Sonoco Products Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 10 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Q2 2024 Sunoco 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. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, 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 2nd quarter earnings call. Last evening, we issued a news release highlighting our financial performance for the Q2 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, 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.

Speaker 1

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 provides 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. Joining me this morning are Howard Coker, President and CEO Rob Dillard, Chief Financial Officer and Roger Fuller, Chief Operating Officer.

Speaker 1

For today's call, we will have prepared remarks regarding our results for the quarter and our outlook for the Q3, followed by a question and answer session. If you will please turn to Page 5 in our presentation, I will now turn the call over to our CEO, Howard Coker for business update.

Speaker 2

Thank you, Lisa. Good morning, everyone, and thank you for joining our call today. As we announced late yesterday, we had a solid quarter where we delivered sequential improvement in adjusted EBITDA. In the Q2, sales were $1,600,000,000 adjusted EBITDA was 262,000,000 dollars and EBITDA margins remained strong at 16%. Our adjusted earnings per share were $1.28 and operating cash flow was $109,000,000 These results reflect improved industrial volumes on a year over year basis, mixed with some continued softness in consumer sales.

Speaker 2

During the quarter, we had continued pricecost headwinds across the portfolio, primarily in industrials that we believe will improve in the second half. Productivity in the second quarter came in at $51,000,000 continuing our strong operating trends and bringing our first half productivity total to just over $100,000,000 All in all, another good quarter from the Sunoco team. If you'll please turn to Page 6, let me now update you on recent progress with our near term strategic priorities. As always, we're fully committed to operating with discipline. Our productivity results in the first half of the year were over $100,000,000 While these figures are ahead of schedule to our expectations for the year, they were not by chance.

Speaker 2

As you know, we have doubled internal CapEx in the last 3 years, targeted towards value driving growth and productivity projects. We continue to make high return investments to drive better and more efficient manufacturing processes and those investments are paying off. Our assertive actions to improve productivity from the right capital allocation, portfolio simplification and strong expense management continue to yield results and I couldn't be more pleased with the efforts from the entire Sunoco team. We also continue to invest strategic capital and innovation to support organic growth and sustainability initiatives. At the recent Environmental Packaging Live event, we were awarded the 2024 Gold Award in Snacks and Confectionery Packaging and a Civil Award for Sustainable Packaging Innovation for our greater than 90% Paper Pringles can design.

Speaker 2

We're delighted to be recognized for our proprietary designs that help our customer achieve their sustainability packaging goals. This new design is being rolled out in store shelves across Europe and will be launched internationally in the near future. Regarding high return capital investments, we're pleased to announce the acquisition of Eviosys in late June, representing an important milestone in our strategy to scale our can packaging platform. The approval and review processes are well underway and Roger and team are making great progress on planning for a seamless integration. Based on the current schedule, we expect to close the transaction in the Q4 of 2024.

Speaker 2

If you'll turn to Page 7, with Eviosys, we're excited to expand our footprint and global capabilities to address the increased demand for innovation and meet growing expectations for the highest levels of customer service. The addition of Eviosys will position us as one of the leading food can and aerosol packaging manufacturers globally, and it represents a platform we can drive differentiated value in the market by leaning into service, quality and innovation, the absolute hallmark of successful Sonoco Business. Through the combination of our existing innovations infrastructure and EBS' technical advanced and well invested manufacturing footprint, will be more effectively serve both existing and new customers and unlock new opportunities in attractive end markets and geographies. We've initially identified meaningful near term operating and procurement synergies that should drive roughly $100,000,000 annually, and this does not include expected commercial and innovation synergies. The financial profile of this combination is compelling.

Speaker 2

The transaction will be immediately accretive to earnings and cash flow, and 1st year returns are expected to be well in excess of our cost to Sky. But most importantly, it gives us strong, a powerful operating platform from which to advance both commercial and operating improvements. It will help us continue to drive sustainable value and returns to our shareholders, further demonstrating the strength of our clear and dynamic capital allocation process. Our businesses continue to identify and bring forward exciting opportunities for value generating investments. To the clarity of our dynamic process, we will continue to support these opportunities where Sunoco can generate the strongest return and value proposition for shareholders.

Speaker 2

And you will see us continue to distance ourselves from businesses that do not regularly offer the same opportunities. We view capital allocation as the heart of our strategic planning process to generate increased value for our shareholders, and we'll keep you fully posted on our progress. With that update, I'm going to turn it over to Rob to talk about the financials for the quarter. Rob?

