Good day, and thank you for standing by. Welcome to the Q1 2024 Sonoco Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Lisa Weeks, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and thanks to everyone for joining us today for Sonoco's first quarter earnings call. Last evening, we issued a news release highlighting our financial performance for the first quarter, and we prepared a presentation that we will reference during this call. The press release and presentation are available online under the Investor Relations section of our website at 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 Slide 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. Joining me this morning are Howard Coker, President and CEO; Rob Dillard, Chief Financial Officer; and Rodger Fuller, Chief Operating Officer. For today's call, we will have a prepared remarks section followed by a discussion of the results for the quarter and outlook for the second quarter, followed by a Q&A. If you will turn to Slide 5 in our presentation, I will now turn the call over to our CEO, Howard Coker, for business update.

Thank you, Lisa, and thank all of you for joining us today. Let me kick off the discussion this morning with an update on our first quarter 2024 overall financial performance. We executed well and delivered solid results in the quarter, which were in line with our expectations. Sales were $1.6 billion, adjusted EBITDA was $245 million, an EBITDA margin of 15%. Our adjusted earnings per share were $1.12, which was above the midpoint of our guidance and operating cash flow was $166 million with strong working capital management. Productivity in the first quarter came in strong as well at $51 million, which is just an outstanding result from our team's focused execution and operating discipline. Our productivity results are from the value-adding capital investments across our plant network, including automation, process improvements and energy cost reductions, all of which is underpinned by our portfolio simplification activities and strong expense management. So I do want to say thank you to our team for your hard work and commitment for our results this quarter. If you'll turn to Slide 6, this past February, we were happy to host our Investor Day 2024 in New York, to share our strategy updates and what's next for Sonoco. Since I took over the CEO role in 2020, we've been on a transformation journey to improve the performance of the company, and we are making progress. We have built a strong portfolio that delivers greater value, simplified the company and unified our global operating model to improve financial results while maintaining our disciplined capital structure. At our Investor Day, we provided our outlook over the next 5 years where we are targeting adjusted EBITDA of $1.5 billion with high teens EBITDA margin. And we are expecting to generate cumulative operating cash flow of $4 billion…

Thanks, Howard. I'm pleased to present the first quarter 2024 financial results, starting on Page 11 of this presentation. Please note that all results are on an adjusted basis and all growth metrics on a year-over-year basis, unless otherwise stated. The GAAP to non-GAAP EPS reconciliation is in the appendix of this presentation as well as in the press release. As Howard said, we've built a solid foundation for continued resilient financial performance, building on our enduring operating model and strong market positions. Our strategy is to deliver shareholder value by growing these positions through disciplined and targeted investments, while also maintaining our investment-grade balance sheet and our differentiating dividend. First quarter results again represent the resilience of our teams and our ability to deliver strong earnings despite a low volume environment. Adjusted EPS was $1.12, which exceeded the midpoint of our guidance range of $1.05 to $1.15. This result was driven by positive productivity of $0.39 per share, offset by negative price cost of $0.51 per share and negative volume mix of $0.12 per share. For the quarter, net sales decreased 5% to $1.64 billion due to index-based price pressure. Volume mix was flat due to low single-digit volume declines in consumer, high single-digit volume increases in industrial and double-digit volume declines in all other. These metrics include acquisitions. Organic volume mix was negative mid-single digits due to lower organic volumes in consumer and flat organic volumes in industrial. Index-based price pressure impacted sales negative $57 million. This result was expected as paper, metal, and some resin indexes have declined from their peaks. Adjusted operating profit was $176 million, a sequential increase due to positive sequential volume mix as well as improved sequential productivity. Adjusted EBITDA was $245 million. We maintained this historically strong profitability to incredibly strong operating…

Yes. Thanks, Rob. Please turn to Slide 20 for our view of segment performance drivers in the second quarter of 2024. In the Consumer segment, we expect volume to be up sequentially and essentially flat year-over-year. We believe the continued retail price inflation and a slower uptick from promotions are the primary drivers of volume in the second quarter. In Rigid Paper Containers, we see sales decline sequentially and year-over-year in the second quarter in North America, primarily in snacks and other discretionary food products. Customer demand is lower than originally forecast, and we see limited impacts from promotions in the near term. Rigid Paper Container net sales for the rest of the world are flat year-over-year where new product launches are progressing against the backdrop of sluggish consumer demand for legacy products in Europe. Our newly merged Thermoformed and Flexibles Packaging business, we anticipate sales to be up sequentially in the second quarter from seasonal volume improvements in both Flexibles and Thermoforming. The Thermoforming and Flexible Packaging team is making excellent progress in the integration of the leadership team and plant structure, and we'll see a near-term cost benefits from the integration. Our focus now will be on driving growth through these resin-based businesses. In our Metal Packaging businesses, sales are expected to be up sequentially in both Aerosol and food cans. Aerosol demand improvement is offsetting lower volumes in food cans, and we expect total year-over-year volumes to be up mid-single digits in the second quarter. The first quarter was impacted by metal price overlap, which extended into the second quarter last year. So this will be a net positive for the quarter. It's worth noting that we are carefully monitoring tightening tinplate steel availability, domestic supply constraints as well as uncertainties around import tariffs have created a…

[Technical Difficulty] tremendous over the last several years for the foundation and look forward [Technical Difficulty] Yes, I'm sorry. We had a little technical issue here. Yes, operator, let's handle any questions that you may have.

