up year-over-year, reinforcing that we're building a more agile and resilient organization to navigate challenges as they arise. Now moving to Slide 12. Adjusted earnings per share for the quarter was $1.20, flat year-over-year after excluding the impact of discontinued operations. The year-over-year results reflect the balance of softer volume and the impact of divestitures, offset by productivity gains, pricing, early profitability savings from our three-year program, a lower effective tax rate and a favorable foreign currency. If we go a little deeper into the bridge here, I'd like to walk you through the components of each bar. We'll start with the discontinued operations adjustment, which is a net impact of $0.18 led by the TFP divestiture, partially offset by interest. The divestiture of ThermoSafe represents a $0.07 decrease. Operational changes are down $0.08 due to the pressures on the top line from the macroeconomic and geopolitical factors within the quarter, partially offset by operational productivity. Nonoperational changes are up $0.09, led by FX, especially the euro, reduction of our debt and tax benefits which helped to offset several headwinds the business faced within the quarter. Profitability performance drove $0.06 of improvement. I want to underscore the importance of what we're doing to drive margins for the rest of the year, by controlling the controllables. We're maintaining pricing discipline, accelerating productivity, advancing our profitability performance plan and tightly managing both our costs and our capital. While the macro environment remains uncertain, we remain committed to executing the long-term financial targets we shared at Investor Day. Turning to cash flow on Slide 13. Operating cash flow in the first quarter was a use of $368 million, consistent with normal seasonal patterns as we build inventories ahead of the canning season. Gross capital investment was $62 million below our expectations. Given the current macro environment, we are actively monitoring capital spending to stay disciplined and meet our targets. The year-over-year decline in cash flows was primarily driven by approximately $140 million of higher tax payments. That includes $103 million related to capital gains from prior period divestitures, which will not repeat. As discussed at Investor Day, we have a clear and disciplined approach to capital allocation. That includes prioritizing high-return projects, continuing to optimize working capital, especially inventory and payables and preserving balance sheet flexibility by paying down debt while still supporting long-term growth initiatives. Turning to Slide 14. Before I go deeper into the segment results, I want to share a brief disclosure related to our Consumer segment and a footnote we've included for this discussion. In the first quarter of 2025, Consumer segment adjusted EBITDA did not include $18 million of unallocated corporate costs. You can find these details in the earnings release table on Page 20 of our press release dated April 21, 2026. Now let's turn our attention to the two segments and overall results. Starting with Consumer. Sales increased 3% year-over-year to $1.1 billion, driven by pricing and favorable foreign currency exchange rates, partially offset by volume and mix softness related to the macroeconomic conditions. Adjusted EBITDA from continuing operations declined 7%, reflecting lower volumes, partially offset by productivity initiatives, pricing actions and early transformation savings. Adjusting for the 2025 unallocated corporate costs I just described, consumer adjusted EBITDA would have been up with margins flat. In Consumer, the team remains focused on price realization and mix discipline across key geographies while driving manufacturing and supply chain productivity. They are also leveraging accelerated transformation savings to improve their margins. Let's move on to our Industrial segment. Sales were $579 million, down year-over-year by 1%, driven by softer volumes, partially offset by favorable pricing and index-based resets with foreign currency benefits. Adjusted EBITDA declined by $7 million to $100 million, a 7% decrease as lower volumes were partially mitigated by pricing resets and productivity improvements. EBITDA margin was lower year-over-year due to unfavorable volume and mix, along with losses attributed to a fire at our recycling facility in Greenville, South Carolina. The Industrial segment is focused fully on capturing index-based pricing resets as they flow through, executing that against cost and productivity initiatives already underway, and preserving margin discipline while managing demand variability. We've seen good progress throughout the quarter, which supports our confidence as we move into the second quarter. Turning to Slide 15. We are pleased with the early progress of our three-year profitability performance plan outlined at Investor Day. In the first quarter, we delivered $8 million of savings progressing towards our $150 million to $200 million target. These savings were primarily driven by structural transformation initiatives, which contributed $6 million, along with $2 million from commercial excellence and operational improvement efforts. Importantly, these savings are already flowing through the P&L reinforcing our confidence in the program's execution and durability. And as they annualize, they represent approximately $32 million of recurring savings. Turning to guidance on Slide 16. We are maintaining our full year outlook while recognizing that continued macroeconomic and geopolitical uncertainty, particularly late in our quarter, creates a dynamic operating environment. We will continue to monitor inflation and demand trends closely. With that, let me walk you through our full year expectations. For the full year, we expect sales of $7.25 billion to $7.75 billion, adjusted EBITDA of $1.25 billion to $1.35 billion, and adjusted earnings per share of $5.80 to $6.20 with results expected to trend towards the lower end of the range. While we are maintaining our adjusted EBITDA outlook, EPS will not track EBITDA one-for-one because of the tighter EPS range of only $0.40. In the current environment, inflationary cost pressures and macro volatility will create a larger impact on EPS rather than EBITDA. Operating cash flow of $700 million to $800 million, inclusive of the $103 million of tax payments related to 2025 divestitures, which were paid in the first quarter. For the remainder of 2026, our mandate is clear: deliver on our three-year strategy of focus by executing the profitability performance plan, which is delivering $32 million of annualized savings in 2026. We have to offset volume pressures that we experienced in early 2026, and we are protecting our margins through disciplined pricing and productivity, strengthening our cash flow through working capital and disciplined capital spending. We are more focused and have stronger execution levers than in recent years, building a higher quality earnings base and strengthening cash generation even in a challenging demand environment. Let me turn the call back over to Howard for some closing comments.

