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Sonoco Reports Third Quarter 2016 Results

Thursday, October 20, 2016

Press release from the issuing company

HARTSVILLE, S.C. - Sonoco (NYSE:SON), one of the largest diversified global packaging companies, today reported financial results for its third quarter, ending October 2, 2016.

Third Quarter Highlights

  • Third quarter 2016 GAAP earnings per diluted share were $0.64, compared with $0.43 in 2015.
  • Third quarter 2016 GAAP results included $0.08 per diluted share, after tax, in restructuring expenses related to plant closures and a goodwill impairment charge involving its industrial converting operations in Brazil. In the third quarter of 2015, GAAP results included $0.23 per diluted share, after tax, in foreign exchange-related asset impairment charges related to operations in Venezuela; asset impairment and restructuring charges related to plant closures; and legal and other professional expenses related to prior misstatements of financial results at a former packaging center in Mexico.
  • Base net income attributable to Sonoco (base earnings) for third quarter 2016 was $0.72 per diluted share, compared with $0.65 in 2015. (See base earnings definition, explanation and reconciliation to GAAP earnings later in this release.) Sonoco previously provided third quarter base earnings guidance of $.65 to $.70 per diluted share.
  • Third quarter 2016 net sales were $1.21 billion, down from $1.24 billion in 2015.
  • Cash flow from operations was $162.6 million in the third quarter of 2016, compared with $145.1 million in 2015. Free cash flow for the third quarter was $85.2 million, compared with $55.9 million in 2015. (See free cash flow definition and reconciliation to cash flow from operations later in this release.)
  • During the third quarter, Sonoco reached a definitive agreement to sell its rigid plastics blow molding operations to Amcor for $280 million. The transaction is expected to close by or near the end of October 2016.

Fourth Quarter and 2016 Guidance Update

  • Base earnings for the fourth quarter of 2016 are estimated to be in the range of $.60 to $.65 per diluted share. This guidance takes into consideration the expected closing on the sale of the Company's rigid plastic blow molding operations at the end of October. Furthermore, as a result of the Company's accounting calendar, the fourth quarter of 2016 contains five fewer calendar days and four fewer business days than in 2015. Base earnings in the fourth quarter of 2015 were $.64 per diluted share.
  • Full-year 2016 base earnings guidance has been raised to a range of $2.70 to $2.75 per diluted share, compared to previous guidance of $2.68 to $2.74. Base earnings were $2.51 in 2015.
  • Free cash flow in 2016 is projected to be approximately $140 million, reflecting expected operating cash flow of $490 million. Expected free cash flow for the year remains unchanged from previous guidance and excludes any proceeds from the sale of the rigid plastics blow molding operations.
  • Note: Fourth-quarter and full-year 2016 GAAP guidance are not provided in this release due to the likely occurrence of one or more of the following, the timing and magnitude of which we are unable to reliably forecast: possible gains or losses on the sale of businesses or other assets, restructuring costs and restructuring-related impairment charges, acquisition related costs, and the income tax effects of these items and/or other income tax-related events. These items could have a significant impact on the Company's future GAAP financial results.

Third Quarter Review
Commenting on the Company’s third quarter results, Sonoco President and Chief Executive Officer Jack Sanders said, “Sonoco achieved better than anticipated financial results driven by record results from our Consumer Packaging segment along with continued improvement in our Paper and Industrial Converted Products segment. Overall, compared to the prior year quarter, the Company's earnings benefited from gains from fixed-cost productivity, a positive price/cost relationship, manufacturing productivity and lower pension and post-retirement benefit costs. Offsetting these positive factors were higher labor, maintenance and other operating costs while overall volume was essentially flat for the quarter.

“Operating profit in our Consumer Packaging segment was up 15.3 percent, from the prior-year quarter, reaching record levels for the eighth consecutive quarter, while segment operating margins improved 170 basis points over the same quarter last year. Overall, the segment benefited from a positive price/cost relationship, manufacturing productivity improvement and lower pension expense which more than offset higher labor, maintenance and other operating costs. The segment also gained from modest volume growth as solid rigid plastics and flexible packaging growth was partially offset by lower global composite can volume. Segment sales declined slightly due to lower selling prices, primarily related to raw material deflation. Display and Packaging segment operating profit declined slightly from the prior year as fixed-cost and manufacturing productivity improvements and a modest positive price/cost relationship were more than offset by lower volume/mix and higher labor, maintenance and other operating costs.