[Operator Instructions] And our first question will be coming from Ghansham Panjabi of Baird.

I hope I didn't miss too much with the call. But I guess, first off on Consumer, if we kind of look at that segment, is it fair to say that at this point, coming out of 1Q that destocking is behind you for the most part and now you're just kind of bearing what the major end markets are doing. Is that how you see things unfolding here?

Yes.Ghans, this is Howard. Yes, we feel like we're fairly well through the destocking, and it is market conditions at this point in time.

Okay. And then in terms of Aerosol, is that -- your performance seems a little bit better than the market. What do you attribute that towards?

Only thing I can say to that is the mix of customers that we have. I think, that's the only way I can really answer that. It's certainly -- I don't think -- I don't see any share movements as much as the customers that we have in our portfolio are doing better than they did, obviously, last year.

Okay. That's a fair answer. And then last question is on the Consumer segment and the RPC component. Just give us a little bit more color in terms of what drove the extent of that decline and the evolution in terms of getting back towards flat. Is that just a function of easier comparisons as the year unfolds?

Yes, I'd say for the quarter, really impressed if you look at internationally with high -- how I can say that, high teens, growth in Asia, South America, relatively lower numbers in Europe. And then we -- in North America really had a difficult quarter. Really around a few discrete customers. And it's back to -- not unique to Sonoco, but in North America, the price versus volume equation and our customers on the RPC side and on the flexible side as well are telling us that they're starting to fill the pain of deleveraging and are planning to start increasing our promotion and marketing activity. So as we go into the remainder of the year, we feel like we should see some benefit from that. But it really was a North American story in RPC.

And our next question will be coming from George Staphos of Bank of America Securities.

I guess first question I had, you generated, I think you said $51 million of productivity Howard or Rodger, on the back of not a lot of volume. And so on the one hand, kudos to everyone on the Sonoco team in that regard, but how much longer can you continue to drive productivity if the volumes don't materialize? Can you remind us what your budgets are for productivity for this year? And how volume dependent they might be?

Yes, George, this is Rodger. I think we said last quarter, our productivity guide for the year is over $100 million. If you remember last year, we did had a record year in productivity over $100 million last year. Certainly, we're tracking to do better than that this year. As I've said in my comments, second quarter, we should see continued strong productivity. It's volume sensitive to some degree, but the work -- the capital investments you weighed, the footprint work we've done, and that continues this year. We're confident we can have another record year in productivity this year. We don't really guide quarter-to-quarter, as you know. But based on what we see for the year from a volume standpoint, the plans we have in place around productivity, we expect a stronger productivity this year than last year. So hopefully, that helps.

Yes. And George, I'd just say you're right, volume equals leverage, and we're looking forward to volume returning to really start driving the invested at the plant level. Improvements that we've made. And we'll talk about this, I'm sure, but really encouraged with what we're seeing from a loading of our North American paper business. I think it's the first time we've seen the amount of backlogs that we have in place, since we've made some really material capital investments, rationalizations. And so see this as upside as we go forward.

Understood. And not to push too hard on this one, but let's say, hopefully not, we're here in October, and we're talking about this persistent issue, consumer hasn't come back. There's still this lingering destocking if that would even be possible. And let's say, volumes are trending, especially in consumer kind of low single-digit declines. Does that put at risk your productivity target for the year? Just trying to get a sense there.

No, it does not put at risk the target we laid out for the year of over $100 million.

Okay. Thanks for your thoughts and your patience on that one. So if we talk about consumer a bit more, I guess the overarching question would be what are your customers especially in paper seeing? It sounds like in answering Ghansham's question, a lot of it is just inflation and the effect on the consumer and their discretionary spending. If I missed that, please relay what you think is happening? And if overall consumer volumes are flat in the quarter coming up, and I think you said metal overall will be up mid-single digits. It would suggest that everything is down, but can you give us a sort of size order, what of the other large consumer segment are down the most and why?

Yes, George, Rodger again. RPC Global, we're expecting to be down a little over 1% in the second quarter, which is an improvement, obviously, from the first quarter, and that's driven by, Howard already mentioned, some really nice international growth with a softness in continuing in North America. And it's exactly what you said. Our customers are telling us it's the price on the shelf. They are promoting, but we've seen limited impact from that. Hopefully, that shows up over time. Slightly positive in Flexibles in the second quarter from a year-over-year standpoint and then slightly negative in Thermoforming versus a strong second quarter last year. And then Metal, as you said, up mid-single digits. So that's why we're calling Consumer flat for the second quarter.

Our next question will be coming from Mark Weintraub of Seaport.

