Sonoco Products Company (NYSE: SON) — Q2 2023 Form 10-Q
Business context and reporting period. Sonoco manufactures consumer, industrial and protective packaging and operates through Consumer Packaging, Industrial Paper Packaging and All Other. This unaudited report covers the quarter and six months ended July 2, 2023; comparisons are with periods ended July 3, 2022. Amounts below are in millions, except per-share data and percentages.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $1,705.3 | $1,913.3 | $3,435.1 | $3,684.3 |
| Gross profit | $357.3 | $387.0 | $731.7 | $758.6 |
| Gross margin | 21.0% | 20.2% | 21.3% | 20.6% |
| Operating profit | $187.9 | $197.5 | $417.5 | $366.5 |
| Net income attributable to Sonoco | $114.6 | $131.7 | $263.0 | $247.0 |
| Diluted EPS | $1.16 | $1.33 | $2.66 | $2.50 |
| Adjusted diluted EPS | $1.38 | $1.76 | $2.77 | $3.61 |
| Adjusted EBITDA | $275.4 | $311.6 | $551.6 | $629.2 |
| Adjusted EBITDA margin | 16.1% | 16.3% | 16.1% | 17.1% |
Q2 sales fell 10.9%, primarily from lower volume and mix, including customer destocking and divestitures, with lower selling prices and unfavorable foreign currency also contributing. Q2 adjusted EPS declined 21.6%; management attributed weaker adjusted results mainly to lower volumes and mix, partly offset by pricing and productivity. For the first half, sales declined 6.8%; reported net income rose year over year, but adjusted earnings fell 23.3%.
Cash flow and liquidity. First-half operating cash flow was $348.6, versus $184.5 a year earlier, supported notably by inventory reductions and lower pension contributions. Investing used $80.4, including $161.7 of capital expenditures; financing used $185.0. Cash ended the period at $319.2. Current and long-term debt totaled approximately $3,153.5, excluding lease liabilities. Sonoco reported $437 million of scheduled debt maturities over the next 12 months, no commercial paper outstanding, and $750 million available under its revolving credit facility. Management said liquidity and expected cash flows were sufficient for maturities and other needs; covenant measures were substantially above required minimums.
Material changes and segment trends
- Consumer Packaging: Q2 sales decreased 6.7%; operating profit fell 31.7% and Adjusted EBITDA fell 25.3%. Management cited destocking, volume declines and unfavorable metal-price overlap, partly offset by strength in flexible packaging and rigid paper containers. First-half operating profit fell 40.2%.
- Industrial Paper Packaging: Q2 sales decreased 19.6%, reflecting lower volumes, the exit from corrugated medium and the S3 divestiture. Q2 operating profit decreased 7.6%, but margin improved to about 15% from 13% on pricing, lower material costs and productivity. First-half operating profit increased 8.7%.
- All Other: Q2 sales were nearly flat; operating profit increased 73.5%, primarily on pricing and productivity.
- First-half reported operating profit included $79.4 of gains from sales of timberland, S3 and U.S. BulkSak. The timberland sale generated a $60.9 gain; S3 generated an $11.1 gain; U.S. BulkSak generated a $7.4 initial gain. These items materially affect comparisons with adjusted results.
Outlook, risks and unusual items
- Management expected 2023 net capital spending of approximately $305 million, compared with $319 million in 2022. The filing does not provide a clear full-year earnings guidance figure.
- Sonoco expected to complete its proposed $330 million purchase of the remaining 65% of RTS Packaging and a Chattanooga paper mill in the second half of 2023, subject to conditions including DOJ antitrust review. The company expected to fund it with new borrowings and cash.
- Restructuring and asset impairment charges were $34.9 million in the first half, including costs related to the Hutchinson, Kansas paper mill closure. The company expected about $3.9 million of further charges for previously announced actions, mostly incurred and paid by year-end; additional restructuring actions remain possible.
- Management identified goodwill at the Plastics–Healthcare and Protexic reporting units as potentially at risk of impairment if results or outlook weaken. Other exposures include raw-material, energy, labor, demand, interest-rate and foreign-exchange risks; the filing also describes uncertainty in Venezuela and highly inflationary conditions in Turkey.
- Environmental contingency accruals totaled $7.1 million. The company stated it could not estimate certain potential exposures beyond recorded amounts, but did not believe resolution of the described environmental or other ordinary-course legal matters was reasonably likely to materially adversely affect its financial statements.
- The company uses non-GAAP adjusted measures that exclude selected items, including recurring restructuring costs, acquisition-intangible amortization and divestiture gains. These measures are not substitutes for GAAP results and may not be comparable with other companies’ measures.
Investor verification priorities
- Assess whether volume and mix trends, customer destocking and Consumer Packaging weakness continued after quarter-end.
- Reconcile reported earnings with adjusted earnings, especially the first-half divestiture and timberland gains and the recurring exclusions used in adjusted measures.
- Check progress on the RTS transaction, its regulatory review, financing and expected integration benefits.
- Monitor debt maturities, interest expense, variable-rate exposure, capital spending and the extent to which working-capital improvements are sustainable.
- Track restructuring costs and execution of the Hutchinson closure, as well as impairment indicators for the identified goodwill reporting units.