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Sonoco Reports Fourth Quarter, Full-Year 2015 Results

Thursday, February 11, 2016

Press release from the issuing company

Company’s Board Approves New $100 Million Common Stock Repurchase Program

HARTSVILLE, S.C. - Sonoco, one of the largest diversified global packaging companies, today reported consolidated financial results for its fourth quarter and full-year 2015. (2014 consolidated financial results referenced in this news release have been restated to reflect adjustments associated with the previously reported misstatements of the Company’s Irapuato, Mexico, packaging center. Information on the restatement is available in the Company’s 2014 Annual Report on Form 10-K/A.)   

Fourth Quarter Highlights

  • Fourth quarter 2015 GAAP earnings per diluted share were $.55, compared with $.48 in 2014.
  • Fourth quarter 2015 GAAP results include $.09 per diluted share, after tax, in asset impairment and restructuring expenses and other non-base charges, net of gains related to releases of deferred tax valuation allowances, compared with $.13 per diluted share, after-tax, in asset impairment and restructuring charges, acquisition expenses and acquisition inventory step-up costs in the fourth quarter of 2014.
  • Base net income attributable to Sonoco (base earnings) for fourth quarter 2015 was $.64 per diluted share, compared with $.61 in 2014. (See base earnings definition and reconciliation later in this release.) Sonoco previously provided fourth quarter base earnings guidance of $.59 to $.64 per diluted share.
  • Fourth quarter 2015 net sales declined 3.8 percent to $1.27 billion, due primarily to the negative impact of foreign currency translation.
  • Cash flow from operations for the fourth quarter was $146 million, compared with $151 millionin 2014. Free cash flow in the quarter was $49 million, compared with $78 million in 2014. (See free cash flow definition later in this release.)

2015 Full-Year Highlights

  • Full-year 2015 GAAP earnings per diluted share were $2.44, compared with $2.19 in 2014. 
  • Full-year 2015 GAAP results were negatively impacted by $.07 per diluted share, after-tax, from a combination of the following: a favorable disposition of Fox River-related claims/litigation; gain on the sale of two metal end plants and favorable tax reserve adjustments, which were more than offset by foreign exchange driven asset impairments in Venezuela; charges for restructuring costs, asset impairment charges, acquisition-related and environmental remediation expenses; and professional fees to investigate and correct the financial misstatements at the Irapuato packaging center. Prior-year results were negatively impacted by $.22 per diluted share, after-tax, primarily composed of restructuring-related charges and acquisition expenses.
  • Full-year 2015 base earnings were $2.51 per diluted share, up 4.2 percent from $2.41 per diluted share in 2014. Sonoco previously guided full-year base earnings to be in the range of $2.46 to $2.51 per diluted share.
  • Net sales for 2015 were $4.96 billion, down 1 percent from $5.02 billion in 2014.
  • Cash flow from operations for 2015 was $453 million, up 8.4 percent from $418 million in 2014. Free cash flow was $155 million, compared to $120 million in 2014.

2016 Guidance and Common Stock Repurchase Program

  • Full-year 2016 base earnings are projected to be in the range of $2.64 and $2.74 per diluted share, with a targeted mid-point of $2.69 per diluted share.
  • Base earnings for the first quarter of 2016 are projected to be in the range of $.57 to $.62per diluted share. Base earnings in the first quarter of 2015 were $.54 per diluted share. As a result of the Company’s accounting calendar, the first quarter of 2016 will contain 94 days, six more than in 2015, and the fourth quarter will contain 90 days, five fewer than in 2015.
  • 2016 free cash flow is projected to be approximately $140 million.
  • Sonoco’s Board of Directors approved repurchasing up to $100 million in common stock in open market transactions beginning immediately. The Board also restored the Company’s residual share repurchase authorization to its original five million shares.

