Sonoco Products Company (SON) Earnings Call Transcript & Summary

Thanks, everybody. Thanks for being here. Next up is a fireside with Sonoco Products Company; Howard Coker, President and Chief Executive Officer; and Rob Dillard, Chief Financial Officer. Rob served as Chief Strategy Officer for the company and responsible for the company's corporate development and strategy function prior to his CFO role, and he joined the company in 2018. Meantime Howard, as I mentioned, is President and Chief Executive Officer of the company, having global leadership sales and operating responsibility for the company's diversified consumer industrial and protective packaging businesses. He's been with the company since 1985 and had virtually every position, I think, possible within Sunoco. So -- we are honored by your presence here, both of you, gentlemen. Thanks for being here.

Great. Sorry, I'm few minutes late.

No worries. You're in high demand. So maybe we'll start coming off of 4Q reporting, both the discussion during your presentation and questions we've been getting, how defensive is Sunoco, given that you've got this industrial business, how much more is left in self-help. A lot of discussion on sustainability at the luncheon we just had earlier today. And what's going on in the perimeter of store, those are all sort of topics that have been coming up in the dialogue. Would you have us sort of start with and take away about Sunoco anything here in terms of this slide, you've got showing here that you want us to really have burned into our brains.

Yes. Well, first off, great slide because it really shows the trajectory that we've been on. And it's not a 1-year phenomenon. We've been working on this for the last 3, 4 years in terms of really the strategy of the company, our portfolio, how we manage the company, the parenting, all of the above and highly publicized from my very beginning as I felt like that we've got 2 core franchises, one being our Paper Cans business, the other one being our which you talked about industrial. But it's more than industrial, it's also a consumer, but it's listed as our industrial paper packaging. And investing more in these businesses, given the leadership team the challenge, if you will, to tell us if you had more funds available, what would you do, and it's been remarkable. So if you look at where we stand today, our Paper Cans business is actually growing. We'll probably talk about that later as it relates to consumer and our expectation. But in every market we serve, and we're in 34 different countries -- every continent, I should say, is -- has got substantial growth projects in play, starting here in North America, Asia, Europe and certainly in South America. So really thrilled about how that business has started to take a turn and George, you followed us and many of you have for years, and that business has kind of been bouncing along. Well, now it's really taking off. The other thing I'll talk about is in the terms of defensiveness, we get asked about industrial all the time. You can see on this chart, not too many years ago, half the company would have been labeled industrial we've weighted that down as we've grown on the consumer side. And so our industrial applications are much lower just from a product portfolio mix perspective than ever before. But I'll tell you that we have spent, just as I talked about on the can side of the business, Paper Cans side of the business, in the industrial side, going back really 5, 6, 7 years ago, looking at our low-cost paper mills, making the appropriate investments, taking down higher-cost paper mills. And more recently in the last 3 to 4 years -- or 3 years is really challenging the team in terms of where your profits are being made. Do you need to be in France, even though you've never made money in France, even though it's going to cost a small fortune to get out of France, let's get out of France. Let's consolidate facilities in the U.K., let's quit losing money in Saudi Arabia, let's get out. Let's change the trajectory of the company and the rest side of it. The one that has carried the most, I'm almost tired of talking about Project Horizon, but it's complete, it's done. And when we talked about it, we talked about it in the context of taking the very large corrugated medium machine and turning it into the lowest-cost URB machine. And the real story here is that particularly as we go into cycles that we feel like we're in right now, it is nice not to be in the medium market today with the smallest machine in the market, non-vertically integrated. That machine, we didn't talk about this when we first announced the investment, but the real driver from my perspective was that machine would make $15 million in a year and it would lose $15 million the next year. Now you guys, we weren't talking much about that, but that's the swing of volatility. And I'm going to stop here to just say that that's been a major, major focus of our is, look, when we have slowdowns, we know our consumer business picks up. It does. People aren't eating out as much, they're at the center of the aisle, they're shopping. And we're -- frankly, we're seeing that right now. But the big part was, well, how do we make sure that when things slow down, how do we lessen that trough? How do we make it less material than it was in the [indiscernible] -- the portfolio is better aligned than it ever has been. I guess the last footprint would be -- footnote would be that not listed here, but where our geographic mix. I mean, we're now almost 80% North America, less subject to geopolitical issues that -- and not to say it will stay that way, but certainly a good place to be if there's a note of uncertainty out there.