Speaker 3

Thanks, Howard. I'm pleased to present the Q2 2024 financial results starting on Page 9 of this presentation. 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 as well as in the press release. As Howard said, we continue to deliver resilient financial results through our enduring operating model and strong market positions.

Speaker 3

Adjusted EPS was $1.28 which was within our guidance range and exceeded the consensus analyst estimates. This result was driven by positive productivity of $0.38 per share and positive volumemix of $0.09 per share, offset by negative price cost of $0.37 per share. Sequentially, we drove 14% growth EPS growth through $0.05 of volumemix, dollars 0.11 of price cost and $0.08 of productivity, which was partially offset by $0.11 of specific other costs. For the quarter, net sales decreased 4.8 percent to $1,620,000,000 due to negative contractual resets in price and negative $101,000,000 of strategic actions to exit or divest non strategic positions. Excluding these strategic actions, net sales would have grown 1.1%.

Speaker 3

We believe that divesting the Protective Solution business, exiting non profitable thermoforming markets and reclassifying the recycling business will increase our ability to focus and execute our strategy. It's notable that volume mix was positive low single digits in the quarter as low single digit volume increases in consumer and double digit volume increases in industrial overcame declines in all other. Organic volume mix was flat as low single digit increases in industrial offset low single digit declines in consumer and declines in all other. We continue to experience negative contractual resets in price as paper, metal and some resin benchmarks have declined from their peak. In the quarter, price impacted sales negative 32,000,000 dollars We anticipate that year over year price comparisons will improve as the year progresses.

Speaker 3

Adjusted EBITDA was 262,000,000 and adjusted EBITDA margin was 16.2%. Specific other expenses that we believe were one time in nature were higher $23,000,000 due to increased employee expenses, bad debt reserves and other accruals. For a year over year comparable, EBITDA margin would have been 17.6%, excluding these specific other expenses. This gives us conviction in our expectation that EBITDA margins will improve in Q3 as we expect volume mix and productivity to improve and volume mix, price cost and productivity to improve on a sequential basis. In the Q2, we achieved historically strong profitability through improving volumemex and strong productivity despite challenging price cost.

Speaker 3

From an EBITDA perspective, volume mix was positive $5,000,000 in the quarter. This was the 1st positive organic volume mix for EBITDA in 8 quarters. Productivity was positive $51,000,000 in the

Speaker 2

quarter.

Speaker 3

In the last 12 months, we have achieved over $180,000,000 of productivity. We believe that this performance is an indication that our strategy of investing to drive earnings growth through productivity is working, and we anticipate that this trend of positive productivity will continue. Price cost was negative $49,000,000 primarily due to Industrial. We anticipate that price cost will improve as the year progresses. Page 10 has our Consumer segment results.

Speaker 3

Our Consumer businesses continue to improve profitability through productivity and commercial execution despite uneven volume. Demand is improving, but promotions at retail have yet to stimulate demand to legacy trends across all sectors. Consumer net sales decreased 4% to $928,000,000 Consumer volume mix increased low single digits due to the NPL acquisition and positive organic volume mix in flexibles and metal packaging. Consumer price decreased 2% due to contractual price resets. We expect these pricing trends to continue for the remainder of the year.

Speaker 3

Consumer EBITDA increased 11% to $148,000,000 primarily due to improved productivity. Our capital investments in consumer are generating meaningful results and the first sequence of investments from 1 to 2 years ago was a primary driver for the improvement in productivity to $25,000,000 Consumer EBITDA margin increased 2 16 basis points to 15.9%. We anticipate that EBITDA margins will increase in Q3 as volumes continue to normalize and metal packaging enters its primary pack season. On a more granular level, RPC sales declined low single digits due to low single digit volume mix decline. We anticipate that this will continue through the balance of the year and we are taking appropriate actions to ensure profitability.

Speaker 3

CFP sales decreased mid single digits as positive mid single digit organic volumes in Flexibles and strong acquisition performance from Innopel partially offset the impact of the exit of a non profitable thermoforming market. Metal Packaging sales decreased mid single digits as positive low single digit volume mix was offset by negative contractual price resets. Volumemix was positive in both food and aerosols. We expect metal packaging volume mix to increase double digits in the 3rd quarter. Volumemix was positive mid single digits excluding one time customer reserves in Q2.

