Q1 2022 Sonoco Products Co Earnings Call

Thank you for standing by and welcome to the Sonoco products first quarter 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please.

We advised that todays call may be recorded should you require any further assistance. Please press star zero I would now like to hand, the call over to Roger Schrum, Vice President of Investor Relations. Please go ahead.

Thank you Latif and good morning, everyone and welcome to Sunoco, Inc. First quarter 2022, Investor Conference call. Joining me today are Howard Coker, President and Chief Executive Officer, Rodger Fuller, Chief operating Officer, and Julie Albrecht Chief Financial Officer.

Also I am pleased to announce that Lisa weeks has joined Sunoco and will be my successor as head of Investor Relations.

It is on the call with us today, and I will be working with her on her transition during the next several months, we're glad to have Lisa as part of the Sunoco team and welcome aboard.

A news release reporting our financial results was issued before the market opened today and is available on the Investor Relations website at Sonoco Dot Com. In addition, we will reference a presentation on our first quarter financial results, which was also posted on the website. This morning.

Before we go further let me remind you that today's call and presentation contains a number of forward looking statements based on current expectations estimates and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties. Therefore actual results may differ materially. Furthermore, today.

<unk> presentation includes the use of non-GAAP financial measures, which management believes provides useful information to investors about the company's financial condition and results of operations.

Further information about the Companys use of non-GAAP financial measures, including definitions as well as reconciliations of the most of those measures to the most closely related GAAP measure is also available in the Investor relations sections of the website.

Now with that introduction I will turn it over to Julie.

Thanks, Roger I'll begin on slide three where you see that earlier. This morning, we reported first quarter earnings per share on a GAAP basis of $1 17.

And base earnings of $1 85 per share. This very strong result is 50 cents higher than the top end of our original guidance range of $1 25 to $1 35 per share and <unk> <unk> above the updated range that we provided on March 22nd a $1.

70 to $1 80 per share.

In addition, these results are 85 cents ahead of the one dollar of base EPS that we delivered in the first quarter of last year with our legacy businesses driving 50 per share of this increase.

The balance comes from the addition of Sunoco metal packaging to our portfolio, reflecting strong operating results that are net of interest expense on the debt we issued to fund the acquisition.

Related to the 68 per share difference between base and GAAP EPS I'll first highlight that most of these non base items are driven by the metal packaging acquisition and or significant inflation and most notably the dramatic increase in steel costs. This year.

The largest non base item, a 37 per share for acquisition related net costs driven by the metal packaging transaction.

We're primarily from the partial write off of purchase accounting step up on the acquired inventory.

Cash based professional fees.

Next we had an add back of <unk> 14 per share related to an acquisition intangibles amortization expense, which as we announced in February is it.

Change in our base earnings definition, starting this year.

All of our prior year results have been recast to reflect amortization expense as non base.

The next item was <unk> 14 per share increase in our LIFO reserve driven by the significant steel inflation and on a go forward basis any changes in our LIFO reserve will be treated as non base.

And finally, we have 11 per share related to restructuring and asset impairment and an <unk> <unk> per share net gain and other items.

I will note that these restructuring and impairment charges include <unk> <unk> per share related to the write down of the net assets and our small Russian operations Howard will talk about our planned exit from Russia, and a few minutes.

So moving to the base income statement on slide four and starting with the top line you see that sales were $1 billion $771 million up 31% from the prior year.

I'll review more details about our key sales driver on the sales bridge in just a moment.

Base gross profit was $416 million $138 million above the prior year.

This performance resulted in a 23, 5% base gross profit as a percent of sales, which was 300 basis points higher than the first quarter of last year.

Our SG&A expenses of $155 million increased by $30 million year over year. The key driver. The key drivers were higher expenses for employee compensation and benefits strategic expenses and the lack of nonrecurring COVID-19 incentives that we received last year.

<unk>.

So all of that's resulting in operating profit of $261 million, which is 72% above last year I will discuss the key drivers on the operating profit bridge in a few minutes.

Net interest expense of $19 million was $1 million higher than last year due to the higher debt balances related to the metal packaging acquisition.

Income tax expense of $61 million was $27 million above last year due to higher pre tax profits, partially offset with a slightly lower tax rate.

So moving down to net income our first quarter 2022 base earnings were $183 million compared to $101 million last year.

Now looking at the sales bridge on slide five you see the volume mix was higher by $27 million or 2% for the company as a whole.

This increase was driven by our consumer segment and our all other business group and was partially offset by lower volume in our industrial segment.

Consumer packaging volume was up $24 million or about 4% driven by strong demand growth in flexible packaging and in plastics food.

For our industrial paper packaging segment volume mix was down $12 million or about 2%, reflecting among other things severe winter weather supply chain disruptions and operational closures in China stemming from COVID-19 restrictions.

Volume declines were concentrated in Asia, and Europe tube and core operations, North America recycling as well as fiber protective packaging.

And finally, our all other group saw an increase of $15 million or about 9% and this was driven by stronger volume across almost all of these businesses.

So moving over to price you see that selling prices were higher year over year by $275 million.

60% of this increase was in the industrial segment with about 35% in consumer and the balance in all other.

Most of these price increases are driven by our continued work to recover escalating costs around the globe.

Moving across the acquisitions and divestitures, you see a topline positive impact of $141 million, mostly driven by the metal packaging acquisition, but also reflecting sales removed with last year's U S display and packaging divestiture.

And finally, the sales impact from foreign exchange and other was negative by $25 million, mostly associated with foreign currency translation on a stronger U S dollar year over year.

Moving now to the operating profit bridge on slide six and starting with volume mix. The contribution to sales of $27 million had a $3 million positive impact on operating profit.

