Sonoco Products Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 1, 2023

There are 9 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Q3 2023 Sonoco Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising that your hand is raised.

Operator

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.

Speaker 1

Thank you, operator, and thanks to everyone for joining us today for Sunoco's Q3 2023 earnings call. Joining me this morning are Howard Coker, President and CEO Rob Dillard, Chief Financial Officer and Roger Fuller, Chief Operating Officer. Last evening, we issued a news release highlighting our financial performance for the Q3 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 sunoco.com. As a reminder, during today's call, we will discuss a number of forward looking statements based on current expectations, estimates and projections.

Speaker 1

These statements are not guarantees of future performance and are subject to certain risks and uncertainties. Therefore, actual results may differ materially. Please take a moment to review the forward looking statements on Page 2 of the presentation. Additionally, today's presentation includes the use of non GAAP Financial measures, which management believes provide useful information to investors about the company's financial conditions 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.

Speaker 1

For today's call, we will have prepared remarks regarding our results for the quarter and outlook for the Q4 followed by a Q and A session. If you will turn to Slide 4 in our presentation, I will now turn the call over to our CEO, Howard Coker?

Speaker 2

Okay. Well, thank you, Lisa. Good morning, everyone, and thank you for joining our Q3 2023 earnings call. Let me begin with highlights of the quarter. For Sunoco, we executed well even with the ongoing market uncertainty.

Speaker 2

Sales came in at $1,710,000,000 adjusted EBITDA was $280,000,000 and adjusted earnings per share was 1.46 Sales were flat sequentially and generally in line with expectations. In the industrial sector, demand remains muted and volumes low. In Consumer, volumes were sequentially higher in most businesses, while minimal aerosol can volumes continue to underperform driven by lower end market Demand and ongoing customer destocking. Our profit results were better than expected from strong productivity and effective cost management by our teams. Our productivity results are benefiting from the capital investments we're making across our plant network, including automation, process improvements And Energy Cost Reductions.

Speaker 2

We expanded adjusted EBITDA margins to over 16% and delivered strong cash flow during the quarter. We achieved these results even while we continue to invest in long term value adding projects And R and D initiatives throughout the portfolio. Overall, I'm pleased with how these results reflect our continued ability To execute simplification, transformation and operational excellence initiatives to build a more resilient company We were also pleased to close the RTS Packaging and Chattanooga Paper Mill Acquisition in September. These acquisitions well aligned with Sunoco's long term strategy to focus on our core integrated businesses and expand our sustainable consumer packaging portfolio serving food, beverage and beauty markets. The integration process is well underway, and we are delighted to welcome our new colleagues to Sunoco.

Speaker 2

And with that, I will turn it over to Rob for more details on the quarter.

Speaker 3

Rob? Thanks, Howard. I'll begin on Slide 6 with a review of key financial results for the Q3. Please note that all results are on an adjusted basis And all growth metrics are on a year over year basis, unless otherwise stated. The GAAP to non GAAP EPS reconciliation is in the appendix of this presentation and in the press release.

Speaker 3

As Howard said, 3rd quarter financial results reflect Sunoco's continued ability to deliver strong results in a low volume environment. We generated sequential growth in sales and adjusted EBITDA and improved the adjusted EBITDA margin to 16.4%. Furthermore, we exceeded our expectations and achieved adjusted EPS of $1.46 This strong profitability was broad based As impactful cost controls and improved productivity drove near record profitability in both flexibles and rigid paper containers in the consumer segment And strong profitability in the Industrial segment. In the Q3, consolidated sales decreased to 1,700,000,000 Sales decreased due to low volumes and index based price decreases in both consumer and industrial. Adjusted operating profit decreased to $213,000,000 and adjusted EBITDA decreased to $280,000,000 We maintained an above 16 adjusted EBITDA margin due to improved productivity and long term cost controls associated with our ongoing business transformation program.