And Howard, was that a specific direction you and Rob wanted to take the company with less notable?

Not necessarily, but it certainly checked the box to say, look, if you can do it in your backyard, let's do it in a backyard.

Understood. So when we look at -- that's a great overview. The guidance for the year, both for the quarter and the year. What do you think the biggest headwinds are right now? And we recently saw URB pricing pull back a bit. I don't want you to get where you can't go. But would that suggest there's maybe a bit more attention on your outlook than would have been otherwise the case or not to -- not necessarily?

Yes. To address that specifically. I mean, obviously, that was starting to happen during our last call. And my answer is the same. We anticipated that pricing was going to fall and costs were going to go up, [indiscernible] was going to go up. So that is -- there's been a move on the URB side, as you see it stays where it is. I can just tell you at this point in time that we haven't reached that point of intersection to what we assumed was going to happen. Through the course of the year, but I expect that will eventually come into play. But that's what's in our models going forward. From a headwind, I mean, I guess...

You assumed this sort of drop in your forecast?

We've assumed this, and let's just say more in our forecast. But we also assume that on the industrial side, consumer, we've already have briefly talked about, certainly talked about a great deal in our last call that January was really surprisingly strong. And so it kind of held up to that are our customers mid-fourth quarter, mid-December, starting to take inventory out of because we did come out of the blocks very, very strong. Industrial seems to have kind of been balancing what, 7%, 8% kind of lower than normal level over -- probably since the middle of the fourth quarter. I was telling somebody today, I was walking out of my car yesterday and our head of our converting business was in the parking lot, and I said, Sir, how's volume, he says there's an uptick. So that's a sign that maybe things are starting to tick up. And the point here is that we have assumed in our modeling that we will see an uptick in the industrial cycle, but still be down for the year. You got anything...

No, I think that those are the key points, George. I think that the degree of confidence in the industrial projection was a little bit wider than it was on the consumer side. I think that there's a lot of variables that are going into that expectation of the result because we're expecting that we'll enter some kind of shallow negative period and that will come out of that by the end of the year was the base case that we based that on. And we're seeing the beginnings of that period. We've kind of flowed through sequentially from where we were in the fourth quarter. So first quarter will look a lot like fourth quarter in the industrial business, but then we are as Howard said, starting to see some kind of green shoots there. And so we're expecting that to perform as expected. I think that the piece that's got the most commentary about that is actually something that -- of our forecast that's got the most commentary is actually the consumer expectation, which is one that we actually feel incredibly confident about. And it's because we've been investing behind it and building that -- that case and have had long-standing partnerships with customers that are really backing those substrates in those formats. So we feel really good about how that's performing. We've actually been surprised as Howard said, about how quickly that started this year and how much momentum it has seemingly for the home run.

Is the growth in consumer being driven. Well, obviously, you put the investment in because you thought the growth would be there, so you've got a happy marriage between those 2. But is it -- is the consumer actually coming back or your products are gaining share and/or your customers are gaining share, and that's allowing for the investments that you made to have this type of -- I think you put like a 4% or 5% growth rate on 1Q consumer volumes. How would you have us think about that?

For sure. So I think for the full year, we're saying mid-single digits. I think the first quarter, that number was actually guided by a little bit lower expectation, but we are seeing some favorability to that in the early days. And there's a fair amount of complexity there because of the number of businesses and substrates, but I think you can tick through them that Rigid Plastic is kind of nice secular growth in the mid -- low to mid-single digits. Flexible package, we've been investing behind that business, which is really driving that nice mid-single-digit growth. Now Metal Cans had really tough comps last year. They're coming off that. So mid-single digits is a pretty reasonable expectation. And then Rigid Paper Cans has incredible growth in emerging markets right now, especially Asia, but also now Latin America, a really nice secular trend in Europe that's mid- to high single digits. And then U.S. now getting new investment and new innovation that's going to drive growth there as well.