Speaker 3

While Metal Packaging price was negative on a sales basis, on an EBITDA basis, price cost was meaningfully positive. We expect positive price cost on an EBITDA basis in Metal Packaging for the remainder of the year. Page 11 has our Industrial segment results. Industrial market conditions are improving and while we are optimistic, we believe that we are still in a U shaped industrial market trend and that there has not yet been a broad based market recovery. Industrial sales increased 3% to $601,000,000 volume increased 10% and organic volume mix increased 2%.

Speaker 3

These results include the reclassification of recycling, which reduced sales by $23,000,000 in the quarter. Adjusted for the impact of recycling reclassification, industrial sales would have increased 7%. Industrial price decreased 2% due to contractual price resets. Industrial EBITDA was $98,000,000 due to $47,000,000 of negative price costs, offsetting $23,000,000 of productivity and $15,000,000 of positive volume mix. Between 2019 the end of 2023, industrial price cost increased $184,000,000 and year to date in 2024, industrial price cost has decreased 102,000,000 dollars We believe that we are now close to a balanced price cost position and that future trends will be positive based on strategic pricing.

Speaker 3

We believe that this is evidence that our pricing strategy industrial is working and we expect price cost will trend positive over the long run. We continue to seek market price increases to offset higher OCC and other inflationary inputs. We anticipate paper benchmarks will accurately reflect the inflationary environment and improving market conditions in the second half of the year. Industrial EBITDA margin was 16.3%. We believe that industrial margins will continue to improve with volume recovery and future pricing action.

Speaker 3

Page 12 has our results for the all weather businesses. All weather sales were $95,000,000 due to volume mix declines and the sale of the Protective Solution business. All weather EBITDA was $17,000,000 due to lower volumemix and negative price costs offsetting $3,000,000 of productivity. Moving to Page 13. Our capital allocation framework aligns with our business strategy to drive value creation through earnings growth and margin improvement.

Speaker 3

The four pillars of our capital allocation model are capital investment to drive growth and improve profitability, dividend increases to reward shareholders, programmatic M and A to action a portfolio strategy and share repurchases to return capital and maximize shareholder value. Our goal is to be the most disciplined deployer of capital in our industry and to drive the highest ROIC and strong cash conversion, while also returning capital to shareholders. To achieve this goal, we remain focused on our dynamic capital allocation strategy. We believe that this strategy is working and that the productivity results we are now generating and the growth that we are anticipating are indications of this success. As Howard mentioned, our long range planning and capital allocation process continues to yield great results.

Speaker 3

We have a meaningful amount of highly strategic, high return capital opportunities, primarily in our RPC and Metal Packaging businesses. As we evaluate these opportunities, we will continue to tighten our focus on fewer bigger businesses. As a result, we are planning to expand our divestiture program, and we believe that we have the potential to yield more proceeds from divestitures in the next 12 months to 18 months than the previously expected 1,000,000,000 dollars As previously communicated, we believe that we have a strong base plan to finance the Eviosys acquisition, which we anticipate will close in the Q4. We believe that expanding our divestiture program has the potential to further accelerate our portfolio and we expect to provide further updates as our plans progress. On Page 14, we have our cash flow performance for the quarter.

Speaker 3

In the Q2, we generated operating cash flow of $109,000,000 Capital expenditures was $93,000,000 for the quarter. We're on track with all major initiatives and anticipate investing between $350,000,000 $375,000,000 in 2024. Over the past few years, we've updated our capital allocation process to focus on strategic, high return, value adding projects. As we improve this process, we are allocating an increasing amount of capital to value adding projects versus value maintaining projects. We anticipate that this capital efficiency will enable us to maintain this level of capital investment even as we increase our scale.

Speaker 3

Turning to Page 15. The foundation of our value creation strategy is disciplined management of our investment grade balance sheet. This strategy provides Sunoco incredible access strong liquidity and low cost. In the Q2, we had over $1,400,000,000 of liquidity, a weighted average maturity of 6.8 years and a weighted average cost of debt of 3.9%. We repaid $75,000,000 of debt in the quarter and reduced net debt to adjusted EBITDA to 2.8 times.