Speaker 3

Adjusted EPS of $1.46 was driven by strong operating performance as well as favorable tax and FX. Adjusted EPS increased sequentially from the 2nd quarter due to modest volume improvement, positive productivity and positive non operating factors, despite negative price costs. The sales bridge on Slide 7 explains the year over year change in sales in the quarter. Volume mix was negative $145,000,000 or negative 7.7 percent. This volume decrease was anticipated And with the product of weakening consumer demand due to the impact of inflationary pricing and destocking at retail and continued low industrial demand.

Speaker 3

We continue to take steps to improve demand visibility and we are managing the business to mitigate the impact of low volumes. Price was negative 58,000,000 Our pricing performance was driven by index based price decreases, primarily in resin and metals based businesses. FX and other had a positive impact of $23,000,000 with FX contributing $17,000,000 The The adjusted operating profit bridge explains the year over year change in adjusted operating profit in the quarter. Volumemix was negative $31,000,000 as low volumes impacted Profitability. Price cost was negative $10,000,000 as index based prices declined more than overall inputs on a year over year basis.

Speaker 3

We continue to experience inflation in fixed costs and variable inputs like labor, While market oriented inputs that drive index based pricing such as metal and most resins declined on a year over year basis. Productivity was $30,000,000 due to restructuring activities targeting fixed costs and favorable manufacturing and purchasing performance. Slide 8 has an overview of our segment performance for the quarter. Consumer sales decreased to 938,000,000 Consumer volumes decreased 8.1% due to inflationary pricing and continued destocking at retail. Customers of our Consumer Packaging remain cautious.

Speaker 3

We believe that our solutions are winning share. Rigid paper container sales were flat as continued global growth, especially in Europe and Latin America, was also by weakness in North America. Flexible sales decreased high single digits as low volume with legacy customers offset share gains with new customers. Metal Packaging sales decreased due to template based pricing decreases and lower volume in both food and aerosol. Demand from our core customers has stabilized.

Speaker 3

Indications are that destocking with these customers has moderated. Consumer operating profit decreased to $112,000,000 as strong productivity was offset by lower volumemix and negative price costs. Consumer operating profit margin increased to 11.9%. Flexibles and rigid paper containers both had near record operating profit due to strong productivity. Turning to industrial.

Speaker 3

Industrial sales decreased to $580,000,000 Industrial volumes decreased 7.5% due to lower demand in all key markets and geographies. We believe these declines are not share related as indications are that we continue to gain share based on quality and service. Operating profit decreased to $75,000,000 due to lower volumes and negative price cost. We generated positive Productivity due to our focus on improving paper mill utilization and reducing fixed cost and SG and A. Recent capital investments such as Project Horizon Have enabled us to focus on the right markets with the right assets.

Speaker 3

We are operating with agility and continue to evaluate System improvements to maximize profitability. Operating profit margin remained at a historically strong 12.9%, A meaningful improvement from previous economic lows. All other sales decreased to $192,000,000 due to low volumes. Operating profit increased 66 percent to $26,000,000 due to strong price cost and productivity. Moving to Slide 9.

Speaker 3

Our capital allocation framework aligns with our business strategy to drive value creation through earnings growth and higher margins. Our priority is dynamically allocate capital to long term strategies to improve growth and profitability in our core businesses. We remain focused on increasing the dividend, which at present has $0.51 per share on a quarterly basis are an approximate 4% annualized yield based on our current share price. After capital investments in the dividend, we prioritize investments in accretive and strategic M and A, balanced against our priority of maintaining Strong liquidity and access to capital. In the Q3, we increased the size of our revolving credit facility and refinanced our term loans to extend maturities And reduced average interest rates, while also funding the RTS acquisition.