Howard Coker, President and Chief Executive Officer

Thanks, Paul. Let me close by again thanking our global team for successfully guiding us through these uncertain times during the first part of the year. The year started out fairly strong, but we were affected by winter weather in the Americas, losing two weeks of production from two of our major consumer customers in the Tennessee region. We also had mill and converting downtime by us and our customers throughout the region. We lost a facility to fire and experienced other relatively one-off type issues and, of course, the impact of the Middle East conflict. In spite of these, we stayed focused on controls and long-term productivity to deliver well within our expectations. I think it's also important to note — while uncertainty remains, there is concern how the rest of the year will unfold. However, April has shown thus far some encouraging signs. As we enter the pack season, Consumer EMEA has seen early positive signs in the South, the tuna pack has been strong, and while we have not built expectation for a rebound in the sardines market, this market too is showing some promise for improvement and salted snack volumes are increasing, which is typical in a World Cup year. We see necessary index-based price resets in North America in our industrial business, which will drive full benefit during Q3 with incremental help in Q2 and early but reasonable expectations for URB and converted products and announced prices in Europe. Our focus on our drive for $150 million to $200 million over the next three years is on pace and will only build as we go deeper into the year. But the reality is we are in uncertain times. Things are changing on a daily basis. We do have some catch-up to deal with from the quick hit of inflation as we entered into Q2 and thus the cautionary tone in our EPS forecast. Let me close by saying how pleased I am with the progress we have made over the past several years and the changes you all have seen. If we had not made the portfolio shift, we'd be living in a vastly different world. Without our simplification efforts, we would not be driving the level of SG&A and other savings noted today. And we would be facing serious supply chain issues at a much larger degree of inflation impact and volume pressure. So again, thanks to our team as we continue to drive through this difficult operating environment and certainly looking forward to any questions that you may have. I'll turn it back over to the operator.

Operator, Operator

Your first question today comes from the line of George Staphos from Bank of America Securities.