Speaker 3

On Page 16, as our guidance for Q3 2024. Guidance for Q3 2024 adjusted EPS is $1.83 to $1.60 We expect consumer volumes to remain on trend in Q3 and expect year over year volumes to increase due to acquisitions and improvements in metal packaging. We expect industrial volumes to improve in Q3 as we are experiencing improved order rates and backlog, especially in the North America paper markets. However, we are not yet anticipating robust recovery. Industrial price trends are expected to improve and price cost is expected to improve sequentially.

Speaker 3

OCC is expected to remain flat in the quarter and TAN vending chip index is expected to reflect market increases later in the second half of twenty twenty four. We are reaffirming our guidance for full year 2024 adjusted EPS to $5 to $5.30 Similarly, we are reaffirming our full year 2024 adjusted EBITDA guidance to $1,050,000,000 to 1,090,000,000 and our operating cash flow guidance of $650,000,000 to $750,000,000 Now Roger will further discuss the outlook for the business.

Speaker 4

Thanks, Rob. Please turn to Page 17 for a view of segment performance drivers for the Q3 of 2024. In the Consumer segment, we expect sales to be up both sequentially and year over year. Our Metal Packaging business is performing well. Sales are expected to be up sequentially and year over year.

Speaker 4

FUKEN sales are solid as we're entering the pack season for fresh vegetables and aerosol sales are strong as the demand for household products is improving after destocking in the same period in the last year. We continue to monitor steel supply based on domestic constraints and tariff uncertainties. So our team is doing a great job to support our customers through strategic purchasing and other and other discretionary food products. We believe lingering high shelf prices continue to mute consumer purchases and we're looking to the future for promotions to stimulate higher volumes. As Howard mentioned earlier, we continue to invest and innovate to meet sustainable packaging goals of our customers and have a multiyear funnel of great opportunities to support future rigid paper can growth.

Speaker 4

In our ThermoForm Flexible Packaging business, we anticipate sales to be flat sequentially, but up year over year. Flexible's organic volume is solid and total volume is aided by the NFL acquisition in Brazil, which continues to perform above our expectations. We remain in the early stages of our integration of flexibles and thermoforming businesses and we continue to see upside opportunities and synergies for combining these as well into the future. So in total for the consumer segment versus same quarter last year, we anticipate that organic volumes will be up mid single digits, price cost will be slightly negative year over year and we expect continued positive productivity across each of our consumer business. In Industrial, we expect sales to be flat sequentially from last year and up year over year from organic volume growth and acquisitions.

Speaker 4

In our North American paper business, volumes in support of tissue and tile consumer end markets remain solid. The capacity utilization of our North American paper operations will remain strong in the Q3 at well over 90%. The same is true for our North American converting businesses where volumes are up year over year from increased demand in our tubes and core business for the film industry, which is driven by both consumer and industrial end markets. As Rob said earlier, this is certainly not a robust recovery, but volume levels have increased over the depressed levels that we saw last year. Price cost is impacting industrial profitability to a lesser degree than in the first half of 2024, but remains a drag year over year as higher input costs for raw materials and labor have not yet fully been recovered in our announced price increases, but we do expect that the contracted price resets will reflect improved pricing in the second half of the year.

Speaker 4

Similar to consumer, we expect industrial productivity to be positive across all industrial businesses in the 3rd quarter and we expect total industrial volumes up low single digits year over year. In all other, sales will be lower on a year over year basis after the sale of our Protective Solutions business. Sales will be up sequentially from seasonally higher volumes from our temperature assured packaging business. We also expect year over year margin improvements driven by improved mix and profitability. Our teams continue to do a real fantastic job on the productivity front as shown by our first half twenty twenty four results.

Speaker 4

As Howard mentioned earlier, our clear and focused investments in value generating capital over the last several years are really paying off. These investments coupled with effective cost management and a strong focus on continuous improvement across the organization have also underpinned outstanding productivity performance. And I just want to as well as Howard and Rob had done, thank the entire organization for these results. So with that, Howard, back to you.

Speaker 2

Great. Thanks, Roger. In closing on Page 18, I just want to take a moment to remind everyone of plans we laid out to deliver long term shareholder value. At our Investor Day earlier this year, we provided our outlook over the next 5 years for targeting adjusted EBITDA of $1,500,000,000 of high teens EBITDA margins. And we're expecting to generate cumulative operating cash flow of $4,000,000,000 to $5,000,000,000 all while we remain committed to growing and paying a competitive dividend.

