Packaging

Sonoco Reports Second Quarter 2012 Results

Thursday 19. July 2012 - Sonoco (NYSE: SON), one of the largest diversified global packaging companies, today reported financial results for its 2012 second quarter, ending July 1, 2012.

Second Quarter Highlights
— Second quarter 2012 GAAP earnings per diluted share were $.50, compared
with $.52 in 2011.
— Second quarter 2012 GAAP results include after-tax charges of $.08 per
diluted share, driven by previously announced restructuring activities.
— Base net income attributable to Sonoco (base earnings) for second
quarter 2012 was $.58 per diluted share, compared with $.60 in 2011.
(See base earnings definition and reconciliation later in this release.)
Sonoco previously provided second quarter base earnings guidance of $.55
to $.60 per diluted share.
— Second quarter 2012 net sales were a record $1.20 billion, up 7 percent,
compared with $1.13 billion in 2011.
Earnings Guidance
— Third quarter 2012 base earnings are expected to be $.62 to $.66 per
diluted share.
— Guidance for full-year 2012 base earnings is revised to $2.34 to $2.39
per diluted share.
Second Quarter Review
Commenting on the Company’s second quarter results, Chairman and Chief Executive Officer Harris E. DeLoach Jr. said, “Sonoco’s second quarter results met our expectations despite the continuing tough global economic conditions. Base earnings showed sequential improvement for the second consecutive quarter and gross profits increased 13 percent year over year while base earnings before interest and taxes (EBIT) improved by 6 percent. Base earnings were down year over year by a little less than 2 percent. The benefits to base earnings from significantly improved productivity, prior year acquisitions and a positive price/cost relationship were largely offset by lower volumes, a negative mix of business and higher pension, interest and income tax expenses. However, absent the impact of a stronger dollar, year-over-year base earnings would have been essentially unchanged.
“Our Consumer Packaging segment’s second quarter operating profit improved 6 percent year over year, but was down 15 percent from the first quarter largely due to normal seasonality. The segment’s year-over-year improvement was a result of productivity gains and a positive price/cost relationship, partially offset by lower volumes, negative mix and higher pension, labor and other expenses. Operating profits from our Packaging Services segment declined 54 percent from the second quarter of 2011, and 17 percent from the first quarter.
Year-over-year results were negatively impacted by the previously announced loss of a large contract packaging customer and a stronger dollar.
“In our Paper and Industrial Converted Products segment, second quarter operating profits were down 2 percent from last year’s second quarter, but were up 23 percent from the first quarter. The year-over-year decline was driven by higher pension, labor and other expenses and a negative impact from exchange rates. These factors were partially offset by improved productivity, a positive price/cost relationship and slightly better volume, coming primarily from improved paper operations.
“Operating profits in our new Protective Packaging segment, created as a result of last year’s acquisition of Tegrant Holding Corporation, improved 66 percent from the first quarter. Tegrant’s operations comprise the majority of this segment and we are very pleased with the improvement we’re seeing there in operating efficiencies and the progress being made in the integration. Year-over-year results in the legacy protective packaging operation improved slightly as a small decline in volume was more than offset by improved productivity.”
GAAP net income attributable to Sonoco in the second quarter was $51.3 million, or $.50 per diluted share, compared with $53.4 million, or $.52 per diluted share, in 2011. Base earnings were $59.7 million, or $.58 per diluted share, in the second quarter, compared with $60.8 million, or $.60 per diluted share, in 2011. Base earnings and base earnings per diluted share are non-GAAP financial measures adjusted to remove restructuring charges, asset impairment charges, acquisition expenses and other items, if any, the exclusion of which the Company believes improves comparability and analysis of the underlying financial performance of the business.
Items excluded from base earnings in the second quarter of 2012 totaled $8.3 million, after tax, or $.08 per diluted share. This included restructuring expenses and asset impairment stemming from previously announced plant closures and manufacturing rationalization efforts in Germany, Canada and the United States. Excluded from base earnings in the second quarter of 2011 were after-tax restructuring and other charges totaling $7.4 million, or $.08 per diluted share, largely attributable to the disposition of the Company’s Brazilian plastics operations and closure of a Canadian flexible packaging operation. Additional information about base earnings and base earnings per diluted share, along with a reconciliation to the most closely applicable GAAP financial measures, is provided later in this release.
Net sales for the second quarter were $1.20 billion, compared with $1.13 billion in the same period in 2011. This 7 percent increase was due to sales from acquisitions of $124 million, almost all of which is related to Tegrant, and higher selling prices, partially offset by lower volume/mix and a $41 million negative impact from foreign currency translation.