This low drop through was due to the negative impact of sales mix across numerous businesses.

Now price cost I will remind you that this category includes the earnings benefits from higher selling prices as well as the impact of total inflation.

In the first quarter, we had $85 million of favorable price cost with most of this has been a benefit generated in our industrial and consumer segments.

Approximately 45% occurred in our consumer segment, which was driven by the timing of price cost changes and recovered about half or just over half of the negative price cost incurred by these businesses in 2021, we.

We do expect our consumer segment margins to normalize beginning in the second quarter.

The balance of our first quarter price cost benefit was mostly generated in our industrial segment driven.

Driven by price increases to recover inflation and supported by continued strong demand driving rising market indices like Tan bending chip.

As usual there was an OCC market pricing slide in the appendix that shows that southeast OCC averaged $160 per ton in the first quarter.

While this is well above the 87 per ton average in the first quarter of last year Southeast OCC declined sequentially in the first quarter from an average of $183 per ton in the fourth quarter of 2021.

Next on the bridge is the impact to total productivity you see that our total productivity was $1 million year over year with a favorable impact from our consumer segment, partially offset by a negative impact in our industrial segment and all other group.

At a high level, our productivity results were negatively impacted by supply chain weather issues and labor shortages across numerous businesses.

Now moving to acquisition acquisitions and divestitures you see the net addition of $49 million of operating profit from our metal packaging acquisition as well as the divestiture of our U S display and packaging business.

Lastly, you see that the operating profit change and other was unfavorable by $30 million with the main driver being higher SG&A expenses that I mentioned before.

Moving to the segment analysis on slide seven you see that our consumer packaging segment sales were up nearly 50% driven by the addition of metal packaging higher selling prices as well as increased demand.

Consumer segment operating profit increased by 113% driven by the metal packaging acquisition favorable price cost results and the improved volumes.

Our consumer segment margin increased by 600 basis points to 20% versus the first quarter of last year when the margin was 14%.

Shifting to our industrial segment sales grew by almost 24% mainly due to year over year price increases mostly to cover inflation in raw materials as well as operating expenses.

Industrials operating profit increased by almost 39% due to improved price cost dynamics compared to last year.

Our industrial segment's operating profit margin was 10, 4% up by 120 basis points when compared to nine 2% last year.

And finally, all other sales declined slightly reflecting the sale of U S display and packaging, which was almost completely offset by strong volumes and year over year price increases mostly to cover inflation.

Operating profit decreased by 22, 6% as the negative impacts from the DNP divestiture and productivity more than offset the positive impacts of price cost and volume mix.

And our all other margins decreased to seven 1% from the prior year quarter's nine 1%.

For the total company sales were up nearly 31% and operating profit increased by 71%, resulting in a company wide operating margin of 14, 7%.

So shifting to cash flow on slide eight about halfway down the slide you'll see that our first quarter operating cash flow was $1 million compared with $139 million last year.

This decrease was almost entirely driven by an increase in cash consumed by working capital compared to the same period of 2021.

Our higher working capital balances. This year are driven by increased sales volumes seasonal inventory build and of course inflation.

Our net capex spending in the first three months was $67 million compared to $39 million in the first quarter of last year.

While spending did continue for project horizon. This year over year increase was largely driven by increased strategic investments and consumer growth and productivity projects.

This takes us to free cash flow, which was a use of $66 million for the first quarter compared to free cash flow generation of $99 million last year.

Finally, we paid cash dividends of $44 million in the first quarter of this year compared to $45 million in last year's first quarter.

Our dividend was unchanged on a per share basis, but this reduced reduced cash payment was due to lower shares outstanding driven by our share repurchase activity in 2021.

On slide nine you can see that our balance sheet and our liquidity position remained strong and reflect the net assets and debt associated with the metal packaging acquisition.

Note that we've completed our preliminary purchase price accounting work and this is reflected in our first quarter balance sheet.

Next on Slide 10, you see our guidance for the second quarter and our updated guidance for the full year 2022.

So focusing first on our second quarter guidance, we're projecting a range of $1 20 to $1 30 base earnings per share with a midpoint of $1 25.

This midpoint represents a strong 34% increase over the 93 of base EPS, we delivered in the second quarter last year.

This increase was driven by slightly higher volumes in our legacy businesses continued favorable price cost results and of course. The addition of metal packaging.

We're raising our full year base EPS guidance to $5.25 to $5 45.

Her share, reflecting our first quarter earnings beat as well as our solid outlook for the second quarter. This new full year midpoint is a 14% increase from the $4 70 per share midpoint of our original February guidance.

In addition, we are increasing our full year EBITDA guidance to a range of $995 million to $1 billion $45 million.

Both our operating and free cash flow guidance remain unchanged from prior guidance. Despite our outlook for stronger earnings due to inflation and increased business activity. We do remain cautious about our working capital balance trend.

So that concludes my comments and I'll turn it over to Howard now.

Okay, well, thanks, Julie and good morning, everyone. Let me start with some brief comments on our record first quarter performance I'll bring you up to date on our capital spending plans.

And then provide some thoughts about market trends.

During the second quarter.

Our team delivered exceptional results during the fourth quarter, which exceeded the high end of our updated guidance provided towards the end of March.

I've been with Sunoco for more than 35 years and this is the first time, but all I can remember that both our consumer packaging and industrial packaging segments achieved record top and bottom line performance in the same quarter.

In addition, we welcome metal packaging to the Sonoco family on January 26.

We were very pleased with our better than expected first quarter results.

We continue to make solid progress on our integration activities and look forward to the contributions the table Mike.

To our future success.

You may have read that we recently named <unk> President of metal packaging honest will work alongside Jim Peterson to ensure a seamless transition.

