Sonoco Products Company 2026 Q3 Earnings Call

Roger, please go ahead. Thank you, Warren, and good morning, everyone.

Last evening, we issued a news release and posted an investor presentation that reviews Sonoco's third quarter 2026 financial results. Both are posted in the investor relations section of our website at sonoco.com. A replay of today's conference call will be available on our website later today, and we will also post a transcript. If you will turn to slide 2, I will remind you that during 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. Therefore, actual results may differ materially. 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 condition 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, and Paul Joachimczyk, Chief Financial Officer. For today's call, we will provide remarks followed by your questions. If you will turn to slide 4 in your presentation, I will now turn the call over to Howard.

Thank you, Roger, and good morning, everyone. During the third quarter, our business has faced a combination of challenges. Through strong productivity initiatives and rigorous cost control, our teams were able to mitigate a significant portion of these issues and deliver resilient operating results. Paul will cover the detailed financial results. If you will turn to slide 5, I will focus my comments on the operating performance of our industrial and consumer packaging segments, where we maintain leadership positions in uncoated recycled paperboard, metal and paper cans, and closures. Our industrial segment delivered another solid quarter with results essentially in line with the second quarter, despite a dynamic operating environment. Productivity continued to be a key driver. North America URB trade ton sales increased 10% year-over-year, and mill utilizations remained strong at 94%. Wire and cable reel sales continued to perform well with double-digit sales growth.

Overall, volume mix in the industrial segment was modestly positive. An additional URB pricing realized in September further strengthens our ability to recover rising input costs moving forward. Results from our consumer packaging segments were below our expectations. Volume mix was down 3% year-over-year, primarily due to hot and dry weather conditions and unfavorable price-cost relationships during the quarter. There were several encouraging areas of performance into the consumer segment. Our international paper can operations delivered double-digit volume growth, supported by continued solid demand for snack products across emerging markets. Also, U.S. aerosol can demand was up 7%, while productivity initiatives generated strong operational benefits across the business. As illustrated on slide seven, we faced several external factors in the third quarter. Drought conditions across part of both Europe and the United States negatively impacted crop yields, reducing demand for food cans.

At the same time, inflationary pressures across raw materials, freight, energy, and other operating inputs were simply beyond our expectations. As shown on slide seven, we have spent much of 2026 managing a dynamic business environment. Freight costs alone increased $17 million year-over-year in the quarter, while diesel prices, which had stabilized in early July, accelerated to record levels, topping $6.50 per gallon in the U.S. Energy, raw materials, other operating costs also continued to rise. Old corrugated containers, or OCC, our largest industrial raw material input, increased another $25 per ton during the quarter and is now 90% higher than a year ago. As a result, total URB production costs have increased more than $60 per ton year-over-year. In addition, the euro is adjusted relative to the U.S. dollar during the quarter, which reduced the translated value of our European sales and earnings.

While these factors were significant, our focus has not changed. We are driving productivity, we are managing costs aggressively, and implementing pricing actions where appropriate. With that brief summary, let me turn it over to Paul, and then I will come back with some final comments.

Thank you, Howard. Before I review the quarter, two reminders. Unless otherwise noted, all metrics are adjusted. Reconciliations to the most directly comparable GAAP measures are included in our earnings materials. Also, third quarter 2025 results included ThermoSafe, which was divested in the fourth quarter of 2025. Where relevant, I will compare results both as reported and excluding ThermoSafe.

During the quarter, we recorded an $829 million non-cash goodwill impairment, primarily related to the consumer EMEA business. The adjustment reflects an updated assessment of the carrying value based on current market conditions and business performance. It does not affect adjusted results that I will be discussing today. Turning to the third quarter results on slide 9. The third quarter reflected changing market conditions. We responded with targeted pricing, productivity, and cost actions. Let me walk through the results. Net sales were $2 billion, down 4% year over year. Excluding the ThermoSafe divestiture last year, sales were essentially flat. Industrial contributed $32 million of growth driven by healthy trade and URB demand, along with pricing realization in North America.

Consumer offset those gains primarily because of the lower pack season volumes in North America and Europe, reflected with the effects of high temperatures, rainfall, and other weather events on crop yields. Adjusted EBITDA was $352 million with a margin of 17.2%. This was down 9% year over year, or 4% excluding ThermoSafe. Productivity and cost actions mitigated a portion of more than $30 million in input costs. Adjusted EPS was $1.67, down 13% year over year, or 7% excluding ThermoSafe. Higher input costs and softer global food can demand affected the reported results, while productivity and the Profitability Performance Plan, or PPP, benefits helped mitigate those pressures. Our businesses again generated strong operating cash flows in the third quarter, delivering $285 million despite seasonal working capital headwinds.

We also strengthened the balance sheet by reducing total debt by $162 million and net debt by $176 million while successfully refinancing an $800 million term loan. That refinancing extends our maturity profile and enhances financial flexibility, supporting our capital allocation priorities while maintaining our investment-grade credit ratings. Although volumes and related inventory affected quarterly cash generation, year-to-date cash flow remains above last year. We are taking significant actions to create advantageous financial outcomes. Industrial sales increased 5%, and productivity initiatives helped offset input costs. Our PPP program delivered an additional $60 million of savings, its strongest quarterly contribution to date. These results demonstrate the disciplined execution and position us well as the market conditions improve. Turning to the EPS bridge on slide 10. Adjusted EPS of $1.67 included $0.26 of operational performance headwinds. In consumer, input costs and the softer global food can demand affected earnings.

In industrial, higher OCC costs preceded contractual price resets during the quarter. Non-operational items provided a net $0.02 benefit to EPS. Lower interest expense from debt reductions contributed $0.12, while SG&A savings added $0.06. Depreciation and amortization, tax rate impacts and other items offset these non-operational benefits. PPP contributed an additional $0.12 to EPS, up from $0.07 in the second quarter. This was the third consecutive quarter of realized savings and the program's largest contribution to date. Year to date, these actions have delivered $0.25 of EPS benefit, offsetting some of the input costs through the first nine months of 2026. Overall productivity, disciplined cost management, and PPP helped mitigate the effects of lower volume and higher input costs in the quarter. Turning to cash flow on slide 11.

We continued to generate solid free cash flow, up 2% year-over-year, even with softer sales and seasonal working capital increases. Disciplined capital spending, now tracking at 3.3% of sales for the year, demonstrates our fiscal responsibility. As a reminder, our year-to-date cash flow includes $103 million of one-time tax payments related to the gains of our 2025 divestitures, which will not repeat. We remain focused on delivering our cash flow commitments and maintaining our strong balance sheet. With that context, let's turn to slide 12. This quarter, we added an additional detail to provide greater transparency into our balance sheet, liquidity, and disciplined approach to managing financial cycles. We reduced total debt by $162 million and net debt by $176 million during the quarter. We also refinanced an $800 million term loan, extending our maturity profile, enhancing our financial flexibility, and maintaining our low funding costs.