So if we look at Page 27 or Slide 27, the number that really jumps out was that negative $56 million price cost in industrial. And as you said, you announced a price increase for February, and that didn't get reflected by Pulp and Paper Week in February, March or April. But you are seeing it in our open market transactions. And so I guess the question is, what do you do with Pulp and Paper Week doesn't reflect it? How dependent are -- is your ability to get prices on the converted product, et cetera, for it to be reflected in Pulp and Paper, what options do you have to make sure it happens? And maybe I'll start there.

Mark, I'd say just direct to your question, we have contractual obligations that are aligned to certain indices, and we're going to have to live by those. I think maybe where you're going is a longer-term question, and that's something that we're taking in consideration. But what do you do, if it doesn't happen, we pull the contingency plans that we've got in place to make up for the difference. But you noted exactly right that the uptake from our open market was highly successful. We are running here in North America with backlogs that I just noted a minute ago that we haven't seen in literally in years. And that is as far as we can see out, let's just say, end of the third quarter. So I would be shocked if any index didn't reflect those type of market conditions. But I think maybe you're asking a longer-term question, and that's one that we're certainly considering at this point here as well.

That's very helpful. And maybe now with the RTS transaction done as well, could you remind us sensitivities for every $10 per ton change, let's just say, in the index, how it impacts the North American market, how it would flow through to EBITDA?

Yes. Each $10 move in Tan Bending Vhip is about $5 million a year, up or down.

I'm sorry, I don't -- maybe I'm asking the wrong question. But don't you have north of 1 million tons of...

Yes, we have 1.2 million tons in North America. But remember, almost 40% of that does not move off the index. If it's either open market and some OCC movement.

Okay. Super. That is helpful. And just maybe real quickly to. You noted that OCC you thought would be higher 2Q than 1Q, I believe, yet it had shown signs of moderating in April. Is that just a carryover from 1Q having been rising as it progressed? Or is that, that you're expecting OCC to start ticking higher again?

Some carryover, and we have projected another $5 move in the quarter as we get to the end of the quarter.

And our next question will come from Gabrial Hajde of Wells Fargo.

I wanted to ask about the food can business. We're reading more reports about imported full cans of vegetables and fruits hitting shelves maybe to circumvent templates steel tariffs and otherwise. I think that's roughly 40% of your food can mix. I'm curious based on conversations with customers, and I know they have to kind of plan for the stuff in terms of plan things, what the expectation is for the upcoming pack season that's embedded in the food can business?

Gabe, I really don't have that level of detail. I heard the same thing in terms of imports. I don't think we're hearing that as a direct impact to our customers. And as we said earlier, we expect to see a slight improvement in the second quarter. And that's feedback from our customers. So at this point in time, I really can't speak to any type of material influence that we are aware of within our customer base related to [indiscernible] import materials, certainly, it's out there.

[Operator Instructions] And our next question will be coming from Gregory Andreopoulos of Citi.

Just a few quick questions for me on consumer price costs. So you mentioned CPGs are kind of stepping up promotions or that could be happening in the near term. So I'm wondering how you think about your -- or the dynamic of CPGs stepping up promotions versus your ability to capture positive pricing in consumer or even positive price cost, depending on how you want to address it? And then I had one follow-up after that.

Yes. I mean, I think that we definitely have seen pricing dynamics at the consumer level. We think that the customer -- our customers are being really dynamic in their response to kind of higher prices on the shelf and our acting appropriately to drive the right volume for them. In terms of our price, how we see that, there are a number of index-based prices that affect that. I think overall, we've got kind of a little bit of price pressure. So I would say low single-digit price pressure going into the second quarter. And I think that some of that is going to be metal probably a little bit more offset, but overall, modest pricing pressure going into the second quarter from a sequential basis and then also on a year-over-year basis.

Okay. That's fair. And I mean, price cost didn't seem as bad as it could have been in 1Q, but down 9%. And I think you mentioned last quarter that you had some contracts resetting lower. So I'm wondering if you could kind of address what kind of cap price cost relatively close to neutral? And then if you could remind us what's implied for the full year guide in terms of consumer price cost for the balance of the year. And I'll turn it over after that.

Yes. Price cost was -- we had a really strong performance in the businesses. I think they're doing everything they can to kind of manage price with their customers, most of these are index-based prices that are causing a little bit of decline, and that was across the board, across consumer. So it was pretty evenly spread. And Q1 is when we experienced metal price overlap, which was $16 million this year, so a little bit down because we've been managing the inventory at the end of the year. And they did a really good job kind of managing the timing and the activation around that. So that, that was only $4 million of the $9 million or $10 million that we had in price negative price cost in Q1. We think that will relieve somewhat in Q2, and actually, we'll get some positive price costs in metal, which will get us to a modest positive in price cost for consumer in the second quarter, and we expect that to continue through the balance of the year.

[Operator Instructions] I'm showing no further questions. I would now like to hand the call back to Lisa Weeks for closing remarks.

Thank you, again, for joining us today. If you have any follow-up questions, we'll be around after the call. And please feel free to contact me if you'd like to schedule a follow-up meeting. We look forward to seeing you all on the road at our planned conferences and events in the coming weeks, and we look forward to reporting our second quarter results in early August. With that, please have a great day. Thank you.

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