Fourth Quarter Comments
“Despite diverging global economic conditions and headwinds stemming from the continued strength of the U.S. dollar, Sonoco put up solid results led by record fourth quarter performances in our Consumer Packaging and Protective Solutions segments, partially offset by lower results in our Paper and Industrial Converted Products segment,” said Sonoco President and Chief Executive Officer Jack Sanders. “Overall, gains from a positive price/cost relationship; volume growth, particularly in our Consumer Packaging and Protective Solutions segments; acquisition earnings; and a lower effective tax rate more than offset a negative mix in some of our businesses, the impact of foreign currency translation and higher labor, pension, maintenance and other operating costs.
                  
“Operating profit in our Consumer Packaging segment improved just over 8 percent and reached a record for the fifth consecutive quarter. This quarter’s improvement was a result of a positive price/cost relationship, acquisition earnings and solid volume growth, partially offset by higher pension and other operating costs, lower manufacturing productivity and unfavorable exchange rate changes. Operating profits in our Display and Packaging segment showed significant improvement due to a positive/price cost relationship, manufacturing productivity improvements and the reimbursement of excess costs by a customer.

“Operating profit in our Paper and Industrial Converted Products segment declined 32.4 percent from the prior-year quarter. More than half of the negative variance for the segment was directly related to the impact of declining market conditions on our one corrugating medium paper machine with the balance essentially stemming from unfavorable exchange rates changes and higher pension expense.

“In our Protective Solutions segment, operating profits grew nearly 12 percent due to continued strong volume growth, a positive price/cost relationship and manufacturing productivity improvements, which more than offset negative mix and higher labor, maintenance and other operating costs.”

Fourth Quarter Summary
GAAP net income attributable to Sonoco in the fourth quarter was $56.1 million, or $.55 per diluted share, compared with $49.0 million, or $.48 per diluted share, in the prior year. Base earnings in the fourth quarter were $65.5 million, or $.64 per diluted share, compared with $62.5 million, or $.61 per diluted share, in 2014. 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.

Fourth quarter base earnings exclude $9.4 million in net expenses, or $.09 per diluted share, consisting of after-tax asset impairment and restructuring expenses and certain other one-time charges, partially offset by certain income tax valuation allowance releases. Base earnings in the fourth quarter of 2014 excluded $13.5 million, after tax, or $.13 per diluted share, of restructuring and asset impairment costs and acquisition-related expenses. Additional information about base earnings and base earnings per diluted share, along with reconciliation to the most closely applicable GAAP financial measures, is provided later in this release.

Net sales for the fourth quarter were $1.27 billion, down approximately 4 percent from $1.32 billion in last year’s quarter, reflecting a nearly $75 million negative impact of foreign currency translation. Absent this impact, reported sales would have increased as net acquisitions accounted for $29 million of additional sales and solid volume growth, primarily in Consumer Packaging and Protective Solutions, were only partially offset by lower selling prices stemming from a year-over-year decline in recovered paper and resin costs.

Gross profit was $239 million in the fourth quarter, down 3 percent, compared with $247 millionin the prior-year quarter. Gross profit would have been higher year over year absent the negative impact of currency rate changes. Gross profit as a percent of sales improved to 18.9 percent, compared with 18.7 percent in the same period in 2014. The Company’s fourth quarter selling, general and administrative (SG&A) expenses on a GAAP basis were $138 million, or 10.9 percent of sales, compared with $146 million, or 11.1 percent of sales last year. The decrease was largely attributable to prior-year acquisition costs, lower current quarter management incentives and the impact of currency rate changes. Year over year, base earnings for the quarter benefitted by nearly $0.06 per diluted share from a lower effective tax rate, partially offset by the negative impact of currency rate changes.