So if a veteran can make or having run our north American paper can in EMS and closures business since 2018.

I have complete confidence in him.

Our overall metal packaging team I want to also thank Jim for his willingness to stick around over the coming months to help on us in this transition.

In addition to building the metal packaging team our integration process is well underway, we've identified and are implementing several synergy opportunities, including optimizing raw material purchases leveraging our indirect spend and coordinating our supply chain logistics combined we believe we should easily meet our target of <unk>.

<unk> million dollars in cost savings by 2024.

Another key element to our future success is our strategy to invest in ourselves as illustrated by the nearly $325 million. We plan to spend this year on capital projects to drive both growth and margin improvements in our core businesses.

During the first quarter capital spending almost double from spending in the same period last year.

And we have recently approved several new important projects.

One of which will have a spending just over $11 million to add a second paper can line to our newest operation in Brazil.

This expansion will double our current capacity to produce stock chip cans and as necessary to meet growing customer demand.

In total we expect to invest approximately $60 million in paper, Canada expansions and new technology upgrades over the next two years in the U S. Brazil Europe .

Asia.

All right.

Obviously in Malaysia, we expect to spend about $25 million in capital on the metal packaging business this year, including increasing <unk> production in our Milwaukee, Wisconsin, and Chestnut Hill, Tennessee facilities.

We're also in the process of spending approximately $60 million of new capital over the next two years and our flexible packaging operations.

Flexible business achieved record sales in the first quarter, including 13% volume mix growth.

We're focusing on growing our niche food markets and launching new products with new customers.

Our latest investment just to add new pouch, making capacity into our Hickory, North Carolina operation to increase our production capabilities by about 45%.

This addition will increase our competitive position in the growing pouch market.

Finally, after recently, starting up new fiber protective packaging lines in Poland in Tulsa, Oklahoma, We have now approved capital to build a new production facility in Turkey to serve one of the largest appliance makers in the region.

Our durable and stackable <unk> packaging will be used to protect the ovens dishwashers washing machines dryers and.

In other consumer electronics.

Demand for this unique paper based protective packaging is primarily driven by our customers' request for more sustainable options, replacing RASM.

Cereals.

As Julian mentioned, we took an asset impairment charge in the first quarter, reflecting our decision to exit our small industrial packaging presence in Russia.

These operations generated approximately $25 million in annual revenue last year, and we have about 60 employees, primarily serving only and country customers that meet all applicable laws were in the process of winding down our involvement in these operations.

And they are receiving no materials or investments.

<unk> at this time.

Sonoco is broader business centers very limited contact with suppliers in Russia.

We have so there has been transitioned to other vendors.

The human toll overall about the war has been on <unk> and I want to thank our employees for all.

All they have done and donating funds food clothing medical supplies, along with one of the board and even blood to help them massive effort to provide relief of millions of refugees.

Sunoco has done a $50000 to the international Red Cross refuge relief efforts and we will continue to look for ways to support our people in the room.

Sure.

Looking forward, we're excited about our accelerated start to the year and combined with our expectation for continued solid business activity in the second quarter.

About our outlook for strong 2022 performance.

Because of the timing of certain one time cost price benefits experienced in the first quarter, we anticipate the margins in our consumer segment will normalize in the second quarter.

In addition, we expect to continue benefiting from the integration of the metal packaging acquisition as we move through the year.

Due to supply chain challenges, which impacted our ability to obtain sophisticated electronics equipment. We have made the decision to delay the conversion of our hartsville paper machine corrugated medium to uncoated recycled paperboard to the third quarter.

This delay is expected to result in less downtown and should provide more favorable results in our industrial the industrial segment in the second quarter.

Despite the delay we are very pleased with the progress, we're making and we're already seeing the benefits from completed parts of the project, including the new Pulping system, which is now operational along with other infrastructure changes, which are improving our overall logistics.

We also expect modest improvements in our all other group of businesses as our teams continue driving commercial and operational improvements.

And our <unk> business, we successfully completed a $28 million order for Covid vaccine shippers in the first quarter.

<unk> continues to provide logistics services.

In addition to new product launches, we're seeing our base temperature assured business improve a general medical activity is picking up while COVID-19 cases to corn.

Within all of our businesses, we remain diligent and stay ahead of the price cost curve and continue to press necessary price coal price cost increases to offset continued raw material energy freight and other non material inflation.

Our teams are also continuing to Russell with supply chain disruptions, particularly in specialty materials, such as storage diseases certain resins and other.

Paper, making chemicals.

As we mentioned at our December analyst meeting, we're pursuing a series of self help actions over the next few years that we believe will drive significant EBITDA growth and margin improvement.

These actions are tied to our efforts to simplify our operating structure to create a more effective organization.

We also remain focused on managing our portfolio for fewer.

Larger businesses, we have.

Have distinct competitive advantages.

In closing, we remain committed to returning cash to shareholders and achieving our objectives to be the benchmark company for yield and stability in the packaging industry.

Our announced 9% increase to our quarterly dividend is an illustration of that commitment and a reflection of our expected strong financial performance going forward.

As a reminder, $1 96 per share annualized dividend provide shareholders with approximately a 3% yield to our stock price has more than doubled the dividend pay by the S&P 500.

I'm not going to pay dividends for 388 consecutive quarters dating back to $19 25, and we have increased the dividend 40 consecutive years.

Now with that operator would you. Please review the question and answer procedures.

Okay.

Yes, Sir as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster. Our first question comes from the line of Mark Weintraub of Seaport Research. Your line is open.

Okay. Thank you congratulations first obviously a fantastic quarter.