How should we read the implications of the growth in the Composite Can, the Paper Cans and what it means for the rest of the portfolio?

For the rest of the portfolio?

Yes. I mean, so does the fact that paper is taking off. I mean at some we start to worry about plastics and maybe not and why not?

We've been pretty open that in establishing all other segment that we're focusing really on 4 -- and it has to do with our parenting strategy, but we're focusing really on 4 core businesses that are supported from Center, and we created the all other, and we're still in process there in terms of how we're going to ultimately segment the All Other. But it's really -- focus is going to be on those 4. That's been -- obviously, the Paper Cans business, our global franchise from a URB perspective, our flexibles and then the new addition with Metal. It's not really substrate driven as much as where do we think we can take each of the business in terms of material meaning to the company?

Yes. It's much more about where are -- where are areas where the packaging really matters and where you have really strong fundamental demand that you can then drive a great business off of. So when we think about that, we think about where is a category where there's a fit-for-purpose packaging solution where you can design a solution around great material science around high functionality of that package. So the package does a lot, and then you can get a lot of value for providing that solution.

Yes. And I appreciate that. I guess what I'm getting at is on the last call during Q&A, at least one of my takeaways perhaps incorrectly, was that Paper was growing outside of North America partly because of a real or perceived sustainability benefit? And what does that mean, therefore, for someone like Sonoco who also makes a lot of really high-value plastic packaging in North America?

First off, well, let me stick with Europe, and that's where we are seeing the market opportunity completely open up in terms of sustainability. So we've got now all -- I say all, but 90% to 95% paper solutions. And what we're seeing there is not so much new folks coming to us and say, "I want to be in your package. There's folks who just left us over the years that said, "I want to go into a blow-molded container because it has a handle, has something different." And the dynamics in Europe are different than they are here today. And so they're coming to us saying, look, fit for purpose, your can works, you've now got a 95%, 90% solution. I want out of plastic into your paper. We're not seeing that so much, and this is where we really have our plastics assets, mostly tray. But we're not seeing that pull here in North America but expect -- and I think we talked about in the call, over time, we can see that happening, but not today. In fact, we're getting more demand out of Brazil and Asia for those all paper solutions. And we're bringing technology here. So we've got 2 new lines that we'll be here next year that we will start developing the market. But...

For which material for the 90% to 95%?

90% to 95% paper solutions.

Yes. And the way you should think about that though is that the European market for the rigid paper containers is different because there's a little bit of premiumization, and there was a little bit of just natural kind of orientation around paper historically than there was around plastic. And so that market is 65%, what we call low to mid barrier and 35% high barrier. The U.S. is almost all high barriers. So that's the traditional salted snack or nuts. And so what we're seeing is the long-term trend of introducing low barrier to the U.S., but then we're also seeing an acceleration of the premiumization of the paper package in Europe because of the orientation of sustainability.

Okay. But -- and so you don't see it as a threat to your flexible business, which would probably be high barrier in North America because paper -- what you'd be offer low barrier and again, back to fit for purpose.

Yes, fit for purpose capital infrastructure. So what we're doing in flexibles is, yes, we've got some period major launches going on right now where we're replacing films with a paper substrate, laminated paper substrate. So different solutions going on in that side of the business.

Thank you, gentlemen. That was very helpful. Any questions in the audience? Linda has a mic. We'll keep forging ahead here. So talk to us a bit about the Metal Pack business and why you view it as making Sunoco actually more of a focused company to fit within the portfolio? What are you seeing in terms of market development and perhaps reaction from your peer companies with Sunoco now being a formidable player here?