Cash generated from operations in the fourth quarter was $146 million, compared with $151 million in 2014. Operating cash flow declined this quarter as higher GAAP net income and lower net pension expense/(contributions) were more than offset by a smaller year-over-year improvement in working capital and an increase in cash paid for taxes. Net capital expenditures and cash dividends were $61 million and $35 million, respectively, during the quarter, compared with $40 million and $32 million, respectively, during the same period in 2014. (Net capital expenditures is defined as capital expenditures minus proceeds from the disposal of capital assets). Free cash flow for the fourth quarter of 2015 was $49 million, compared with $78 millionfor the same period last year. (Free cash flow is defined as cash flow from operations minus net capital expenditures and cash dividends).

Full-Year 2015 Overview
Net sales for 2015 were $4.96 billion, down 1 percent, compared with $5.02 billion in 2014. The negative impact of foreign currency translation reduced reported sales by approximately $276 million in 2015, more than offsetting $236 million in sales added by acquisitions net of divestitures. Favorable volume/mix was essentially offset by lower selling prices stemming from declining recovered paper and resin costs.

Net income attributable to Sonoco for 2015 was $250.1 million, or $2.44 per diluted share, up 12 percent, from $225.9 million, or $2.19 per diluted share, in 2014. Current-year earnings included a net loss of $.07 per diluted share, after-tax, from a combination of the following: a favorable disposition of Fox River-related claims/litigation, gain on the sale of two metal end plants and favorable tax reserve adjustments, more than offset by foreign exchange driven asset impairments in Venezuela, restructuring costs, asset impairment charges, acquisition-related and environmental remediation expenses, and professional fees to investigate and correct the financial misstatements at the Irapuato packaging center. Fiscal year 2014 earnings were negatively impacted by $.22 per diluted share, after-tax, for restructuring and other related charges and acquisition expenses.

Base earnings for 2015 were $256.7 million, or $2.51 per diluted share, compared with $248.6 million, or $2.41 per diluted share for 2014. This 3 percent increase in base earnings stemmed from a positive price/cost relationship, manufacturing productivity improvements, acquisition earnings and a lower effective tax rate. Partially offsetting these positive factors were higher labor, pension, maintenance and other operating costs and unfavorable changes in exchange rates. Improved volume in the Company’s Consumer Packaging and Protective Solutions segments was partially offset by lower volume from the Paper and Industrial Converted Products segment and negative changes in the mix of products sold in most businesses.

Current-year gross profit was a record $929 million, up 2.4 percent, compared with $908 millionin 2014. The prior-year acquisition of Weidenhammer Packaging Group, a European composite can business, was a benefit to gross profit, offset by the negative impact of currency rate changes. Gross profit as a percent of sales was 18.7 percent, compared with 18.1 percent in 2014. SG&A expenses were $496 million in 2015, down from $507 million in the prior year. SG&A expenses were 10.0 percent of sales in 2015, compared with 10.1 percent in 2014.

In 2015, cash generated from operations was $453 million, up 8.4 percent, compared with $418 million in 2014. Both operating cash flow and free cash flow were higher in 2015 on higher GAAP net income that also reflected higher impairment, depreciation and other non-cash charges in the year. Pension and post-retirement plan contributions, net of expenses, were $47 million less in 2015 than the previous year. These positive cash flow changes were offset by an increase in cash paid for income taxes of approximately $40 million. Net capital expenditures and cash dividends were $189 million and $138 million, respectively, during 2015, compared with $169 million and $129 million, respectively, in 2014. Free cash flow for 2015 was $155 million, compared with $120 million last year. For the year, the Company used available cash to reduce debt, net of proceeds, by approximately $115 million. In addition, the Company utilized $17 million of net cash for acquisitions, including $16 million in the second quarter to purchase a majority interest in a flexible packaging business in Brazil.

As of Dec. 31, 2015, total debt was approximately $1.13 billion, compared with $1.25 billion at December 31, 2014, including no outstanding commercial paper. The Company’s debt-to-capital ratio was 43 percent at the end of 2015, compared with 46 percent at the end of 2014. Cash and cash equivalents were $182 million at year end 2015, compared with $161 million at year end 2014.