Speaker 3

We began the 4th quarter with record liquidity and the ability to continue to pay down debt with cash from operations. In the Q3, we generated operating cash flow of $268,000,000 and invested $93,000,000 in capital expenditures. On Slide 10, we have our guidance update. We are increasing our full year 2023 EPS guidance $5.25 to $5.40 raising the lower end of the range to reflect our year to date performance, We're maintaining the top end of the range to reflect the current market instability, especially considering recent weak demand trends in December. We're also increasing our full year 2023 adjusted EBITDA guidance to $1,050,000,000 to 1,080,000,000 To reflect these changes and to reflect our expectation of maintaining higher receivables and lower payables than anticipated, We are revising our full year 2023 operating cash flow guidance to $850,000,000 to $900,000,000 We are managing capital expenditures appropriately and expect to invest between $300,000,000 $325,000,000 in 2023.

Speaker 3

Now Roger will discuss the 4th quarter outlook.

Speaker 4

Thanks, Rob. If you please turn to Slide 11 for our view on the segment performance drivers for the Q4 of 2023. First, in the Consumer segment for the Q4, we expect stable volume performance versus last year and down slightly sequentially to the Q3 due to seasonality, primarily in our flexible and rigid plastics businesses. In our global rigid paper containers business, softness in some legacy products is being offset with new products Using our proprietary sustainable paper solutions, we're excited to continue the global expansion of our rigid paper containers as we utilize the new capacity Add in our existing operations in Brazil, Malaysia and Poland, these operations are utilizing our state of the art equipment and automation technologies with plans for more investments in 2024 in emerging markets for paper cans. In our flexible packaging business, we expect seasonally lower volumes after The Q3 holiday pack, but we should see continued solid productivity in flexibles as a result of recent investments in new technology.

Speaker 4

In metal cans, we expect seasonally lower food can volumes after the peak pack season in the Q3 and metal aerosol volumes are expected to remain soft in the Q4. We expect positive productivity in metal to continue in the 4th quarter due to capital investments. Turning to the Industrial segment. As we expected for the second half of twenty twenty three, global demand for our paper and converted products remains soft. In the 4th Quarter global industrial volumes will be slightly lower versus last year.

Speaker 4

We have seen some slight demand improvement in our North American paper and converted products business With Europe and Asia remaining quite weak. Also in the 4th quarter, price cost benefits will be lower in industrial due to index based pricing and cost inputs. With the lower volumes in industrial, productivity improvements remain challenging, but we will continue to aggressively manage variable expenses as a countermeasure to minimize the impacts from volume deleveraging. And finally, in all other businesses, we expect slightly lower volumes from seasonality. So in conclusion for the Q4, the team's focus on cost control, footprint optimization and all forms of productivity will be critical till we see a sustained improvement in customer demand.

Speaker 4

And with that, back to you, Howard.

Speaker 2

All right. Thanks, Roger. In closing, I just want to state that Despite all the external demand uncertainty this year, our team is performing extremely well. We have continued to solidify the foundations of Sunoco and make progress on our strategic initiatives. Speaking further on behalf of Sunoco's management team, I would like to recognize the dedication and hard work demonstrated through the quarter year At this point, and thank all of you for the work you've done.

Speaker 2

Our transformation is well underway. There's still more to be done, and I know our teams are up And just to further touch on these strategic initiatives, which I've been covering through the year, I'll remind you We're only midway through reshaping our portfolio, and we look forward to completing our non core divestitures When we can maximize value in the marketplace. On the operating model side, Sunoco is becoming a more focused, Agile and operationally efficient company. The continued optimization of our mix and factory footprint Combined with driving productivity and value added capital projects will sustain and drive margin expansion in the future. Our balance sheet remains strong and we continue to generate cash and allocate capital in a disciplined and efficient management.

Speaker 2

And lastly, our commitment to ESG and sustainability initiatives are unwavering and remain wholly aligned to the core values of the company. There are a lot of great things going on in Sunoco and the team, and I generally look forward to providing more in-depth updates on our progress During our planned Sunoco Investor Day, which is scheduled for February 22 next year At 75 Rockefeller Plaza in New York City, we will be sharing key updates on our segments, our markets And our fantastic technology innovations, and we look forward to seeing you there. At this time, operator, we would be happy to answer any

Operator

Our first question will be coming from George Staphos of Bank of America. Your line is open.