Question for you just as we don't get ahead of ourselves you did reference the one time cost price benefits in the first quarter and I do see that you raised guidance for the next three quarters. So certainly the underlying earnings power seems to indeed be stronger, but could you bracket how significant what you.

Wood.

Define as one time cost benefits in the first quarter were.

Sure Mark.

Basically what we have seen in the first quarter was a net of between 30 to 35 cents.

And then really materializing in the consumer sector.

So that is that is what we are viewing us.

The one time.

Benefit in a quarter.

But what I do want to do is walk you back.

If you net that out.

We know that the underlying performance of the business.

That out and we were about a $1 50.

Against last year.

Sure.

For share performance. So we are absolutely thrilled with how the businesses are.

Performing and how they're proceeding jewelry talking about price cost $85 million.

In the quarter alone.

Split.

Between.

Australian consumer we've got select margin improvements that we talked about and of course, we are.

At a base.

Contribution from the acquisition as well so.

About 30 to 35 is a one off in <unk>.

And just a real positive outlook on a go forward basis.

Super and one follow up.

Youre thinking about the rest of the year what type of inflation expectations are you building in is it sort of more of the same more inflation.

And are you beginning to see any signs of flattening out for instance have been some commentary that maybe freight is starting to even come in a little bit are you seeing any of that or is that.

Still to be hoped for but but not apparent yet.

Hey, Mark it's Roger good. Good question, Yes, we are building a more more inflation than we did when we last spoke to you back in February .

The most significant really is resin we talked about it I think at 8% to 10% increase in resin in February now its more like 18% to 20% so almost double.

And then if you translate that into some of our laminations, we purchase for our flexible business, we are seeing increases there.

<unk> paper packaging materials price, we're really staying stagnant still up at about the same we said in February as far as your question, particularly on freight we've seen the spot market E. Some on freight which is which is a good sign with contract market.

So it's still very solid volumes contract market is very solid we have seen the spot market ease up some so that could be temporary or that could be assigned it is slowing I think this is too early at this point to really make a call on it.

<unk> shift or not yes.

Yes, Mark Thanks, Matt add is if you look at our go forward guidance.

No what's going to really happen, but I think what module will kind of cover this.

We're viewing.

Guidance.

At the end of the year, so that's our expectation.

Super I appreciate it.

Thank you. Our next question comes from Adam Josephson Keybanc. Please go ahead.

Thanks, Good morning, everyone and Lisa welcome.

Thank you.

Good morning, Adam.

Good morning Howard.

A couple of clarification questions from me as well.

The EBITDA guidance increase of $85 million can you help me with how much was price cost and just also help me with what your updated price cost expectations for the year is in terms of millions of dollars compare to what it was before.

Yeah, sure Hey, Adam it's Julie.

So really say most of that EBITDA increase is price cost and again, just pretty well I would say broad across the business, but really the strong Q1 as Howard mentioned is really just a key driver there.

And then when we look at how we've refreshed our view on the full year when it comes to real really all of our key drivers and bridge items.

We absolutely have increased our outlook for contribution from price cost.

I'd say right now.

We're probably looking at.

Operating profit in that closer to like 125 million ish of positive price cost. So if we delivered $85 million like we did in the first quarter you could tell that we expect that to normalize in the coming quarters, but the outlook there is.

Again upwards of $125 million.

Okay.

Kelly just related to that I think Paul metal pack EBITDA last year was about 110, if memory serves and then I think you were previously expecting.

EBITDA of about $1 30, this year forgive me if I'm off but what is your current expectation along those lines compared to what the businesses EBITA was last year.

Yes.

Some of them.

Youre correct in last year, and what our go forward expectations were and we had pretty clear visibility of.

131, 35 type range.

As we come out of the blocks.

So just great performance.

As I talked to when we first announced the acquisition, but the move.

Almost $200 million of capital spend in that business over the course of two years.

And frankly, it played into our valuation as well.

We're going to see increased productivity coming off of lines that literally we're starting up in November December .

And these were major capital investments.

We've made our best guess at about 130 to 135.

If we look into.

The go forward, we're probably going to be north of that.

<unk> hundred 60 ish range.

So again very very pleased with.

With how the businesses moving forward.

And how do you consider that kind of a normalized number or do you think there is some one time benefits in there and perhaps we shouldnt think of that as kind of a.

Our run rate level of profitability for the business.

I'd like to think of it as a run rate.

Go forward.

The synergies start kicking in the productivity continues.

So.

That's fair.

From the company.

Visibility I have today as we go into 2023 and beyond.

I would say that yes.

We hope and expect will happen.

Got it and just one last one on demand can you talk about Howard what Youre seeing in April .

To the extent it differed at all from what you saw on <unk> and just given the substantial price increases that you and your competitors and your customers and everyone are implementing.

When would you expect to see.

Some demand elasticity.

I mean, we.

Your volume was up 4% and consumer obviously CPG food volumes have been down but your volume was up nicely. How are you thinking about that issue of demand elasticity as we progressed through the year.

Yes.

Roger to speak really more granularly, but what I'd say.

As we enter April we're seeing more of the same in terms of overall demand we've got softness in.

Select markets, obviously, China.

But.

We feel really really good about.

The visibility we have right now.

So Raj if you don't mind, just talk through what really center around the world.

Exactly.

Just real would be the one to look at if you're talking about demand elasticity, but we actually expect industrial volumes to be better in the second quarter and the first if you look at our first quarter. We had a number of one time events like winter storms in North America, which took 10000 tons of <unk> of our system disrupted a number of our.

Converting plants.

One time issues in Europe , we had a planned three week downtime at one of our large paper mills in Europe , which has a footprint consolidation in Europe . So the market itself.