Corporate
Net interest expense for the fourth quarter of 2015 increased to $14.1 million, compared with $13.7 million during the same period in 2014. The small increase was due to higher average year-over-year debt levels as result of the Weidenhammer acquisition. The 2015 fourth quarter effective tax rate on GAAP and base earnings was 19.3 percent and 29.7 percent, respectively, compared with 39.0 percent and 35.9 percent on GAAP and base earnings, respectively, for the prior year’s fourth quarter. A more favorable distribution of earnings between high- and low-tax jurisdictions, as well as certain non-recurring tax charges recognized in last year’s quarter, contributed to the lower year-over-year effective tax rate on both GAAP and base earnings. Additionally, the year-over-year decrease in the GAAP rate was driven by the release of deferred tax asset valuation allowances in the fourth quarter of 2015.

Board Approves New $100 Million Common Stock Repurchase Program
Sonoco’s Board of Directors has authorized management, at its discretion, to immediately begin repurchasing up to $100 million of the Company’s outstanding common stock through open market purchases. Based on the February 10, 2016, stock price of $40.41, if fully utilized this authorization would reduce the Company’s outstanding share count by approximately 2.5 million shares. In addition, the Board restored the Company’s residual common stock repurchase authorization to its original 5 million shares. 

“For more than nine decades, Sonoco has consistently returned cash to its shareholders in the form of cash dividends and share repurchases, including nearly $1.5 billion over the past decade,” said Sanders. “Based on our projected dividend payments and this new common stock repurchase program, the Company expects to return approximately $240 million in cash to shareholders in 2016. With one of the strongest balance sheets in the Packaging sector and strong cash flow generation, we are well positioned to continue investing to grow our business while returning cash and delivering increased value to our shareholders.”

2016 Outlook 
Sonoco expects first quarter 2016 base earnings to be in the range of $.57 to $.62 per diluted share. Base earnings in the first quarter of 2015 were $.54 per diluted share. As a result of the Company’s accounting calendar, the first quarter of 2016 will contain 94 days, six more than in 2015, and the fourth quarter will contain 90 days, five fewer than in 2015. Full-year 2016 base earnings are projected to be in the range of $2.64 to $2.74 per diluted share, with a targeted midpoint of $2.69 per diluted share. The Company’s guidance has been updated to reflect the announced share repurchase program. Compared to 2015 results, the Company’s full-year outlook reflects an expected benefit of approximately $.07 per share from lower pension expense and an expected negative impact of $.03 per share from the effect of a stronger dollar on the translation of foreign earnings. Free cash flow is expected to be approximately $140 million in 2016. The free cash flow projection reflects expectations for higher pension and post retirement plan contributions of $12 million. The Company’s 2016 outlook also reflects the recent decision by a customer not to renew a contract to continue operating a packaging center in Irapuato, Mexico. Sonoco expects to transition the operation to its customer over the next six months. The loss of business will have a modest impact on second-half 2016 sales for the Company’s Display and Packaging segment, but minimal year-over-year impact to operating profit.

The Company believes the assumptions reflected in the range of guidance are reasonable. However, given uncertainty regarding the future performance of the overall economy, potential changes in raw material prices and other costs, as well as other risks and uncertainties, including those described below, actual results could vary substantially.

Commenting on the Company’s outlook, Sonoco CEO Sanders said, “As we enter 2016, it is clear the pace of change in our businesses and the markets we serve is accelerating and, while we can’t control the marketplace, we can control our actions to address the challenges and opportunities we face. We remain committed to executing on our ‘Grow and Optimize’ strategy, which is focused on targeted growth of our Consumer Packaging and Protective Solutions businesses and optimizing our Industrial-focused businesses. We are excited about the expected launch of several new innovative products in 2016, as we continue to work closely with our customers through our i6 Innovation Process™ and utilizing the full capabilities of our recently opened IPS Studio in Hartsville. And finally, we are working diligently to offset current economic, market and currency headwinds by further optimizing our supply chain, driving productivity improvements and further streamlining our cost structure.”