Speaker 5

Hi, everyone. Good morning. Thanks for the details. Thanks for taking my question. I guess the first question I had, Howard and team, 3rd quarter, you performed better than your guidance.

Speaker 5

Congratulations on that. It sounded like A lot of that was productivity. So I guess my question would be, what was if that's the correct Premise, what was the driver of the outperformance? And as we overlay that into the Q4, might we not see that continue? And yet, we're looking at a steeper drop in 4th quarter earnings year on year.

Speaker 5

And the related question to that would be, is that largely because of price cost becoming a bit more negative for the reason that you mentioned? And if you had color on that, that would be great. I had one follow on after that.

Speaker 2

Sure, George. Yes, the 3rd quarter Volumes were about where we expected them to be a little bit softer, But you're right, productivity actually covered that. So that's the real driver as well as how we manage General cost containment, etcetera. As we look into the Q4, we're seeing seasonal type declines Ahead of us, I expect that productivity still should be pretty solid. The real question mark is all around what the volumes are going to be.

Speaker 2

And as we hit into that December timeframe, That's the real watch out for us. So we see people taking extended downtime during the holidays, etcetera. So being cautious in that regard, But that's the main drivers of what we're looking at for the remainder of the year. Do you guys have any other?

Speaker 3

Yes, George, that's a good question. I think that Howard hit it right. If you think about next quarter, What we're thinking is volume will be a little bit weaker just generally because of the seasonality and we always have been cautious about projecting December in the last Couple of years, but the productivity performance has been really strong and is due to some of the Strategic investments we've been making, so we're hitting really on all three cylinders of our procurement, manufacturing and really getting after fixed And that's what all the activity the team has been doing. So if you think about year over year in the Q4, We're expecting to have pretty similar year over year performance and productivity of between $0.20 $0.25 of improvement. And so we feel really good about how all that's starting to flow through the P and L.

Speaker 5

Thanks for that, Rob. I guess one related question and then a quick one on metal. So you mentioned that legacy Flexible Was weak, meaning your legacy customers in Flexible were weak. You picked up some new business that helped offset. Rigid Paper was down in North America.

Speaker 5

It's sort of the same novel we've been all reading in terms of all the companies, But what are your customers in those key consumer markets? Were you saying about whether we're done with destocking, whether the consumer demand is looking Sequentially better as we get into 2024. And then last question, metal, where is that performing versus your deal model at this juncture, Given all the volume degradation we've seen, thank you. Good luck in the quarter.

Speaker 2

Yes. What our customers are saying right now, George, and what we're seeing is and you can say it as well that we're starting to see more promotional activity on the shelves, more discounting Part of what we've been dealing with and I think the sector in general is the price Inflation through the course of the year and trying to maintain that, and so we're starting to see breaks in that. Don't expect that that's going to be a material impact In the Q1, we're still early to kind of looking at what is next year going to look like. But certainly, we're seeing having conversations with customers and you're seeing them on the shelf as it relates To exchanging price for volume at our customer level. As it relates to the deal model on metal, we're right We said we or thought we would be, particularly if you look at the ebbs and flows of year 1 and as we encroach the end of year 2.

Speaker 2

We had a just phenomenal year last year and it's really relative To the well publicized inventory variances that we had year over year, positive versus negative, you take them and you average them out and we're right on top of exactly where we thought we would be. So we feel very good about that. But even more importantly, as we continue, The integration has gone fantastically. The synergies that we identified are there and being obtained. And frankly, Really pleased with the incremental synergies that we didn't anticipate that we have ahead of us.

Speaker 2

And I've said this before, the market reaction has been very, very positive. And Frankly, this is a marathon, not a sprint, but really pleased on how it's been integrated, really pleased with the overall financial performance And I'm looking forward to continuing with the synergies And other opportunities that we see over the coming period.

Speaker 6

Thank you very much. Good luck in the quarter.

Operator

Thanks. And one moment for our next question. And our next question will be coming from Anthony Pettinari of Citi. Your line is open, Anthony.