George Staphos, Analyst (Bank of America Securities)

I guess I had three questions. I'll ask them in sequence and turn it over. Howard, first of all, Paul, could you discuss what the effect of the storms was in the first quarter from a percentage of volume standpoint? In other words, if you did not have the storms, what would volumes have been? And what kind of early run rate are you seeing on volumes in consumer and in Industrial for the second quarter? Second point, we appreciate you calling out the inflation effect so far of $8 million to $10 million in 2Q. Is that a sequential impact from 1Q or year-on-year and if costs stay where they're at right now, would that be the effect in 3Q? Or would it be a lesser effect? And then the last question I had for you is, can you talk to us about how you feel on your metal supply chain, both aluminum and steel? Are there any flash points we need to watch out for relative to the Street? Or do you feel like you're pretty well situated as far as you can see for the rest of the year?

Howard Coker, President and Chief Executive Officer

Thanks, George. I'm going to let Paul cover the detailed volume impact. I don't have the direct numbers; Paul does either the full numbers in terms of the impact of the storm. What I would say on the metal side, which I will handle, is we have no issues, no concerns, not only in terms of supply chain, but we have fixed pricing through the year. Obviously, we've seen tariffs and other things that can impact. But based off of where we sit today, we're in good shape.

Paul Joachimczyk, Chief Financial Officer

And George, on the first question that you had around the storm effect, we did experience more declines in our consumer business in the Americas, primarily due to the weather that was out there with some of our CPGs being down — two of our largest customers being down for over a week — that did create a larger impact disproportionately than our international business. I'll say the early run rate though that we're seeing is we're seeing some recovery back in the business, more so on our industrial businesses. We're seeing strengthening in those markets as mills are getting closer back to the 90% effective run rates that are there. We're seeing some lift back in our consumer businesses, but still more focused on the international side. The Americas are still lagging behind, but it did impact the volume pressures there for sure. Moving on to your second question...

George Staphos, Analyst (Bank of America Securities)

Just — so I know it's early, but what kind of volume are you seeing up or down? Can you put a percentage on it in your key consumer or industrial categories?

Paul Joachimczyk, Chief Financial Officer

Yes. I would say internationally, low single digits are up there. Industrial is in the same ballpark too. March was impacted primarily because of all the uncertainties that are out there; we're starting to see the recovery of those flows coming in early part of the month. And I'll say it's — right now, if that trend continues, it will be a nice quarter for us in Q2. If I move on to your second question around the inflation impact, the $8 million to $10 million is what we have line of sight to for Q2. And with our recovery mechanisms that we have in place, there is a little bit of a lag. So I'd say right now, our exposure for Q2 is $8 million to $10 million. Obviously, if there's more macroeconomic effects, if there's something that happens with pricing pressures on our input costs, those could change to be greater in Q3 and Q4. But we do think our recovery mechanisms will help cover and offset this in those future quarters. We don't have full line of sight to what's going to happen in the macro world, but today, we feel confident in our exposure for what Q2 is going to bear. If everything holds steady, those would not recur and we could recover that by Q3 and Q4.

Operator, Operator

Your next question comes from the line of John Dunigan from Jefferies.

John Dunigan, Analyst (Jefferies)

Thank you, Howard. Thank you, Paul. I really appreciate all the details. I wanted to start back on the cost inflation with the $8 million to $10 million. Can you walk us through some of those key buckets and in particular, natural gas and electricity across U.S. and Europe? And how much of that you have hedged across your businesses? And then if we're thinking about the freight surcharges that you called out, is there any kind of lag to putting those through contractually? And maybe you can help us quantify how much of your contracts currently have those surcharge mechanisms contained in them?

Paul Joachimczyk, Chief Financial Officer

Yes, John, I'll take the first part of that. So the cost inflation breakdown — freight is the primary driver of that. That was the one that we experienced almost immediately as rising fuel prices, primarily in diesel, came through. We do have recovery places and mechanisms. There is a lag related to those, call it roughly three to four weeks of a time period to get that recovery back. So you're exposed for about a month, to be simplistic. As far as the other inputs, whether it's resins, energy and things like that, I'd say we do have some coverage through hedging. We haven't gone out with exactly what that coverage is from a hedging perspective — the $8 million to $10 million is inclusive and net of what we already have hedged and placed into programs. So that is the impact that we'll experience in our P&L. But freight is primarily the largest impact for us.

