SONOCO PRODUCTS CO Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Third Quarter Results: Sales were $1.68 billion, adjusted EBITDA was $281 million, EBITDA margins 16.8%, adjusted earnings per share $1.49, operating cash flow $162 million. Volumes higher year-over-year in Metal Packaging and TFP; Rigid paper can volume recovery below expectations. Industrial volumes flat sequentially and up year-over-year in NA and Europe, with price/cost impacts as a headwind.
• Hurricane Impact: 63 facilities in Hurricane Helene's path shut down, and Hurricane Milton caused major damage to Plant City location. Focus on caring for people and delivering products continued.
• Strategic Priorities: Driving productivity through supply chain savings, production efficiencies, fixed cost reductions. Portfolio simplification includes closing paper mill and converting operations in China. Acquired Eviosys to scale metal packaging platform, expect to close in Q4 2024. Reviewing strategic alternatives for TFP to accelerate portfolio simplification.
• Productivity: $39 million of productivity in the quarter, seventh quarter of year-over-year productivity improvement. Anticipate trend to continue despite challenging comparatives in Q4.
• Sustainability: Received Sustainable Innovations Award for mono-materials Pringles can, investing in sustainable packaging innovations.

Segment Performance

• Consumer: Sales were $984 million. Volume growth in TFP and Metal Packaging drove mid-single-digits overall consumer volume increases. Consumer adjusted EBITDA increased 6% to $160 million. Consumer price decreased 2% due to index-based price resets. Volume mix was positive $8 million and productivity was positive $18 million, driving a 90 basis point increase in consumer adjusted EBITDA margin to 16.2%.
• Industrial: Sales were $585 million, including a $20 million reduction from recycling reclassification. Adjusted for that, industrial sales would have increased 4%. Volume increased mid-single-digits, organic volume was marginally negative. Price increased low single-digits. Industrial adjusted EBITDA was $102 million with $18 million of positive productivity and $8 million of positive volume mix offset by $23 million of negative price/cost.
• All Other: Sales were $107 million, meaningfully impacted by the divestiture of Protective Solutions. Excluding that, All Other sales would have grown low single-digits. All Other adjusted EBITDA was $20 million with $4 million of productivity offset by negative price/cost.

Guidance

• Q4 2024: Adjusted EPS guidance $1.15 to $1.35. Expect consumer volumes to grow low single-digits, industrial volumes flat, price trends to improve but price/cost still negative. OCC expected to decline seasonally, Tan Bending Chip Index to reflect market increases.
• Full Year 2024: Reaffirm adjusted EPS guidance $5.05 to $5.25, adjusted EBITDA $1.05 billion to $1.09 billion, operating cash flow $650 million to $750 million.

Risks

• Potential regulatory hiccups with the Eviosys acquisition, though clearance from CMA is in progress.
• Uncertainty in industrial market recovery, with industrial volumes expected to remain flat in Q4 and slow to recover in 2025.
• Mix issues in RPC, where volume shortfalls are temporary due to customer mix changes rather than a secular trend.

Question and Answer

• Q: George Staphos from Bank of America Securities on Eviosys acquisition and TFP divestiture impact on return on capital, growth, and capital intensity A: Howard Coker and Rob Dillard discussed that the Eviosys acquisition and TFP divestiture are part of moving to three core businesses with better capital efficiency. Expect ROE to improve to the teens, with pro forma revenue over $1 billion and EBITDA over $200 million, and capital investment required to be the same or less.
• Q: Ghansham Panjabi from Baird on operating outlook and portfolio management A: Howard Coker noted positive volume trends in Q4 but conservative outlook for 2025 with low single-digit growth in consumer and flat in industrial. Emphasized open communication with employees and customers during portfolio changes. Metal and paper expected to be roughly 50:50 split post-transactions, with Industrial Plastics division remaining.
• Q: Matt Roberts from Raymond James on productivity and divestiture timings A: Rodger Fuller discussed continued productivity gains with confidence in hitting high end of $300 million to $500 million range through 2028. ThermoSafe divestiture expected mid-2025 with strong performance and interest from buyers; TFP divestiture process well underway with advisers and high confidence in outcome.
• Q: Anthony Pettinari from Citi on decision to exit single-use plastic and Metal pack performance A: Howard Coker explained decision was based on financial metrics and identifying core platforms. Metal pack performance driven by good mix of customers, share gain, and return to normalcy in aerosol markets post-destocking.
• Q: Mark Weintraub from Seaport Research Partners on M&A confidence and Eviosys EBITDA accretion A: Howard Coker and Rodger Fuller noted confidence in Eviosys integration, with indications that EBITDA accretion targets should be met, and seasonality in Eviosys' third quarter being strong, carrying into Q4.
• Q: George Staphos from Bank of America Securities on industrial markets and boxboard supply A: Rodger Fuller discussed uneven industrial volume trends, flat outlook for 2025 due to slow recovery in Asia and Europe. URB capacity in North America around 94% in Q3, expected to be in high 80s in Q4, with no substantial change in boxboard imports impacting Sonoco.
• Q: Gabe Hajde from Wells Fargo on TAM lending chip prices and customer consolidations A: Rodger Fuller stated TAM lending chip prices expected to be flat for the balance of 2024. Customer consolidations were viewed positively, with increased brand promotion and distribution opportunities.