Speaker 2

We are in full execution mode of our next era enterprise strategy and certainly with the highly strategic simplifying the company and unifying our global operating model to improve financial results while maintaining our disciplined capital structure. So I'm really looking forward for you to see what's next for Sunoco. And with that operator, we'd be happy to take any calls or questions.

Operator

Certainly. And our first question will come from Matt Roberts of Raymond James. Matt, your line is open.

Speaker 3

Hey, good morning everybody and

Speaker 5

thank you for the time. Rob, on the incremental divestitures you mentioned, I wanted to wonder if you could provide any additional color on other product lines or segments that you've expanded that program to and any type of EBITDA contribution you're considering? Just trying to get a sense of the magnitude of what you're looking at and what the business will look like on the other side?

Speaker 2

Back in February.

Operator

And you're on the stage. You may re answer.

Speaker 2

Operator, are you there?

Operator

I'm here on the line with you. You may re answer your question.

Speaker 2

I'm not sure where we are in terms of the Q and A process. So Matt, is your question still pending?

Operator

I will move Matt Roberts back to the stage. And Matt Roberts' line is open. He is on the stage.

Speaker 5

Hey, Howard. Sorry about that. Yes, so still on the first question really just

Speaker 2

Operator, I'm not sure what's happening here. Matt or audio wasn't working, but

Speaker 4

I think you need to re answer it.

Operator

The speaker line is promoted to the stage. However, when I promote Matt to the stage, it removes the speaker line.

Speaker 2

And I'm not exactly sure how to resolve that.

Operator

I can promote George Staphos. One moment.

Speaker 2

Let's try George and see if we can get the call rolling.

Operator

I'm bringing George to the stage now.

Speaker 6

Everyone, can you hear me okay?

Operator

And George's line has been promoted.

Speaker 6

Always nice to be promoted. Can you guys hear me okay? Operator, I'm not hearing anybody on the other end of the line.

Operator

One moment.

Speaker 6

I can ask a question, but I'm not sure they'll hear it.

Operator

Please ask your question and I'll promote them back to the

Speaker 6

stage. Okay. Thank you. I think I was going to ask the same question as Matt, which is, can you talk to what else you're adding perhaps to the divestiture queue? And Rob, maybe a specific question on ROIC.

Speaker 6

You talk about ultimately want to be the most disciplined capital allocator and have the highest ROIC in the industry. What is the starting point for ROIC in your view? Where are you relative to peers? And what's the goal in 3 years? So divestitures and ROIC kind of my two questions.

Speaker 2

I positioned at this point in time to talk about specific businesses that we're targeting. Our thought processes have evolved as we look at the materiality of the current transaction acquisition and really allowed us for just the opportunity to take a look at 2 things. 1 is to pull forward on the strategies. That simplification strategy where we have yet to define to you guys exactly what we're looking at. And I know you're trying to get to that, but we do we will be bringing it to you in the very near future.

Speaker 2

But it allows us to do a couple of things. 1 is move forward the simplification strategy and improve the capital structure of the company on a more rapid basis than otherwise we had thought. So more to come on that side and I will pass it on to Rob on the roll request.

Speaker 3

Yes. Thanks, George. And hopefully, I've been promoted too. From a ROIC perspective, we're really excited about this capital allocation program and the initial results that we're getting. It's given us a lot of conviction to really move forward with the strategy from a portfolio perspective.

Speaker 3

And as we think about that, that's going to give us a lot of opportunity to further expand the ROIC on two fronts: 1, from doing really smart capital investments and deploying our operating model and then also managing the portfolio in a really active way. Where we're starting now is we're above 11%. So, we feel like that's a strong ROIC, but one that we can definitely improve. We don't have a specific goal, but I would tell you that the focused businesses in our portfolio have over 20% ROIC. And so we're investing with expectations that the ROICs of our investments exceed that, and we feel really good that we'll be able to meet those expectations.

Operator

And one moment for our next question, which comes from Ghansham Panjabi. One moment.

Speaker 7

Thank you. I'll just ask one question just to eliminate future issues. On the consumer business, maybe you can give us a bit more color on the step function and productivity that you generated in 2Q, which I think was $25,000,000 for the segment versus $15,000,000 in 1Q. What drove that differential because that was obviously the biggest component of your margin increase? And then second, in terms of the outlook for consumer, I think you said mid single digit growth in the back half of the year.