Fourth-Quarter Segment Review
Sonoco reports its financial results in four operating segments: Consumer Packaging, Display and Packaging, Paper and Industrial Converted Products and Protective Solutions. 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; global brand artwork management; and metal and peelable membrane ends and closures.

Fourth quarter 2015 sales for the segment were $550 million, compared with $545 million in 2014. Segment operating profit was $64.8 million in the fourth quarter, compared with $59.8 million in the same quarter of 2014.

Segment sales during the quarter were up 1.0 percent due to the prior-year acquisition of Weidenhammer and this year’s purchase of a majority interest in a Brazilian flexible packaging business, partially offset by the sale of two metal ends plants. Sales also benefited from solid volume gains in flexible packaging, international composite cans, and injection-molded, thermoformed and blow-molded plastics, which more than offset declines in North Americacomposite cans. Exclusive of acquisitions and dispositons, sales decreased year over year as the net gain in volume was more than offset by lower selling prices for plastic and film-based products due to declining resin costs and a $23 million negative impact from exchange rate changes. Segment operating profit improved 8.3 percent in the quarter due to a positive price/cost relationship, acquisition earnings and solid volume growth in international composite cans, flexible packaging and rigid plastic containers. These positive factors were partially offset by higher labor, pension, maintenance and other operating costs and lower year-over-year manufacturing productivity resulting from last year’s fourth-quarter reimbursement of excess costs incurred earlier in that year due to a raw material issue in our flexible packaging business.

Display and Packaging
The Display and Packaging segment includes the following products and services: designing, manufacturing, assembling, packing and distributing temporary, semi-permanent and permanent point-of-purchase displays; supply chain management services, including contract packing, fulfillment and scalable service centers; retail packaging, including printed backer cards, thermoformed blisters and heat-sealing equipment; and paper amenities, such as coasters and glass covers.

Fourth quarter 2015 sales for this segment were $156 million, compared with $169 million in 2014. Segment operating profit was $3.6 million in the quarter, compared with $1.1 million in 2014.

Sales for the quarter declined 8.0 percent as the negative impact of foreign exchange more than offset volume growth in international display and packaging activity and higher selling prices. Quarterly operating profit for the segment improved significantly year over year due to cost recoveries paid by a customer as well as a positive price/cost relationship and improvements in productivity. These positive factors were partially offset by higher labor and other costs, and the negative impact of foreign currency translation.

Paper and Industrial Converted Products
The Paper and Industrial Converted Products segment includes the following products: 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 material recycling services.

Fourth quarter 2015 sales for the segment were $431 million down from $476 million in 2014. Segment operating profit was $25.0 million, compared with $37.0 million in 2014.

Segment sales declined 9.5 percent due to the negative impact of foreign exchange and lower selling prices related to declining recovered paper costs. Sales were also negatively impacted by lower volume in recycling, corrugating, international paper and reels, partially offset by improved volume in European and Latin American tubes and cores. North America tube and core volume was essentially flat. Operating profit declined 32.4 percent with more than half of the negative variance directly related to the impact of declining market conditions on our corrugating medium paper machine with the balance essentially stemming from unfavorable exchange rates changes and higher pension expense.

Protective Solutions
The Protective Solutions segment includes the following products: custom-engineered, paperboard-based and expanded foam protective packaging and components; and temperature-assured packaging.

Fourth quarter 2015 sales were $130 million, compared with $127 million in the same period in 2014. Operating profit was $9.8 million, compared with $8.8 million in the same quarter of 2014.

The nearly 3 percent increase in fourth-quarter sales was due to higher volume in temperature-assured packaging and paper-based appliance packaging, partially offset by the negative impact of foreign exchange. Operating profit increased nearly 12 percent due to a positive price/cost relationship, volume gains and manufacturing productivity improvements, partially offset by a negative mix of business and higher labor and other operating costs.

 

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