“Results in our Paper and Industrial Converted Products segment improved slightly in the third quarter with operating profit gaining 2.9 percent over the same quarter last year and operating margins improving 30 basis points. The improved results were driven by strong fixed-cost and manufacturing productivity and lower pension expense more than offset the continued negative impact of difficult markets for our one corrugating medium paper machine. Absent corrugating medium losses, segment earnings would have been well above last year's results. Segment volume/mix was slightly negative in the quarter due to depressed reel sales which overshadowed continued growth in global paperboard and tubes and cores. Quarterly segment sales declined slightly year over year as lower corrugating medium prices and the divestiture of a paperboard mill in France in May 2016 more than offset higher converted product selling prices.

“Operating profit in our Protective Solutions segment was essentially flat year over year as a positive price/cost relationship and volume growth were more than offset by higher labor, maintenance and other operating costs. Also in the quarter, Sonoco's ThermoSafe unit acquired the assets and operations of Laminar Medica in the United Kingdom and Czech Republic, from Clinimed (Holdings) Limited, and the PharmaPort 360™ active temperature-controlled cargo container assets, licenses, trademarks and manufacturing rights from AAR Corporation.”

GAAP net income attributable to Sonoco in the third quarter was $65.4 million, or $0.64 per diluted share, compared with $43.9 million, or $0.43 per diluted share, in 2015. Base earnings in the third quarter were $73.5 million, or $0.72 per diluted share, compared with $66.7 million, or $0.65 per diluted share, in 2015. Base earnings and base earnings per diluted share are non-GAAP financial measures adjusted to remove restructuring-related items, asset impairment charges, acquisition expenses and other items, if any, the exclusion of which the Company believes improves comparability and analysis of the ongoing operating performance of the business. (See base earnings definition, explanation and reconciliation to GAAP earnings later in this release.)

Third quarter GAAP earnings include after-tax charges of $8.1 million, or $0.08 per diluted share, in restructuring expenses related to plant closures, a goodwill impairment charge involving the Company's industrial operations in Brazil, and acquisition related costs. In the third quarter of 2015, GAAP results included $0.23 per diluted share, after tax, in foreign exchange-related asset impairment charges related to operations in Venezuela; asset impairment and restructuring charges; and legal and professional expenses related to the investigation of prior misstatements from a former Mexico packaging center.

Net sales for the third quarter were $1.21 billion, down $33.9 million, or 2.7 percent, from last year’s quarter. The decline in sales was a result of the previously reported discontinuation of the Company's contract packaging business in Irapuato, Mexico; lower selling prices, primarily linked to lower raw material costs; and divested businesses.

Gross profits were $235.4 million in the third quarter, up $6.0 million, compared with $229.4 million in the same period in 2015. Gross profit as a percent of sales improved to 19.5 percent, compared with 18.5 percent in the same period in 2015. The 101 basis points improvement in the quarter was due primarily to a positive overall price/cost relationship, lower fixed costs and lower pension expense, which were partially offset by higher labor expenses and increased operating costs. Third-quarter selling, general and administrative expenses were down $8.8 million from the prior year at $121.6 million, driven mostly by a decrease in legal and professional costs related to the previously disclosed 2015 investigation of the misstatement of financial results in Mexico. Other than this change, selling, general and administrative expenses were flat as lower pension and post-retirement benefit costs, and fixed-cost reductions, were mostly offset by wage inflation and higher management incentive costs.

Cash generated from operations in the third quarter was $162.6 million, compared with $145.1 million in the same period in 2015. This $17.6 million improvement was largely driven by higher GAAP earnings as well as changes in working capital. Cash consumed by working capital changes was higher in 2015 primarily due to a greater increase in accounts receivable during last year's quarter resulting from invoice and payment timing with certain customers. During the quarter, net capital expenditures were $40.3 million, compared to $53.9 million in the prior year quarter; and cash dividends paid were $37.1 million, compared to $35.3 million in the prior year.