Speaker 7

Is that just a function of purely easier comparisons, the lapping of inventory destocking or just directional increase in promotional activity? What's behind those numbers? And I'll turn it over after that. Thanks.

Speaker 4

That's where we focused a tremendous amount of our capital, productivity capital, focus on generating incremental capacity out of our best lines. Automation is a huge effort for our consumer businesses and we've got a backlog of automation projects for the company expanding until the end of 2025. And then a real focus on cost control and getting our footprint right with a number of footprint consolidations. You add that with improving volume as we said back in February.

Speaker 5

If you remember

Speaker 4

back in February, we laid out $300,000,000 $500,000,000 of productivity over the planning period, which averaged about $100,000,000 a year. Obviously, we're ahead of that pace. We said at that time, improving volume would help us increase and continue to drive to the high end of that $300,000,000 to $500,000,000 level. So I'd say it's across the company, not just consumer, but yes, very strong. It was manufacturing productivity driven by the plants on a day to day basis.

Speaker 4

On second half consumer, you're right, some of that is versus an easier, I guess, comparison with Q3 last year being our most difficult quarter from a consumer volume standpoint. But as I said in my prepared comments, we're seeing the effects of any kind of inventory build through coming out of COVID, especially in our metal can business go away. All our teams are leading in service and quality and we continue to gain some share in that area. So yes, it's a combination. We've not yet seen a big impact of promotions, but we're expecting that based on what we hear from our large consumer customers to see more promotions coming as we get into the second half of the year.

Operator

Thank you. And our next question should come from Mark Weintraub of Seaport Research Partners. Your line is open.

Speaker 8

Thank you.

Speaker 2

Operator, we've lost Mark, or at least we're not thinking

Speaker 8

about that. So I'm hoping you can hear me now. So just following up on the expanded divestiture program, does that potentially have implications for the plan to issue up to $500,000,000 of equity? And then second, on rigid paper containers, I know you've been very optimistic on the business 6 months, 12 months ago and certain I thought there were certain opportunities you thought were going to be coming through this year. Are those just delayed?

Speaker 8

I know you mentioned the high shelf prices, but maybe a bit more color on what's going on in that business? Thank you.

Speaker 2

But we could with the appropriate valuation in terms of divestiture draw that down. So I'll leave that where that is and on our rigid paper container business. Really it's almost a discrete issue with a couple of larger customers still dealing with the pricing dynamics in the marketplace and getting that right. So we view that as a short term type of phenomenon. Really when we're talking about RPC and the amount of capital we have been putting towards that business, That's next year following a multiyear journey in terms of new facilities that are starting up in Latin America and Asia, new capacity we're adding around the world.

Speaker 2

Just like any capital investments, it will take time for those to truly start showing up in a material fashion. But the current situation is more discrete than that.

Speaker 4

Yes, Mark, this is Rod. Rod, I'd just add. If you look at the Q3, I mean, there is actually strong growth in the rigid paper can business outside of North America. Just to build on what Howard said, it's really a North American issue, the discrete issue that Howard talked about. So the investments we're making driving sustainable packaging across Europe and paper, investing in stack chip capacity outside of North America is performing exactly as expected.

Speaker 4

So really it's just waiting for that North American volume to get back to more normal levels.

Operator

And our next question will come from Gregory Autrystallis of Citi. Your line is open.

Speaker 9

Hi, good morning everyone. Just a few quick ones for me. So just on consumer, I guess, first. You spoke about kind of this modest uptick in discretionary categories in the Q2. I think snacks were referenced.

Speaker 9

So I'm wondering if you've seen any other mix trends that you would consider notable in consumer that maybe suggest to you that there's some underlying shifts in consumer trends going on or any other mix items that you think are worth flagging? And then maybe just one more on productivity. Year to date, you've gotten over 100,000,000 dollars How do you think about the cadence of productivity versus the $300,000,000 to $500,000,000 that you guided to at the Investor Day for $24,000,000 to $28,000,000 And just kind of has your day productivity came in above or below your expectations? And is that kind of pull forward from the $300,000,000 to $500,000,000 or is that incremental? Is there incremental upside to those numbers?

Speaker 9

And I'll turn it over.