The Americas and Europe held up extremely well in the first quarter and we're seeing that continue into April maybe we will see some impacts from that.

Issues in Ukraine in the second quarter in Europe , but so far we've not really seen anything that.

Would raise concerns other than actions, we're taking in Russia, which Howard has already talked about Asia as the.

The challenge.

Primarily in China for example, our cone volume in China was down 30% in the first quarter versus first quarter last year, our tube and core business was down 16, 5% in Asia versus last year at all in China, the balance of Southeast Asia held up fairly well. So I guess the point is we feel like.

Industrial volumes will hold up well into the second quarter.

<unk> is a good sign for the economy overall, and we're not seeing any pullback from what you said around price increases in fact.

Our global ERP system is continuing to be sold out we continue to have customers on allocation.

And we're seeing no let up in demand.

All other segments really recovering from all of the Covid issues that was most hit by Covid, we're seeing recovery in our medical business, we're seeing recovery in our retail security business and of course, the thermostat business continues to be strong and growth.

So far as Howard said, nothing major changing in the second quarter and again, we actually expect industrial to be slightly better.

Thanks, very much I think.

More to your question.

Whereas the.

The macroeconomic situation.

There's a lot of concern about what the economies are going to look like going into second half of the year.

I'll just remind you that.

We participate 80% of our consumer businesses.

What I would call a staple food items.

We perform extremely well.

As we see.

Consumer activity slowdown.

To say the word recession, but that's been floated around but we've always really driven well through that.

Got it the way we expect it to play out thanks.

Thanks, a lot Howard.

Yes.

Thank you. Our next question comes from George Staphos Bank of America. Your question. Please sure.

Sure Hi, everyone. Good morning, Thanks for all the details Lisa Congratulations we look forward to working with you big shoes to fill Roger Thanks for all you've done again, and we look forward to working with you in the transition.

I wanted to hit on since Adam Teed it up.

Our review back again on ball metal and so when I look at the bridge on EBIT and you had about $49 million of.

Benefit and that was net of divestitures so that.

Being simplistic about it would suggest that annualizing that.

You're running maybe upwards of $200 million out of bond metal if I do that for the whole year Howard why is the new run rate.

Only 160 on the one hand, and then on the other hand, when you gave us the updated guidance what changed in terms of the productivity. That's a big jump from $131 35 to the 160. So a couple of questions here on ball metal and acquisitions.

Sure George noted.

<unk> comments, we do see that there is about 30 to 35.

In the consumer sector that is related to.

What we would call a one off.

Okay.

Catching up in terms of productivity now within that I will say that as across the consumer sector not just from BNP SMT.

Yes.

And.

Yes.

In terms of the productivity items I talked about.

The real.

It's just what we model out.

The better performance.

On the capital investments that we've made on top of that.

Synergies.

Part of the pull down from an annualize in one quarter.

Sure.

<unk>.

There's going to be a bit of a fall off and we're going to see.

Normalization.

Thanks, Tom we don't see some ramp up as it relates to productivity incentives.

Okay I appreciate that Howard and if we could talk a little bit about what was actually one off in the quarter within consumer in terms of those price cost benefits. If there's a way to sort of parse that and then if I do some simplistic math on that.

Let's take the 30 to 35 cents.

Multiply by shares gross it up for tax.

It kind of suggests that consumer may be over earned by 4% to 5% margin.

Would that be fair.

Parse that and then is that a decent adjustment factor for the margin in terms of where you should be Q3 Q.

And consumer.

Yeah, Hey, George George Hey, Julien.

Yeah, Hey.

I think one thing that to your prior question just to be sure I just want to make sure you get all the dots connected of course, the operating profit bridge and when you look at that acquisition divestiture bucket, that's operating profit and Howard comment of course is EBITDA with the one sure.

I just wanted to make sure of their pet.

All of that.

Lined up but yes, when we look at the.

Some of it some of the key things I mean, I will say there are various one time items in that 30% to 35%.

Obviously, some positive price cost.

But as well we talked about.

Higher SG&A around comp and benefits and some spending that type of thing that are also we view as a little bit unique in the first quarter, but we actually view that as consistent in 'twenty, two and things that very well may normalize as we get into 2023, so some some positives related.

To price cost and timing of some things, but then some of the things we've netted against that are really in the SG&A arena. So just to kind of give that color and then just just want to highlight I mentioned this in my prepared comments, but really.

It's just really important to note that a lot of that benefit in Q1 came on price cost.

He was.

Covering from negative price cost last year, and we didn't get all the way recovered in that regard and we do expect some additional timing of that recovery to come in the second quarter, but anyway. So when you look at.

Really for US were looking at Hey, how does price cost, especially in consumer perform quarterly in through 'twenty, one and again, we were negative most of 'twenty, one and for the full year and then now how is that trending into 2022 of course by quarter and again.

The first quarter was just a real positive.

Catch up from some of that negative timing of last year, and we do expect that again to normalize as we move forward I think as far as consumer margins going into Q2, I think you probably have underestimated that just a little bit I think that kind of maybe.

11% ish range is probably more appropriate for what we're looking for in the second quarter for consumer Okay.

I appreciate that Julie and I will turn it over after this question and I don't want to belabor. It again, you had a great quarter and congratulations you're starting the year off on such a strong footing.

What I heard you, saying, though is basically comparisons are easy right. You are running negative price costs last year, you're caught up a lot of your contracts allow for the catch up on January . So yes, you had a very strong price cost in consumer, but I'm still not sure why that's kind of a one time and why it doesn't continue going forward.

Other than your comps get tougher, but your margin shouldn't drops. So help me understand if theres anything else that I need to be mindful of and thanks, and I'll turn it over and good luck in the quarter.