Gross profits were $217 million in the second quarter of 2012, compared with $191 million in the same period in 2011. Gross profit as a percent of sales was 18.0 percent, compared with 16.9 percent in the same period in 2011. The improvement in gross profits was due to productivity improvements and a positive price/cost relationship, partially offset by lower volumes, a negative shift in the mix of business and higher labor and other costs. The Company’s selling, general and administrative (SG&A) expenses increased 19 percent year over year in the quarter, primarily due to added costs from the acquired Tegrant businesses. SG&A expenses were 9.9 percent of net sales in the 2012 period, compared with 8.8 percent in 2011.
Cash generated from operations in the second quarter was $42.9 million, compared with $45.9 million in the same period in 2011. Capital expenditures net of proceeds and cash dividends were $54.9 million and $30.2 million, respectively, during the second quarter of 2012, compared with $34.0 million and $28.9 million, respectively, during the same period in 2011.
Year-to-date Results
For the first six months of 2012, net sales increased 8 percent to $2.41 billion, compared with $2.25 billion in the first half of 2011. Net income attributable to Sonoco for the first six months of 2012 was $94.4 million, or $.92 per diluted share, compared with $110.8 million, or $1.08 per diluted share, in the first half of 2011. Earnings in the first half of 2012 were negatively impacted by after-tax restructuring and other charges of $19.1 million, or $.19 per diluted share, compared with $8.5 million, or $.09 per diluted share, in the same period in 2011.
Base earnings for the first half of 2012 were $113.5 million, compared with $119.3 million in the same period in 2011. This 5 percent year-over-year decline in base earnings stemmed from lower volume, a negative mix of business and higher pension, labor and other expenses. These negative factors were partially offset by productivity improvements, acquisitions and a positive price/cost relationship.
Gross profit increased 12.5 percent year over year to $433.4 million, compared with $385.3 million in 2011. Gross profit as a percent of sales increased in the first half of 2012 to 17.9 percent, compared to 17.2 percent in 2011.
For the first six months of 2012, cash generated from operations was $144.4 million, compared with $32.1 million in the same period in 2011. The first half cash flow reflects pension and postretirement benefit plan contributions of $58.9 million, compared with $110.5 million in the first half of 2011. Cash flow from operations also improved during the first half of 2012 due to less management incentives paid in comparison to last year. Capital expenditures and cash dividends were $102.0 million and $59.3 million, respectively, during the first half of the year, compared with $70.5 million and $57.0 million, respectively, for the same period in 2011.
At the end of the first half of 2012, total debt was approximately $1.32 billion, a $32.0 million increase from the Company’s year-end total debt of $1.29 billion. The Company’s debt-to-total capital ratio was 47.4 percent, which is unchanged from year end 2011. Cash and cash equivalents as of the end of the first half of 2012 was $196 million, compared with $176 million at the end of the year.
Corporate
Net interest expense for the second quarter of 2012 increased to $15.3 million, compared with $8.2 million during the same period in 2011. The increase was due to higher debt levels as a result of the acquisition of Tegrant. The effective tax rate for the second quarter of 2012 was 35.3 percent, compared with 32.1 percent for the same period in 2011. The effective tax rate on base earnings was 32.8 percent and 31.9 percent in the second quarters of 2012 and 2011, respectively.
Third Quarter and Full-Year 2012 Outlook
Sonoco expects third quarter 2012 base earnings to be in the range of $.62 to $.66 per diluted share. Base earnings in the third quarter of 2011 were $.66 per diluted share. For the full-year 2012, base earnings are projected to be in the range of $2.34 to $2.39 per diluted share. The Company had previously provided full-year guidance of $2.34 to $2.44 per diluted share.
The Company’s base earnings guidance assumes sales demand will remain near current levels, adjusted for seasonality. Although the Company believes the assumptions reflected in the range of guidance are reasonable, given the uncertainty regarding the global economy and fluctuating raw material prices and other costs, actual results could vary substantially.
Commenting on the Company’s outlook, DeLoach said, “We expect third quarter base earnings to continue to improve sequentially and possibly could be near our results for the third quarter of 2011, which benefited from some lower incentives, taxes and other favorable actions. While we are encouraged by the progression of improvement in many of our businesses in the first half of the year, general economic conditions continue to be challenging and our customers’ long-term order patterns remain difficult to predict. Accordingly, we are focused on implementing operating excellence initiatives to improve our manufacturing productivity and working to further reduce costs and control spending. Also, we expect to complete several important growth projects this year, including the third-quarter start-up of our new rigid plastics container plant in Columbus, Ohio. Finally, efforts to successfully integrate our Protective Packaging businesses continue and we expect to meet our objective of achieving annualized synergies of $12 million by year end.”