Speaker 4

Yes, it's Roger. On the consumer volume, I think the only highlight, if you look at cocoa pricing, any chocolate type products from our customer base have been hit by significant inflation. So as we look at promotions and price on shelf, any chocolate type products we're seeing continue to be in a pretty high range and that's generating obviously some pullback from the consumer. Beyond that, other than the one item that Howard has already mentioned in North America, we're seeing starting to see some improved demand versus same time last year and quarter over quarter outside of North America. So for me, again, it's really a North American specific challenge and hopefully promotions and some pullback on pricing on the shelf will help with that.

Speaker 4

On productivity, I wouldn't really call it a pull forward. I think again, we said in February, we had a range of $300,000,000 to $500,000,000 that we could push towards the top of that range with excellent execution and good volume and we're starting to see volume improve. Obviously, we can come back and relook that and see if we can improve on that. So it's again, it's an impact from the capital investments we're making, the good work our team is doing. And I think the other significant event this year on the industrial side is a great job our paper team is doing in North America from a capacity utilization standpoint.

Speaker 4

As you know, we've taken out some high cost capacity, put more product into our lowest cost best running mills and we've been running in that mid-ninety capacity level for the last few quarters and that generated some pretty significant productivity for our paper business as well. So I think for me those would be the highlights versus what we've already talked about.

Operator

Our next question will come from Matt Roberts of Raymond James. Your line is open.

Speaker 5

Hey, thanks. Hopefully, you all can hear me this time. So a question on paper price. So last quarter when you spoke to this, you guys were constructive on the February increase that was then partially reflected in the index shortly thereafter. So maybe if you could speak to what you're seeing in the recently announced price increase.

Speaker 5

Are you seeing that reflected in open market contracts? And how is how are demand and backlogs trending compared to the environment last quarter when the price was reflected in the index? And then to that, does the outlook or the guidance anticipate any index pass through?

Speaker 3

Thank you.

Speaker 4

Yes, Matt, it's Roger. Yes, I'd say it's fairly similar. I know we just talked about capacity utilization in our North American paper mills. AFPA just published the latest results for the Q2. You see backlogs continue to be pretty solid, pretty flat with where we were same time last quarter.

Speaker 4

As far as open market pricing, we've been very pleased with the contracts that we have that are open market. And both of the increases we got high yield out of the first and then process getting high yield out of the second. So as Rob said in his prepared remarks, we're expecting some of that to come through from an index pricing in the second half of the year, timing to be determined of course, but we expect it to come through. We didn't build it into our guidance, but if it comes through in the next month or 2, it will have an impact really late this year, but more significant impact on 2025. So I'd say at this point stable, pretty stable where we were in the Q2 and as far as mill utilization pretty stable to where we were in the second.

Speaker 5

Okay, great. Thank you for the additional color there, Roger. Kind of to a different point here on your leverage, in regard to maintaining your investment grade, it seems like you do have some buffer where your current ratings are to maintain that investment grade rating. But is there some kind of minimum leverage number or benchmark throughout the next 24 months post close that you think you need to achieve in order to maintain that investment grade rating? And along those lines, I mean, maybe holistically, why is that so important when some of your other peers don't stress it as much?

Speaker 5

I mean, do you have any needs for incremental debt here or any covenants depending on maintaining that existing rating?

Speaker 3

Yes, that's a good question. Certainly, we don't feel there is no bright line in terms of leverage for investment grade ratings. We have really constructive dialogues with both S and P and Moody's, and we think that those are really productive discussions that we've had and will continue to have around the rating. They feel very comfortable with kind of the prospective plan for financing eviosis. And as we said on the call, we're continually thinking about shareholder friendly ways to improve that financing plan.

Speaker 3

And we think that really revolves around besides just advancing the strategy and really thinking about the portfolio, we would we're creating plans to delever more quickly than we originally anticipated. And as Howard mentioned, we're also evaluating the use of equity, whether or not that's going to be the most efficient source of funding for us. So, we're being very thoughtful about that and we've got a very constructive relationship with the rating agencies. They do have kind of their own benchmarks around what they would like and they publish those, but I would say that that's part of the constructive dialogue that we have with them because we're both a paper company and a packaging company from that perspective. And we think as we become more of a packaging company, we'll have a lot more leeway in terms of ratings.

Speaker 3

And that's a really constructive dialogue that we have there.

Speaker 5

Great. Thank you, Rob, and everyone else for the time.

Operator

And our next question will come from George Staphos of Bank of America. Your line is open.