John Dunigan, Analyst (Jefferies)

Great. That's very helpful. And then just on my follow-up, I just wanted to jump over to the cost savings. You called out the $8 million from the initiatives towards the $150 million to $200 million. But productivity in the quarter was pretty impressive. It was up $33 million year-over-year. Can you just walk us through the difference between those two figures and how we should think of the cadence through the rest of the year?

Paul Joachimczyk, Chief Financial Officer

Yes. John, that's a great question. We're trying to delineate productivity, which really is covering our inflationary impacts and similar items, versus the profitability performance plan. The profitability performance plan is costs that are going to fall right to the bottom line and they're going to be there every quarter on a go-forward basis. So that's why we did the delineation this quarter and we'll continue that going forward. But we want to assure you that what we are delivering in those savings on that program — the $150 million to $200 million target — is something that you can bank on; it's going to be recurring quarter after quarter.

Operator, Operator

Your next question comes from the line of Michael Roxland from Truist Securities.

Niko Pacini, Analyst (on behalf of Michael Roxland, Truist Securities)

This is Niko Pacini on for Michael Roxland. Just to clarify on the inflationary impacts, does your current guide assume that $8 million to $10 million is the limit of the impact? Or do you assume current conditions basically persist through the rest of the year rather than improve? And then secondly, what do you think your customers' and consumers' ability is to absorb price? How much can you push before the manufacturing disruption might occur?

Howard Coker, President and Chief Executive Officer

Yes. I would say this is what we have visibility to at this point in time. I went to extra effort to point out that with the new portfolio, particularly our key raw materials being more protected, we are contractually covered through the year in many cases. The resin exposure I spoke to in my opening comments also has recovery mechanisms, and timing varies from within the month to within the quarter. Will we see more? It's hard to say. It depends on what happens in the macro environment; things are changing rapidly. From a key raw materials perspective, we feel good about the position we're in at this point in time. On customer impact, it's hard to say, but historically in our consumer business, staples and center-of-the-store items have been resilient. In some cases, volumes have improved as people shift to cooking at home. Ultimately, pricing pressure is broad across food and related packaging, and we'll see how that plays out through the consumer.

Niko Pacini, Analyst (on behalf of Michael Roxland, Truist Securities)

Got it. Understood. Just a quick follow-up. I think you mentioned a little softer URB volumes in 1Q, but a pickup more recently in April. What do you attribute that pickup to? And can you share where backlog stands right now?

Howard Coker, President and Chief Executive Officer

We don't really track backlogs on URB, but what we're seeing is, as Paul noted, roughly 90% to 91% operating rates in our largest market for URB in North America. There are a couple things going on. We told you at Investor Day about new products and new markets that we're entering with URB that traditionally were served by other grades of paper and some supply has left the market with mill closures. We've been successful in converting saturated kraft, and we've got our first customer and a pipeline of customers that is helping us look out into the quarter and move operating rates from the low 90s toward the low 90s to mid-90s as that volume starts flowing through the mill now.

Operator, Operator

Your next question comes from the line of Hillary Cacanando from Deutsche Bank.

Hillary Cacanando, Analyst (Deutsche Bank)

Just regarding the softer volumes and inflationary pressures in the first quarter, could you elaborate on what specific end markets or geographies underperformed expectations or outperformed expectations most notably? I know you talked a little bit about tuna pack and sardines but if you could give a little more detail on other end markets.

Howard Coker, President and Chief Executive Officer

Yes. From a geography perspective, Consumer EMEA was down low single digits year-over-year. It was a bigger impact in North America. I don't want to get into customer-level confidentiality, but two of our largest customers in our paper can business lost seven to eight days during the winter storm. Typically, you see a rush to make up that time and some catch-up within the quarter. Then the onset of geopolitical events led customers to bring inventories down. We're now starting to see a bit of pickup and the expectation is the magnitude of what we saw in the first quarter will not repeat; in fact, customers should be looking to make some of that up through the year.