Segment Review
The Company reports its financial results in four operating segments: Consumer Packaging, Paper and Industrial Converted Products, Packaging Services and Protective Packaging. Segment operating results do not include restructuring and asset impairment charges, acquisition expenses, interest income and expense, income taxes or certain other items, if any, the exclusion of which the Company believes improves comparability and analysis.
Consumer Packaging
Sonoco’s Consumer Packaging segment includes the following products and services: round and shaped rigid containers and trays (both composite and thermoformed plastic); blow-molded plastic bottles and jars; extruded and injection-molded plastic products; printed flexible packaging; metal and peelable membrane ends and closures; and global brand artwork management.
Second quarter 2012 sales for the segment were $477 million, compared with $490 million in the second quarter of 2011 and $496 million in the first quarter of 2012. Segment operating profit was $42.8 million in the second quarter, compared with $40.2 million in the second quarter of 2011 and $50.1 million in the first quarter of 2012.
Year-over-year sales declined in the quarter due primarily to lower volumes in the Company’s global composite can business and the unfavorable impact of foreign currency translation, which more than offset gains in sales prices. Operating profit increased 6 percent year over year as productivity improvements and a positive price/cost relationship more than offset negative volume and mix along with higher pension, labor and other expenses. The decrease in results from first quarter was due primarily to normal seasonality in our composite can and metal ends businesses.
Paper and Industrial Converted Products
The Paper and Industrial Converted Products segment includes the following products: high-performance paper and composite paperboard tubes and cores; fiber-based construction tubes and forms; wooden, metal and composite wire and cable reels and spools; and recycled paperboard, linerboard, corrugating medium, recovered paper and other recycled materials.
Second quarter 2012 sales for the segment were $475 million, compared with $485 million in the second quarter of 2011 and $464 million in the first quarter of 2012. Segment operating profit was $39.7 million in the second quarter, compared with $40.4 million in the second quarter of 2011 and $32.3 million in the first quarter of 2012.
The 2 percent year-over-year reduction in second quarter sales was primarily due to the negative impact of foreign currency translation and lower recovered paper prices in the Company’s recycling operations. Operating profits declined by 2 percent year over year, but would have been essentially unchanged absent the impact of exchange rates. Higher pension, labor and other costs were offset by improvements in productivity and a positive price/cost relationship. The increase in results from first quarter was primarily driven by price cost recovery and productivity improvements.
Packaging Services
The Packaging Services segment includes the following products and services: designing, manufacturing, assembling, packing and distributing temporary, semipermanent and permanent point-of-purchase displays; supply chain management services, including contract packing, fulfillment and scalable service centers; and paper amenities, such as coasters and glass covers.
Second quarter 2012 sales for this segment were $108 million, compared with $126 million in the second quarter of 2011 and $115 million in the first quarter of 2012. Segment operating profit was $4.0 million in the quarter, compared with $8.7 million in the second quarter of 2011 and $4.8 million in the first quarter of 2012.
Sales declined 14 percent from last year’s second quarter as an improvement in global fulfillment activities was offset by the previously disclosed loss of a contract packaging customer and the negative impact of foreign currency translation. Operating profit for the segment declined 54 percent year over year due primarily to lower volumes associated with the lost contract packaging customer and higher pension expense. The impact of a stronger dollar contributed approximately $1.0 million to the year-over-year decline in segment operating profit.
Protective Packaging
The Protective Packaging segment includes the following products: custom-engineered, paperboard-based and expanded foam protective packaging; temperature-assurance packaging; and retail security packaging.
Second quarter 2012 sales were $142 million, compared with $26 million in the second quarter of 2011 and $138 million in the first quarter of 2012. Operating profit for the second quarter was $11.7 million, compared with $3.4 million in the second quarter of 2011 and $7.0 million in the first quarter of 2012.
The significant year-over-year growth in this segment’s sales and operating profits was due to the fourth quarter 2011 acquisition of Tegrant. Sales from the Company’s legacy protective packaging business declined 5 percent year over year due to lower volume and the negative impact of foreign currency translation. The year-over-year increase in operating profits reflects the fourth quarter 2011 acquisition of Tegrant. The improvement in operating profits from this year’s first quarter is attributable to Tegrant and reflects both higher volume and improved margins driven by operating efficiencies and integration synergies.