Speaker 6

Hi, everyone. Thanks again for taking my questions. Three quick ones. First of all, can you talk to the other specific expenses that impacted Q2 and why they go away for the Q3? As far as potential divestitures go, question 2, could some of these actually occur within the consumer segment as it's currently composed?

Speaker 6

And how would you deal with any trapped overhead, the investment that you've made in the past on your innovation centers, which leverage paper and flexibles and metal? And my last question on ROIC, Rob, back to that. I know you want to be the strongest ROIC company. I know you're at you said 11% or 12%. Why not have a goal if that's what you aspire to be?

Speaker 6

Why not have a percentage target that we can keep evaluating? Thanks and good luck in the quarter.

Speaker 9

Yes.

Speaker 3

Thanks, George. On the other specific expenses, it was really around a couple very discrete items. 1 was just some employee expenses that were extraordinary really on a year over year basis. They were just lower last year than you would normally expect. 2nd is, we had an AR charge that was specific to one customer that we really wanted to be conservative around the expectation for receiving that, and so we took a relatively meaningful charge.

Speaker 3

And then we're also kind of constantly evaluating the accruals, and we had an accrual that was meaningful as there was a catch up from a change in our rate. And so those things all kind of sum to a relatively meaningful amount for the quarter, which we thought was extraordinary and worth calling out just from our comparable basis. Really, the point there is that if you we don't expect those to reoccur. And then in the Q3, you should anticipate our margin to be much higher than it was in the second quarter, more in line with the proxy that we gave. In terms of divestitures?

Speaker 2

Yes, I think, yes, it could be in the consumer area. And George, I'm sorry, if it sounds like we're being coy, we are in the midst of having to manage a process that involves internal team members, customers, etcetera. And we'll be rolling out as soon as possible exactly what our plans are. But we do expect, as we said several times during the course of this call, that this should be it will help us do 2 things. 1, our goal of simplification as well as the overall balance sheet implications and financing structures.

Speaker 2

So more to come on that. 2nd part, I hate to ask for a follow-up, but the expanded cost, Sam, you were referencing, we see that as a real opportunity across the entire company as we further simplify, as we saw in our first tranche, that we where we came down to the structures that we have today, we generated significant SG and A productivity. This is as part of the leverage as we continue to so I don't see a real concern as it relates to any type of stranded costs if that was indeed your question. It's actually opportunity.

Speaker 3

Yes. And on ROIC, George, I love you. You're a finance guy at heart. We love to have targets, and we definitely do internally. We're constantly thinking about how we can push the edge.

Speaker 3

It's a big part of our strategy to get the ROICs right. As we get the portfolio more balanced, we can come out with a total company expectation for ROIC. But as I said, we think that it's going to be a really constructive number that will be will really show the value of these legacy portfolio that we have and also the ability that we feel like we're going to have to drive really meaningful value in some of these newer businesses that we're really investing in now.

Speaker 8

Thank you.

Operator

And one moment for our next question. I'm showing no further questions. I'll hand it back to management for closing remarks.

Speaker 1

Thank you all for joining us today and our sincere apologies for the technical difficulties. We will certainly follow-up on that for future improvement. But if you do have any follow-up questions, please contact me and we'll be happy to set up a follow-up discussion. And we look forward to providing further business updates on our progress in the coming weeks months. And thank you all again and have a great day.

Operator

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

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Key Takeaways

  • Sunoco delivered Q2 adjusted EBITDA of $262M on sales of $1.6B with a 16.2% margin, driving adjusted EPS of $1.28 and $109M in operating cash flow.
  • Operational productivity totaled $51M in Q2, exceeding $100M in H1 and contributing to over $180M in LTM savings, fueled by targeted capital investments and expense management.
  • The company announced the Eviosys acquisition, expected to close in Q4’24, which will expand its global can packaging footprint, deliver ~$100M in annual synergies, and be immediately accretive to earnings.
  • In the Consumer segment, EBITDA rose 11% to $148M (15.9% margin) driven by $25M of productivity gains, while the Industrial segment saw 10% volume growth but faced $47M of negative price‐cost impacts.
  • Sunoco reaffirmed Q3 guidance of $1.60–$1.83 in adjusted EPS and full‐year 2024 targets of $5.00–$5.30 EPS, $1.05–$1.09B in adjusted EBITDA, and $650–$750M in operating cash flow.
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Earnings Conference Call
Sonoco Products Q2 2024
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