Speaker 7

Good morning. Just following up on George's question. In consumer, you obviously sell into a lot of different end markets and customers. I'm just wondering, are there specific markets where destocking maybe is a bit closer to an end or others where maybe you're seeing New rounds of destocking or pullback that's surprising you. And I'm sorry if I missed this, but is it possible to quantify what you're expecting for 4Q

Speaker 4

Hi, Anthony. It's Roger. Yes, consumer 4th quarter, we're looking at flat on a year over year basis, With some improvement in the can side of the business, both metal and paper and some continued volume struggles in Flexibles, but flat year over year. And you really have to look at it almost SKU by SKU, but in the Flexibles area, confection and snacks have been very weak. I wouldn't call that destocking.

Speaker 4

I think that's more of a price on the shelf issue. And then if you think about where the inventory and the Destocking is really more on our metal side of our business where you have longer shelf life on products. And as Howard said, we're seeing that start to ease And come to an end not come to an end, but ease up. So again, in the Q4, we see slightly better metal volumes than Q4 of last year.

Speaker 7

Okay. That's very helpful. And then in Industrial, you talked about maybe some Improvement in the U. S, I don't know if that's just purely a function of easier comps or there's maybe some organic growth there. And I just wonder if you can comment on that.

Speaker 7

And then in Asia and Europe, understanding you don't have great visibility and there's a lot of macro uncertainty, Do you have any sense whether those markets are getting worse or sort of stable or getting better or any other comments you can give there? Yes.

Speaker 4

Hey, Roger again. Yes, North America, I said slight improvements and I think that's what we've seen. We've certainly seen we feel like the bottom in North America From a volume standpoint in Industrials, if you look at our URB system, we operated about 85% Capacity in the Q3, which was 5% better than the marketplace. So we felt good about that. That's coming from our integrated System as well as some really good strong long term customer relationships.

Speaker 4

So North America, a little sign of improvement. I wouldn't call it a trend yet, but we'll see how it goes in the Q4 and move into the Q1. Europe and Asia remain weak. They're not getting worse, Which is nice, but they remain weak. The URB systems ran in that 75% to 80% capacity area, but we expect the same For the Q4, if you look at year over year industrial volumes for the Q4, we're calling it down about 1.5% to 2%, And that's versus down 7.5% in the Q3 year over year.

Speaker 4

So incrementally, we're seeing a little improvement, plus of course the comps are getting easier as we move quarter to quarter and that will continue into the first half of next year.

Speaker 2

Yes. And Anthony, I'll just add to that. As we talk about the volume side and We feel like we've been in manufacturing depression or recessions really since December or so of last year, our volumes, as you have seen through the course of that period of time on industrial, have I'm challenged to say the least, but I can't tell you how impressed I have been with the team performance. We talk about productivity. We talk about the investments that we've made.

Speaker 2

I guess you guys are probably glad we're not talking about Project Horizon every moment that you see us or hear from us, but that's just a poster child of Not being in the corrugated medium market right now vertically integrated and how does that flatten out and frankly improve particularly And times like this, our overall industrial margin profile. We're seeing some degradation, very high levels last year from a price cost perspective, even with difficult volumes. You're saying, Tanvenion chip has dropped by $20 a ton, but we are extremely confident that we're going to maintain those Double digit type margins even in difficult times. And what excites me about where we stand today is there will be a recovery. We're not losing share.

Speaker 2

The market is not shifting in any way and there will be recovery. And when that happens, The leveraging effect we are not enjoying right now in our productivity will come into play. And looking forward to getting out of this situation that we're in. Hopefully, that will be And for us, it's hard to have for anybody to have the crystal ball. But Maybe mid next year, we start seeing some type of improvements on the industrial side and with that will come Added leverage as it relates to the investments and the productivity that we have.

Speaker 7

Okay. That's very helpful. I'll turn it over.

Operator

And one moment for our next question. Our next question will be coming from Mark Weintraub Of Seaport Research Partners, your line is open, Mark.