So George last year, I think first quarter was about 14% on a consumer and uplift.

Substantially.

As Julie noted for the year of negative price.

<unk>.

Once again.

I can point towards.

My opening comments around the 30 to 35.

Net.

Half of impact.

We have seen in the floor.

We do have increased.

Margin I think opportunities come in as it relates to we haven't caught up on all of our contracts. So we've got.

Contracts that don't come in the price movement doesn't come into play until the fourth quarter.

And similarly on the paper side of the business.

We have the same in fact, if you look at last year.

For the second half of the year.

Recovered very little on our paper side of the business.

Right.

That's a long winded way of saying.

11% to 13% that's more my range I think.

As we look into the second quarter, and we'll see how that plays itself out.

For the second half of the year alright.

Alright, thanks, very much Howard.

Thank you. Our next question comes from <unk>.

BMO.

Capital markets. Please go ahead.

Good morning, everyone.

Good morning, Good morning, I, just wanted to ask about the healthcare portion of all other.

In your comments at the beginning of this call. We heard of some very positive mentioned of Covid vaccine shippers I think you said $28 million and a pickup in medical spending, but then the release has I mentioned lower health care packaging demand can you just clarify that a bit.

Not quite sure.

If I can answer the question.

I think this is going I think the services business performed very well and it was our TQ.

Medical Thermo.

The reformed containers that actually did have lower demand in the first quarter and I believe that was the only piece of that particular business group that had lower demand so that was the.

The outlier there.

<unk> medical businesses, but very different markets. That's right. That's right. Joe. This is Roger Yeah that was specifically the thermo scan probe covers for ear thermometers that really took off during the pandemic.

And I'm now settled back to actually lower levels than normal as they built up a lot of inventory, but thats a very specific issue in that medical business, but across that we are seeing pickup in.

I would like to surgeries all of the operating room products are coming back. So it is playing out like we thought but it was really negative on that one product, which is a fairly significant over that business.

Got you. Thank you very much for that.

And then the other question I wanted to ask about was the labor shortages I know this isn't been going on for a while and it's certainly not just you guys, but what actions can you take or what have you been taking and is this sort of accelerating your plans around automation.

Absolutely Yes. This is Roger again.

You had asked that question six months ago, I would say we were about 10% short.

People on average in our U S plants, that's eased up now it's probably five to seven so still shortage.

So we've got a very comprehensive automation strategy now.

We talked last year about a partner that just joined with Sunoco one of the best integrators in the country and we've got a very comprehensive plan and we're rolling out primarily focused on those.

The large four large businesses that Howard talked about early on the floor integrated businesses, where we can multiply that effect by standardizing across very life converting operations or like packing packing operations. So the answer is absolutely that take some time of course.

But as you as you mentioned that entry level job as the one we really need to attack, especially in off shifts.

So that automation strategy will pay off over the coming years.

Great. Thank you very much.

Thank you. Our next question comes from Ghansham Panjabi Baird. Your line is open.

Thanks, operator, good morning, everybody.

I was hoping you would get a little bit more of a bridge on the industrial segment, just trying to reconcile your comments about $85 million in price cost and.

Roughly half of that came from that segment. So that's let's say 40 plus million.

And the operating profit only being up 20, if you could just give us some of the offsets there.

Yes, sure Hey, Ghansham, yes.

When we look at industrial I mean, yes.

The one positive operating profit driver there absolutely was the very strong price cost like we like we've mentioned.

Really again.

As you know as we've mentioned volume and so the drop through to operating profit was slightly negative not that material, but a little bit of a headwind as.

And as well I mentioned their productivity was slightly negative as well again, I would say not that material.

Both the lower demand at the total industrial level as well as the weaker productivity were slight headwinds to that price cost benefit really the rest of that is what we call that other bucket and again really higher SG&A expenses, so not just specific to industrial.

But really at the company level and allocated across the segments. So again as I mentioned.

We've got inflation in comp and benefits, we are doing really good things in it.

Does that strategy continues and Roger just mentioned some of that focus on automation, but we've got other digital oriented cyber security type projects that we're investing in there and so again that the.

The rest of that call it negative impact to operating profit is really in that other category.

So let me just add as well.

Talk about the negative volume in industrial that really have isolated to Europe in our Asian operations.

Of course, Russia, but.

We had a loss single largest urban core customer has not operated due to strikes.

Union activities, they've had since the beginning of the year I'm not even sure on the operational until.

Bill on operational and of course, Roger has already talked to the impact.

China on the productivity side, particularly as it relates to.

The western Europe and here in the United States.

Demand is so strong.

European network.

That just simply drive negative productivity certainly Ross.

Price and price cost improvements.

Well noted.

Lots of changeovers and other supply chain issues.

Calls.

Our productivity targets, but as soon as things normalize.

Our expectation is that the type of market, we should continue with a solid price price call scenario.

Just real and we will start seeing our productivity start ramping.

Shipping up accordingly.

Okay. Thanks for that Howard on the consumer side I mean, so the volumes were very very strong at plus 4% relatively healthy comparison from a year ago also.

As I look at my model I mean, the fourth quarter was down in that segment. So do you sort of see that I was just normalization between two quarters from a volume standpoint, or do you see actual underlying strength and then second.

As it relates to all other also very strong volume quarter, but.

We're seeing a lot of headlines associated with auto production moderation given all of the.

Various iterations of issues that continue so should we expect that segment to start moderating as well from a volume standpoint is as the year unfolds.

Yes, Thanks Scott.

We tried to note across the fourth quarter on a consumer side.

Really had.

Supply chain disruptions.

Our customers.

We had one of our largest customers here in North America did not operate for two five weeks or so because they just simply could not get the necessary raw materials.