Hillary Cacanando, Analyst (Deutsche Bank)

Got it. Great. And then just a follow-up. As we're three weeks into the second quarter, you said April picked up, but are you seeing any real discernible change in customer ordering patterns or conversations? Has anything materially changed?

Paul Joachimczyk, Chief Financial Officer

Hilary, really no discernible patterns beyond a slight uptick in volume that gives us a bit more confidence in our guide. But it's essentially a recovery from Q1 rather than a change in ordering patterns.

Operator, Operator

Your next question comes from the line of Anthony Pettinari from Citi.

Bradbury, Analyst (on behalf of Anthony Pettinari, Citi)

Maybe just focusing on consumer a little bit. Volumes were down against a pretty tough comp from last year. Do you think we start to see some improvement in year-on-year volume growth in 2Q and as we start to get into the back half, maybe from easy comps or ramping investments? Any detail on how that volume trend could develop in 2026 in consumer?

Howard Coker, President and Chief Executive Officer

It's hard to be precise. On aerosol in North America we have tough comps heading into the summer; that category can be discretionary. On the other hand, center-of-the-store food can be favorable in an economic downturn as people cook at home. In Europe, the World Cup may boost volumes, as is typical. So it's a bit of a balance. We expect some improvements in some categories and geographies, but it's a wait-and-see situation as consumer behavior evolves.

Bradbury, Analyst (on behalf of Anthony Pettinari, Citi)

Got it. And maybe just on working capital. Is there any sensitivity to raw material inputs that we should be mindful of as the year goes on, particularly higher metal prices and petrochemicals? Any detail on working capital or free cash flow sensitivity?

Paul Joachimczyk, Chief Financial Officer

From a working capital perspective, no real concerns. We are disciplined about capital spend for the remainder of the year to meet our guide and targets. We may postpone some projects but we're not cutting back on growth or value-adding capital. We feel confident with our supply chain team's efforts to secure metals and other inputs. So no major working capital concerns at this time.

Operator, Operator

Your next question comes from the line of Ghansham Panjabi from Baird.

Ghansham Panjabi, Analyst (Baird)

So obviously, 1Q was impacted from a volume standpoint for all the reasons you covered. 2Q you gave some parameters as it relates to raw material cost inflation, etc. Specific to 2Q, do you expect earnings to grow year-over-year? Or will it be comparable to 1Q given the price-cost headwinds?

Paul Joachimczyk, Chief Financial Officer

Ghansham, we do expect earnings to grow in Q2 year-over-year. That said, there is the inflationary impact for the raw materials and freight we discussed, which will create a little bit of a margin drag, but overall we expect growth in earnings for Q2.

Ghansham Panjabi, Analyst (Baird)

On the volume impact and customers knowing price increases are coming, have you seen any preordering or order pattern distortions that might amplify volume early in 2Q?

Howard Coker, President and Chief Executive Officer

No, not really. The inflation we're seeing is not product inflation but delivery and freight and some energy. It's not the type of situation where customers are loading up because of an announced large product price increase.

Paul Joachimczyk, Chief Financial Officer

And Ghansham, we also have some new market entries that are providing self-help volume, which helps operating rates and offsets some of the headwinds.

Operator, Operator

Your next question comes from the line of Anojja Shah from UBS.

Anojja Shah, Analyst (UBS)

First, I want to confirm that the $8 million to $10 million of inflation in 2Q, based on the lag in your pass-through, you're confident that should get recovered in the second half?

Paul Joachimczyk, Chief Financial Officer

Yes.

Anojja Shah, Analyst (UBS)

If there is additional inflation, you referenced about a quarter exposure — is that correct?

Paul Joachimczyk, Chief Financial Officer

Correct.

Anojja Shah, Analyst (UBS)

You announced a new term loan at the end of March. In the bridges you gave last quarter, you had a $0.20 to $0.40 nonoperational contribution on EPS. Is the interest on that new term loan a headwind to that contribution and part of why EPS guidance is now on the lower end?