Speaker 6

Thank you. First question was the RTS transaction getting completed. Obviously, the world's changed a little bit, OCC higher, URB a bit lower. Can you update us kind of on what type of accretion or EBITDA contribution In the current environment, is it reasonable to be anticipating?

Speaker 3

Yes, Margaret, that's a good question. Really no change. I mean, we've been really pleased with how those assets have come over to our portfolio. And when we talked about it last year, we said it was $50,000,000 of EBITDA with about $16,000,000 of targeted synergies, but $10,000,000 of those were kind of day 1. And what we're seeing is that those synergies are coming through day 1.

Speaker 3

So the business is performing well. I would say The TSA load is probably a little bit more than you probably were anticipating. We think that this is that it's give or take $0.05 plus or minus a $0.02 per quarter next year. And so we feel really good about how that's coming through And how the business is operating. And as Howard said, I think that it's additive to the system in this low volume environment Because the mill is relatively covered, but it gives us more tons to spread across the system.

Speaker 3

So we feel really good about that.

Speaker 6

Okay, great. And that includes Chattanooga when you're talking, in this conversation?

Speaker 3

Yes, that's a good question. I was talking about both. I mean, we think about it all as one kind of integrated transaction.

Speaker 6

Got it. Makes sense. And then and Sang, maybe what are some of the other actions that you're taking that can move the dial that are Outside of business getting better that are going to be flowing through next year that you'd want to highlight as we think about Bridging out 24 versus 23.

Speaker 2

Mark, yes, we continue on our journey as it relates As you know, 3 years ago, 3.5 years ago, we really started kicking up our capital related to growth and productivity. And with the COVID, a normal capital cycle can run 1.5 to 2 years COVID has extended that. So the expectation is we're going to see incremental improvement from those investments going to next year. And we've talked a lot about restructuring, how we manage our businesses from the center And what is the portfolio going to look like going forward? So we've been busy over the last 18 months or so.

Speaker 2

The turnaround there is clear in the underbrush, but doing small divestitures, closing facilities that are dilutive To the overall company and non strategic, that's going to continue. And when we're together in February, We plan to try to we will present to you guys, it's not mission accomplished. It's where we stand at this point in time and I think you'll be pretty impressed with some of the restructuring activities that we'll announce at that point in time And how we're going to be managing the company going forward. From a modeling perspective, sorry, I can't help you with How that all equates economically quarter by quarter or through the year, but hopefully more information will be coming As we get together in February.

Speaker 6

Okay. Fair enough. And just lastly, recognizing it's a dynamic environment, but Given where Tenplate is, etcetera, did you have a perspective on whether there is likely to be additional Inventory impacts that flow through metal benefits or negative impacts next year Or any help there? I mean, it would seem like that could be another negative, but

Speaker 2

Yes. Well, it's early and everybody is aware of What's going on from a supply side perspective there, tariffs, acquisition discussions, etcetera, Lot of noise, which is causing delays in terms of our negotiations. So We're really not there yet to talk about what we think from a direct inflationary impact. What I would say is from a deflation or deflation, Empath. What I would say is that the our customer profile from an inventory perspective is much more favorable.

Speaker 2

Major customers are saying, in one case, I was with a customer a couple of weeks ago who has half Their inventory, to our detriment in the first half of the year as they brought it down and they're coming in so we're seeing that across The Board that inventories are starting to normalize. So whatever happens on steel pricing up or down, The relative impact should be less favorable or negative as inventories at our customer locations have decreased.

Speaker 6

Understood. That's helpful. Thank you.

Operator

And one moment for our next question. And our next question will come from Gabe Hajde of Wells Fargo Securities. Your line is open.

Speaker 8

Hi. This is Alex on for Gabe. Thanks for taking my question. I appreciate all the comments you guys made on the Q4. But maybe just if I were to kind of think about 2024, can you kind of comment on how you're thinking about The working capital and your inventory.

Speaker 3

Hey, Alex. For Q4?

Speaker 8

Okay. For Q4 in 2024, if you can comment on that

Speaker 2

Next year, Samator?