In turn that has led to.

Our recovery that we're seeing in two and.

And to the first quarter of this year so <unk>.

In particular, but if you get down to it.

They can business.

It's roughly flat globally, but I would like to point out that.

That's against the 4% increase Q1 of last year of Covid related type environment.

High demand so we're really pleased that.

But.

We've held on to that type of volume and then we've seen just continued ramping up of the plastics.

Side of the business in terms of the trays.

Frozen and ready made meals sector, so that continues to improve.

Roger I would just say that got us in the flexible business continues to show good growth and it's not only the recovery of segments like confectionary, which was up probably.

25%, but that business is doing a fantastic job of going out and winning new business.

Alex with new customers share from some of our existing accounts.

Flexible was up significantly in the quarter and we expect that to continue.

Into the second quarter, the only challenge there is getting the materials, we need to to make the product.

All other we'll see a little bit of moderation in therma site, because we had the slug of Covid vaccine packages in the first quarter, we will see some of that but not as much in the second quarter, but again, if you look across the board.

Our alloy business, our retail security business, our medical business other than the examples I've already given one example is already giving us picking up so I would expect all others that look a lot alike.

The second the first quarter in the second quarter, we see volumes are holding up.

Kelly will you mentioned automotive thats, our protective business. It was weak in the first quarter. So we would expect a little bit of the same in the second quarter, but all in all I think volumes will be will be solid for the second quarter and all other just like the first.

Okay. Thanks, so much.

Thank you. Our next question comes from Joshua Spector of UBS. Please go ahead.

Hi, This is Lucas spell out on for Josh Good morning.

I was just wondering if we could talk a little bit more about metal pack.

Could you tell us what the growth was a year on year and how are you.

You see the demand progressing sequentially.

Yeah.

Yes.

<unk> volumes were.

We don't have great comparative we didn't own them last year, but my understanding is slightly down.

And frankly.

That has to do with some of the Covid.

On the aerosol side some of the coated products that were in obviously high demand, but not I wouldn't say materially down.

We're looking forward to the really busy part of the season, which is starting now we're starting to build inventories as we get into the tax season.

Into the second and third quarter.

So at this point in time.

We really don't have any concerns about the go forward volumes on the business.

Okay.

Great. Thanks, and then just on the type of side I'm, sorry, if you guys could just update us on your outlook for ICC in Europe April yes.

Spreads at the moment I kind of.

Pretty much at record levels. So I was just wondering how you guys are thinking about the sustainability of that as we make through the year.

Lucas I'll take your question was around OCC.

Yes, <unk> and <unk>.

And with the spreads being at.

Record levels currently.

How you see the outlook for <unk> through the year and.

Whether you think the spreads are sustainable from here or not thanks.

First off I'd say I think we're about $1 50, right now in the southeast.

Yeah.

Let's look at things as we might see maybe a slight decline for the second quarter, but those things normalize in the second half of the year for model.

A demand perspective move volume or capacity coming on stream.

Modeling somewhere between in the second half somewhere between 160 and $165.

So it's picking up.

In the second half of the year.

But the spread we don't we see it maintaining itself the <unk> market.

<unk> to be time.

We are still remaining on allocations were very much looking forward for the number 10 machine to complete its conversion so that we can get back up to.

Full supply of the amount of demand that we have.

I knew my new terms a day as we have seen a bifurcation.

Price cost and we expect to continue as market dynamics right now appear to support that.

Going into the future so really bullish about it.

No matter, what OCC does that.

That.

The type of spreads we're enjoying today will continue into the foreseeable future.

Great. Thank you.

Thank you. Our next question comes from Kyle White of Deutsche Bank. Your question. Please.

Hey, good morning, Thanks for taking my question and congrats on a pretty strong quarter.

Just focus on the Hartsville and the conversion there are you able to give us kind of the negative impact that you're expecting related to the downside that you can take the third quarter.

As you can relate that machine.

Then any kind of thoughts about maybe even potentially prolonging that just given some of the price increases that we're seeing over on medium and the benefits you're getting from that as well.

So for number 10 in the third quarter impact was somewhere around 10 million $10 million spread between the third and the fourth third and fourth quarter and the second part of the question I'm sorry, Kyle.

Yes. The second part was just if you haven't given any kind of thoughts to potentially even prolong you're delaying that conversion just given kind of the strength in medium and the recent price increase that market just got it as well.

Yes. Thanks.

Interesting question.

The first part of that is certainly the delays have not hurt us.

But no we think that.

As I've just said, we're short right now in terms of meeting.

The overall demand on your price cost spread is very attractive right now.

So all of the original economic assumptions that we made from the beginning.

Remain true.

Yes.

<unk> board or medium is strong right now, but <unk> is equally as strong.

And with pent up demand too to help lead the machine.

As it starts up.

All good.

Sounds good then for my second question is just on M&A I mean, clearly youre in deleveraging mode. Following the <unk> acquisition right now but.

But you can't always time on deals and assets come to market. So I'm curious if you would have any appetite from an operational and financial standpoint.

In the event that an asset comes to market in the food and aerosol can space.

Right now.

We're really focused on the integration of the business.

There's a lot of balls in the air around the globe.

Again.

Now this integration to deliver on that.

The promise that we've made to our shareholders.

This one.

We'll see what happens depending on.

Opportunities that may or may not come into play.

Sounds good I'll hand, it over and good luck with the balance of the year.

Thank you.

Thanks.

Thank you. Our next question comes from Gabe <unk> of Wells Fargo Securities. Your line is open.

Howard Julie Roger Lisa Good morning.

Good morning.

I hate to belabor the point here, but I guess, maybe just for posterity sake and to make sure maybe I understand.