Paul Joachimczyk, Chief Financial Officer

The term loan we announced is a delayed draw term loan to effectively retire our loan that would be due in September later this year. It does not have a significant impact to our EPS guidance. The main driver to our EPS being on the lower end is the short-term inflationary impacts rather than the financing activity.

Anojja Shah, Analyst (UBS)

Because of the tight EPS range, that's why it's impacting EPS more than EBITDA, correct?

Paul Joachimczyk, Chief Financial Officer

You got it. If you think about EBITDA range, it's a much wider dollar range. When you translate to EPS, which is a tight $0.40 range, even modest impacts on EBIT or EBITDA produce a more pronounced effect on EPS after taxes and other nonoperational items.

Anojja Shah, Analyst (UBS)

How are you feeling about your geographic footprint now with your current split between U.S. and Europe? Some peers are reconsidering benefits of a European footprint. Do you believe your global platform gives significant economies of scale that outweigh complexity?

Howard Coker, President and Chief Executive Officer

We like the way we're situated today. We're over half North America overall and about 40% in Europe for the total company. The balance shifts over time depending on market opportunity. Southeast Asia, particularly on the consumer side, is becoming more material. We're happy with the portfolio and geographies we participate in and have no current plans for portfolio moves. That said, ratios may shift over years as markets evolve.

Operator, Operator

Your next question comes from the line of Mark Weintraub from Seaport Research Partners.

Mark Weintraub, Analyst (Seaport Research Partners)

I got disconnected earlier, sorry. A couple items on volume and growth opportunities. With the new paper can facility in Thailand, how much revenue or opportunity might that provide? And in Europe, any update on converting customers who were doing their own can-making? Also, you mentioned saturated kraft conversion — can you scale that opportunity? And on the flip side, where volume disappointed, any comments on GLP-1 impact for you?

Howard Coker, President and Chief Executive Officer

We won't get into granular plant-level revenue guidance, but the Thailand plant is expected to produce roughly 200 million units annually and it contributed a 6% lift in paper can volume in the region in Q1. Saturated kraft has become an interesting new market for us; we've won our first customer there. We won't give customer-level or plant-level revenue forecasts, but we see meaningful opportunity from these initiatives over time. On GLP-1s, we feel better about our situation because we reduced exposure in categories like confectionery and certain snacks where GLP-1s have been more impactful. That portfolio shift has reduced our vulnerability. Salted snacks are growing internationally and haven't shown the same GLP-1 impact as in the U.S.

Paul Joachimczyk, Chief Financial Officer

To add context on Thailand: the plant will lead to 200 million units annually and it contributed a 6% lift in the region's Q1 paper can volume. It will be a significant asset and contribute to our growth strategy in that region.

Mark Weintraub, Analyst (Seaport Research Partners)

When you start up a plant, are there extra costs that occur during start-up that will fade away?

Howard Coker, President and Chief Executive Officer

Yes, start-ups have ramp-up costs and a ramp curve, but our team has strong experience and we've managed those effectively.

Mark Weintraub, Analyst (Seaport Research Partners)

One more: your math on transport versus the $8 million to $10 million — can you help reconcile why it seems small versus gross freight exposure?

Paul Joachimczyk, Chief Financial Officer

Mark, we gave a net number — $8 million to $10 million — which is net of our recovery efforts and hedges. The gross exposure is larger, but our supply chain and commercial recovery mechanisms mitigate and reduce the amount that flows to P&L in Q2.

Operator, Operator

Your next question comes from the line of Gabe Hajde from Wells Fargo Securities.

Gabe Hajde, Analyst (Wells Fargo Securities)

I'm struggling a little with the commentary on the second quarter. Specifically, when you say earnings will grow in Q2, are you talking EBITDA or EPS? I think reduction in interest expense would get you maybe $0.15 of EPS year-over-year, so clarity would help.

Paul Joachimczyk, Chief Financial Officer

Gabe, it will be both: EBITDA and EPS are expected to grow in Q2. EPS benefits from year-over-year interest favorability as well.