Speaker 3

Yes. So for Q4, how we're thinking about it and what we thought is, and I think Howard kind of hit The point on metal is that we have taken out and made a real concerted effort to take inventory out of the business. And so at this point, The inventory is a little over $250,000,000 less than what it was. We expect that will be stable through the end of the year. A big part of that reduction was in metal.

Speaker 3

For the other working capital categories, You see from last year Q3 to Q4, we released $100,000,000 of AR. That's something that While we don't expect it to be that magnitude every year, that's just part of the normal cycle for us. And so we expect to release another $100,000,000 of AR in Q4, which will put us out about $148,000,000 of working capital give or take. For next year, it's really early days. We are really managing inventory really aggressively and have been, and we're managing AR and AP Really aggressively as well.

Speaker 3

We feel like we're at the right level of days at this point And don't feel like we need to be too aggressive in pulling inventories down any further in the businesses, especially as Some businesses are expecting growth next year. So I think the days, the metrics for working capital will stay constant next year, And that would be the guidance we would give on working capital in 2024.

Speaker 6

Okay. Thank you. And can

Speaker 8

you just remind me again or remind us again what portion of COGS is labor?

Speaker 2

Can you repeat that again? Gabe, you're breaking up just a little bit.

Speaker 7

Sorry. Can you just remind us again what portion of COGS is labor? And

Speaker 8

I guess, how should we

Speaker 5

kind of think about the

Speaker 8

mid single digit labor inflation next year? Do you have anything in your contracts to And it passes through to your customers through price increases?

Speaker 2

We do have the opportunity to pass on labor, but we're having to carry it until those Until the timing of price adjustment come into place, typically quarterly, but Certainly, labor inflation is continuing to roll over through this year and into early next year. So It will be a timing issue with the customers.

Speaker 8

Okay. And sorry, lastly, just What portion of COGS is labor?

Speaker 3

Yes. It varies by business. I mean, I'd say that in some businesses, it's In the 10% to 20% range, most of the COGS is really material and there's a component of that that's certainly fixed. But it's definitely less than 25% in every business. And some businesses, it's really in the single digits.

Speaker 8

Okay. Thank you. I'll turn it over. Thank you.

Operator

Okay. And I would now like to turn the conference back to Lisa Weeks for closing remarks.

Speaker 1

Thank you for joining us today. If you have any follow ups, we'll be around after the call to answer your questions or Please feel free to contact me to schedule a follow-up. We look forward to seeing you on the road at our planned conferences and events in the coming weeks, And we will look forward to reporting our Q4 and full year results on February 15, 2024. 1 week later, we will be having our Investor and Analyst Day on February 22, 2024 in New York as Howard referenced. This will be an in person event and a webcast will also be available.

Speaker 1

Registration details The in person event as well as the webcast will be available on our website soon. And with that, we'll close the call and hope you all have a great day.

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Key Takeaways

  • In Q3, the company delivered $1.71 B in sales, $280 M of adjusted EBITDA (16.4% margin) and $1.46 of adjusted EPS, driven by strong cash flow and productivity despite low volumes.
  • Industrial volumes declined ~7.5% year-over-year on muted demand across key markets, while Consumer volumes rose sequentially in most areas but aerosol cans continued to underperform amid ongoing customer destocking.
  • Productivity and cost management initiatives—backed by plant automation, process improvements and energy reductions—contributed ~$30 M of gains, offsetting price pressures and volume declines to expand margins above 16%.
  • The RTS Packaging and Chattanooga Paper Mill acquisitions closed in September, adding ~\$50 M of EBITDA potential plus synergies, and broadening the sustainable consumer packaging portfolio.
  • Full-year 2023 guidance was raised to $5.25–5.40 EPS and $1.05–1.08 B EBITDA, with Q4 expected to see flat Consumer volumes, seasonal dips, marginal industrial improvement and continued focus on cost control.
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Earnings Conference Call
Sonoco Products Q3 2023
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