Can you tell us EBITDA contribution from the metal pack acquisition in the first quarter.

Gabe.

Really have never talked about individual business unit.

Results.

We've always focused on the segment.

Yes, I mean, you can look at the operating profit bridge and.

And obviously there is some net there of the contribution to operating profit.

Against metal Pack addition versus the display and packaging U S divestiture last first quarter, albeit.

As Youre aware DNP U S.

Relatively small.

The decline year over year because of just the nature of the size of that business. So.

Yes, I think we probably can leave it at that from a operating profit.

Kind of contribution from really that net M&A activity.

Okay.

Maybe a point of clarification Howard on the $25 million of spending in metal packaging is that return on capital I E incremental above and beyond I think what you identified is the $20 million to $25 million.

I'm sort of maintenance Capex that was required for that business and then.

Post, adding some of this two piece capacity as that in fact, replacing existing three piece capacity or is it.

Adding incremental two piece capacity if that makes sense.

And then how much after the fact, we'll be remaining three piece.

Yeah.

It is.

Almost all value added.

Capital that we.

<unk>.

It's not new two piece investments expansion of toothpaste lines to increase productivity.

That's a big part of that.

And the remainder is also tied to.

Two.

Increasing productivity on various operations throughout the business.

Im not saying that was.

Having said that it was well capitalized going and will stay with you.

<unk> equipment.

The team and we all agreed that.

We could actually improve on those initial investments.

Enhancing them with Decrementals, so it's spread out over.

I'm trying to think through the probably the largest of the 25, there's a couple of $5 million in theirs.

A tail off from there.

No. It's all about how do we become even more stronger than we are today.

Okay last one for me, maybe Julie can you I mean, I'm coming up with that.

Get back into the range.

With respect to the bridge between EBITDA and operating cash flow.

Working capital use of $75 million to $100 million is there anything else in there.

Does that number sort of resonate with you and anything else that we should be mindful of.

Yes, I think on a full year basis.

Youre spot on and I will tell you it.

It is tough in this environment to forecast full year change in working capital, but our teams are very focused and I'll just add this on collecting receivables on time, managing our inventories appropriately and then we.

We're just looking at all kinds of ways, especially even with metal Tac, bringing the sunoco balance sheet metal pack actually is helping us better manage their working capital. So just a little color on ways. We are trying to offset pressures of inflation and other things on upwards on working capital, but I think your range.

Is it as good as ours kind of that $70 million to $80 million higher working capital year over year is what we've got console then.

So I think we're in pretty good shape there otherwise.

Theres nothing else really terribly unusual and especially thats changed much since our initial cash flow guidance and the assumptions we made early in the year.

Thank you good luck.

Thanks.

Thank you again to ask a question. Please press star one on your Touchtone telephone again Thats Star one on your Touchtone telephone to ask a question.

Our next question comes from the line of Adam Josephson of Keybanc. Your line is open.

Thanks, a lot everyone I appreciate it just one follow up for I don't know powered or Julie.

Just back to the price cost for a moment. So if if the entirety of the EBITDA guidance increase just go with me on this was price cost that's $85 million of which 30 was involved metal pack as you talked about earlier and that leaves 50 of additional price cost elsewhere in consumer and consume.

Ask Paul metal pack industrial all other et cetera.

I know you implemented price increases in consumer, but your resin cost expectations are.

<unk> higher than they were three months ago.

And then in industrial you got another you RV price increase but I think that was really I mean, your OCC has gone down by a little bit but not too much. So can you help me Julia Howard with what were.

Where are the other 50 is coming from and.

And why.

Yes.

Well I think Adam I mean, it really.

Key part of this is we really do look at the benefit we had in the first quarter right.

$85 million.

And again split between as we've talked about not exactly half of it roughly between consumer and industrial so really that's.

In itself about almost 70% of what we're expecting from the benefit from the year. So and I think we've kind of explained a fair amount in this call about kind of the drivers to that so I think when you look at our inflation expectations for the rest of the year broadly speaking as Rogers mentioned and then really our continued focus on how we are.

Managing price it does moderate as we move through the year. So I don't know that we can really provide a lot more specifics than we are.

Already done today, but.

A lot of this price cost or again about 70% of this we think is.

In the first quarter, so already recognized and at this point, we're going to continue.

Really working hard to again manage the price versus all of this inflation and so I don't know that we can get a lot more than what we've already done.

One thing I'd add to that.

We're not obviously not done as Joe just said.

We've got contracts.

Legacy.

Acquisition related that we saw.

Still have not recovered from so we've got we've got the price movements happening in the <unk>.

Second quarter price movements.

Based on contracts with customers.

Neural type product price.

What one time a year increases that will come into play July one so we've got more to come and I would just finally and last name that I think the team has done a remarkable job.

Over the last year or so.

So the position we are today.

Our skulls problems perspective, and they will continue to do that.

We have really honed our skills, if you will in terms of that.

Making sure that were not only capturing the material signs of inflation, but now even more importantly, all of the non material inflation that we're seeing so.

Got it thank you.

So they fill out a bridge for you Adam but not some kind of color on how we're thinking.

Yes, thanks very much.

Thank you at this time I would like to turn the call back over to Roger Schrum for closing remarks, Sir.

Thank you again, let heath in closing, let me simply say, it's been my pleasure working with each of you over the past 16 years.

I think this is my 66 earnings call.

With Sunoco, so thats certainly enjoy each and every one of them.

Look forward to introducing lethal to each of you over the next few months and as always thank you for your interest in the company.

And just give us a call with any other questions you might have thanks again.

Yes.

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

[music].

Sure.

[music].

Yes.

[music].

[music].

[music].