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By the numbers
Q2 net sales in Consumer Packaging: $924M
Down 7% year over year, while net sales in Industrial Paper Packaging were down 20% to $585M
Q2 net income: $115M
Down 13% year over year
- Q2 readout: Reporting an overall drop in volumes and sales, Sonoco executives offered a mixed business picture during Tuesday’s second quarter earnings call. Executives highlighted “record results” in flexible packaging and strength in the rigid paper container business, while describing a weak quarter for metal packaging and the industrial North American region business. “Market conditions were pretty turbulent in the quarter with a marked down-shift in demand as the quarter progressed, translating into lower volumes across virtually every area of our business on a global basis,” said CEO Howard Coker.
- Destocking and customer inventory management: Sonoco said in the earnings release that inventory management and destocking trends, combined with inflationary pricing pressures, resulted in “lower and increasingly uncertain demand,” seen most in its metal and industrials businesses. The company pointed to “accelerated inventory reduction programs” at top customers in food and aerosols. Among industrial customers — where volumes for paper and converted products remained low across end markets — Sonoco said destocking was one factor in declines.
- Analysis of customers: “Our customers are searching for price point elasticity which creates demand and inventory management challenges throughout the supply chain,” Coker said. They’re facing “real macro-driven changes to consumer buying habits, their own working capital management priorities, and promotional timing, which makes visibility harder in the near term,” Coker said, with Sonoco seeing downstream impacts. However, Coker said promotional activity does appear to be increasing. “Our customers are telling us that we should see some improvements going forward on the consumer side. The industrial side is the real head scratcher right now.”
- Business expectations in Q3 and beyond: Chief Operating Officer Rodger Fuller said that all geographic areas where Sonoco does business “are suffering from persistent demand weakness.” But the company expects strong performance in the flexibles business in Q3, as well as in its global rigid paper containers business where sustainability initiatives are driving interest. On the other hand, the company anticipates metal volumes will improve sequentially in the quarter as the upcoming food-packing season affects the can business, but volumes are still below prior expectations for the second half of the year in light of destocking. Sonoco also expects “seasonally soft volumes” in its rigid plastic foods business following volume challenges in Q2.
- Outlook in industrial: In industrial, volumes are predicted to decline sequentially 4% from Q2 and stay soft into Q4. This is a shift from previous optimism about improvements in the second half of the year. “What we're hearing from our customers now leads us to believe that's simply not going to happen,” Fuller said. “We were expecting some of the inventory had worked itself out of the system, and we'd see some pickup now in our guidance. We're not seeing that in the second half of the year. I think that was the biggest volume change from our previous guidance to where we are today.”
- Updated guidance: For the full year 2023, Sonoco lowered its expected adjusted earnings per share and earnings before interest, taxes, depreciation and amortization. The company cited lower volume trends in both consumer and industrial paper packaging and anticipates “a less favorable price/cost environment” in industrial in the second half of the year. It’s maintaining its operating cash flow guidance, which Sonoco projected in Q1 would fall between $925 million and $975 million.
- M&A updates: Coker shared an update on its pending acquisition of RTS Packaging from joint venture partner WestRock, saying Sonoco foresees it closing late in Q3 or early in Q4. Broadly on M&A, the company is “managing a funnel of accretive acquisitions and plans for non-core divestitures over the next few years,” Coker said. “As you know, the deal environment is not great right now. And any future selling or buying of assets or businesses will be based on timing for the best value for our shareholders.”