Gabe Hajde, Analyst (Wells Fargo Securities)

If we break out volumes for Q1 across North America food, European food cans, and global composite cans — can you offer some directional trends? You had Europe food up low single digits in Q1; what about North America food or aerosol and composite cans?

Howard Coker, President and Chief Executive Officer

You're close in your math on low single digits in EMEA. I don't have the full granularity broken out in the call beyond the segment-level commentary. We can follow up with more detailed analysis offline.

Gabe Hajde, Analyst (Wells Fargo Securities)

And on tax rate and other items: Q1 D&A was lighter at $125 million versus an expectation of $135 million. Is $125 million a good run rate going forward?

Paul Joachimczyk, Chief Financial Officer

Depreciation may tick up a bit as products come online later this year, so you may see a small increase, but your range is in the same ballpark.

Gabe Hajde, Analyst (Wells Fargo Securities)

One last question: reconciling transport and resin exposures to the $8 million to $10 million — seems like the gross numbers add to more. Are we overestimating?

Paul Joachimczyk, Chief Financial Officer

Gabe, the supply chain team has done a phenomenal job negotiating and leveraging contract mechanisms. We do have contract delays in how pricing gets passed and we optimize transportation and plant footprints. The $8 million to $10 million figure reflects the net exposure after those mitigations — the gross number is indeed larger but largely offset through our actions.

Operator, Operator

Your next question comes from the line of Matthew Roberts from Raymond James.

Matthew Roberts, Analyst (Raymond James)

A couple on RPC. First, what was RPC volume performance in 1Q? I believe that used to be in the slide deck. Second, on April promotional trends: last year there was a customer on hold for working capital. Has the promotional environment changed now that the deal is closed? Any broader promotional changes given customers are seeing cost inflation? And lastly, in 2025 how big was frozen juice in that category and any material headwinds in 2026?

Howard Coker, President and Chief Executive Officer

Matt, when we reorganized to two segments, we report Consumer in total and won't break out RPC cans separately on the call. We'll note material events but won't provide that plant- or format-level detail. On promotions, activity is slowly increasing — more on international than North America so far — and the customer relationship is solid. On frozen juice and concentrate, it's relatively immaterial to us now and not a material headwind; volumes have been low and are not a major factor.

Operator, Operator

Your next question comes from the line of George Staphos from Bank of America Securities.

George Staphos, Analyst (Bank of America Securities)

So just finishing up here. Can you talk about the size of the reels business within the portfolio or remind us how big that might be? Secondly, related to some of the activity that didn't happen last year on the consumer side with some customers, are there any new products now being considered that you may actually win business for this year, and can you size any of that opportunity for us? Lastly, Howard, longer term on the dividend: the dividend has been growing faster than organic volume growth. How long can you keep growing the dividend at that rate if volume isn't growing accordingly? And when do you think we will get to positive volume in the businesses — third quarter, fourth quarter 2026 or 2027?

Howard Coker, President and Chief Executive Officer

George, the reels business has doubled in the last couple of years and is approximately 10% of our industrial segment today. We continue to invest there. On new products, there are more than a few launches planned in the second half of the year across geographies; I can't give success rates or specific revenue but we're excited about the funnel. Regarding the dividend, our payout ratio has declined as we've grown earnings, so the dividend increases have been supported by productivity and margin improvements. We like the dividend trajectory and the lower payout ratio; we will continue to manage payout thoughtfully as we drive bottom-line improvement. On when volumes turn positive, we have several initiatives and new market entries that should contribute over the next couple of years, but I can't give a definitive quarter — it's a combination of macro recovery and execution of our pipeline.

Operator, Operator

And that concludes our question-and-answer session. I will now turn the call back over to Roger Schrum for closing remarks.

Roger Schrum, Head of Investor Relations and Global Marketing Communications

Again, thank you for your time this morning. And as always, if you have any further questions, please don't hesitate to give us a call. Thank you, and you can disconnect.

Operator, Operator

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