Sonoco Products Earnings: Moderate Pricing Gains Soften the Impact of Volume Declines

No-moat-rated Sonoco Products SON reported first-quarter earnings that were in line with our expectations. Sales decreased roughly 2% year over year as pricing gains in both segments were not enough to offset lower volumes across much of its portfolio. Despite near-term uncertainty, management raised its full-year adjusted EPS guidance to $5.85 (midpoint) from $5.80 (midpoint). We think this is attainable, but Sonoco faces near-term volume headwinds that could constrain its financial performance throughout the remainder of the year. As such, we maintain our $55 fair value estimate.

Sonoco’s consumer packaging business posted mixed results in the quarter, with revenue up almost 5% year over year due to strong pricing gains that offset declines in volume. While management noted a strong start to the quarter, volumes slowed as the quarter progressed as customers worked through built up inventory. This was most notable in metal packaging, but demand moderated across most products. Additionally, the segment reported a 10% operating margin, down significantly from 20% a year ago. This was largely due to an unfavorable overlap with metal prices that management expects to work through by the end of the second quarter. We expect segment margins to improve sequentially through the year, but moderating demand will likely weigh on volume growth.

The industrial paper packaging segment reported a 12% decrease in revenue year over year due to a decline in volume and the exit of the corrugated medium market and its operations in Russia. Nevertheless, the segment benefited greatly from higher prices and lower materials costs during the quarter. Segment operating margin increased almost 500 basis points year over year to 15.3%, aided by significantly lower old corrugated container prices. Much like Sonoco’s consumer business, the industrial paper segment faces near-term challenges from customer destocking and moderating consumer spending amid heightened economic uncertainty.