Yes. So yes, to take you back to the early days, as we were looking at our core competencies and you really lay all those out, we are still -- we were and are the largest producer of peel-off easy open ends in North America and Brazil. We have a large metals business that supports our paper can business and you get into the technologies behind the difference between making a 3P, it all made sense to us that we can certainly have a right to win from an operating perspective. We looked at end-use markets, where we know the markets extremely well, the application is extremely well and said, this just seems to make perfect sense for us to add this to our can family, if you will, paper and now adding metal. Then you look at it and say, well, wait a minute, what is the market conditions. And we felt like there was a lot of noise in the industry, private equity and question marks about what the long term is going to be and is there a strategic willing to really lean into the business. And from that, we said, yes, this is something we want to get into. So it's played out exactly as we thought it would. The market reception has been extremely positive. We do -- many of our larger customers are family-owned businesses that we have developed really strong relations with in a very short period of time. So just really pleased about how the integration has gone, how the market reception. And where do we go from here? We bought it as a -- look, there is a lot -- it's a concentrated market with private equity involved on both sides, Europe and the U.S. And look, could be opportunities for us or it could be opportunities for someone else to roll the market up .

But you could see yourself over time with inorganic growth in metal?

Theoretically.

Yes. Understood. And do you expect on an organic basis in '23 and maybe -- cumulatively '23 and '24 to grow based on what you know, in line or above or below the market. If you can comment.

Yes, I'd just say, look, we would say last year, been our first year is looking to be a pretty good comp for us. So we're expecting to be up this year, and kind of in line. I don't want to get into too much specifics. But look, the market reception has been extremely positive of a company like Sunoco interested in leaning into it.

Understood. Any questions from the audience? So we talked about sustainability of your earnings. Yes, industrial maybe has got some weak spots, but you're putting words in your mouth, you guided relatively prudently here. Consumer looks to be quite strong. Consumer is center of story, that's Sunoco's wheelhouse. It sounds like things are doing well there. So all good. What about Perimeter store? How does that fit strategically for you over the next few years, the business you built out? It's had some weather-related disruptions most recently prior years and quarters, it's had some other disruptions. How do you view it? Is it -- I'll leave it there.

Yes. I talked a lot about it over the last really several years. It has been a struggling business for us, and I'll give it to the leadership team who have done a wonderful job in terms of turning that business around. So it really had a nice year last year. We had the hiccup as it relates -- hiccup, but the weather in California and in Florida that impacted our customers, but that's a short term. George, I'll just leave it this way that there's a number of businesses that are under review. We'll see how that all falls out in the coming periods. But we're happy with the way it's been performing, and I think it's a really good team that we've got behind it.

Thank you, Howard. And investors, what should they take away about your capital allocation from here. Sunoco traditionally, it's managed the balance sheet to stay investment grade, sanctity of the dividend. Any changes to that? -- as you look out the next few years.

No, dividend has been core and I don't know, 90 years, consistently paid something like that. So dividends are important to our foundation and our investors. And so that certainly is top of list. You talked about well, organic investments as well as inorganic. And then certainly, we're mindful of the balance sheet in an investment grade. We've got plenty of run, but we'll be paying down that along the way.

So Howard, we have, again, a full room here listening to you and Rob, we have people on the web listening to you. What do you want them to take away. One or two reasons why today, they should be adding to their positions in Sunoco? Or what would you have them take as a cautionary comment perhaps. They call [indiscernible] or what should they call their trader today right now on Sunoco?

Yes. It's -- you've been hearing a story for the last 3 years or so about how we're going to change the way we manage, run this business, how the portfolio is going to be aligned, how we're going to invest wisely from an organic perspective, how we're going to make the right moves from an inorganic perspective. And I'm just as thrilled as I can be in terms of how this team has done just that and seeing the type of results that we're seeing come to fruition last year and into this year. I think from my perspective, I think our TSR was somewhere around plus 8% last year, and you've -- minus. Our ROIs are just stuck on these slides saying that your EBITDA was up 51%. Your EPS was up 65%. And so there's just -- to me, there just seems to be pent-up opportunity to get in at a point where it doesn't seem like the broader market has quite accepted the fact that the trajectory of the company and the core of the company is vastly different than it was not too many years ago.

Thank you, Howard. Thank you, Rob. Any other last questions for Sunoco before we wrap up? If not, please join me in thanking Sunoco Products for a great presentation.

Thank you, guys.

Thank you.