Free cash flow for the third quarter was $85.2 million, compared with $55.9 million in the same quarter last year. Free cash flow is a non-GAAP financial measure which may not represent the amount of cash flow available for general discretionary use because it excludes non-discretionary expenditures, such as mandatory debt repayments and required settlements of recorded and/or contingent liabilities not reflected in cash flow from operations. (See free cash flow reconciliation later in this release. Free cash flow is defined as cash flow from operations minus net capital expenditures and cash dividends. Net capital expenditures is defined as capital expenditures minus proceeds from, and/or plus costs incurred in, the disposition of capital assets.)

Year-to-date Results

For the first nine months of 2016, net sales were $3.64 billion, down $56.6 million, compared to $3.70 billion in 2015. Sales declined during the period due to an estimated $70 million impact from foreign currency translation, lower selling prices related to lower raw material costs and the loss of contract packaging business in Mexico. These negative factors were partially offset by improvements to volume/mix, including the positive effect of six additional calendar days, which includes four more business days.

GAAP net income attributable to Sonoco for the first three quarters of 2016 was $181.6 million or $1.78 per diluted share, compared with $194.1 million or $1.90 per diluted share in the same period in 2015. Current year-to-date earnings included $33.1 million, or $0.33 per diluted share, in after-tax asset impairment and restructuring charges related to the sale of the Company's paper mill in France, the sale of its retail packaging business in Puerto Rico, along with other previously announced plant closures and related restructuring actions and a goodwill impairment charge for the Company's industrial converted products business in Brazil. GAAP earnings in the first nine months of 2015 benefited from a net gain of $2.9 million, after tax, or $.03 per diluted share, 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 a favorable tax reserve adjustment, partially 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 former Mexico packaging center.

Base earnings in the first three quarters of 2016 were $214.7 million or $2.11 per diluted share, compared with $191.2 million or $1.87 per diluted share in the same period in 2015. This 12.3 percent improvement stemmed from a positive price/cost relationship, gains in volume/mix, including the positive impact of additional business days, productivity improvements, lower pension expense, and acquisitions net of divestitures. Partially offsetting these positive factors were higher labor, maintenance and other operating costs and a negative impact of foreign currency translation. (See base earnings definition, explanation and reconciliation to GAAP earnings later in this release.)

Current year-to-date gross profit was $722.6 million, up 4.7 percent, compared with $690.1 million in the first three quarters of 2015, largely due to a positive/price cost relationship and gains in volume/mix. Gross profit as a percent of sales was 19.8 percent, up 119 basis points, from 18.7 percent in 2015.

For the first nine months of 2016, cash generated from operations was $348.7 million, compared with $318.1 million in the same period in 2015. Year-to-date 2016 pension and post-retirement plan contributions were $10.5 million more than the previous year. Net capital expenditures and cash dividends were $143.9 million and $109.8 million, respectively, during the first nine months of 2016, compared with $109.6 million and $102.7 million, respectively, in 2015.

Free cash flow for the first nine months of 2016 was $94.9 million, compared with $105.9 million in same period last year. As noted above, free cash flow is a non-GAAP financial measure which may not represent the amount of cash flow available for general discretionary use. (See free cash flow reconciliation later in this release.) Year-to-date, the Company has spent $58.9 million to repurchase approximately 1.25 million shares of common stock at an average cost of $47.38. These repurchases were made under the Company’s previously announced plan to repurchase shares at a total cost of up to $100 million during 2016.

At October 2, 2016, total debt was approximately $1.09 billion, compared with $1.13 billion as of December 31, 2015. At the end of the third quarter, the Company had a total debt to total capital ratio of 40.7 percent, compared with 42.4 percent at December 31, 2015. Cash and cash equivalents were $159.3 million at October 2, 2016, compared with $182.4 million at December 31, 2015.

Corporate
Net interest expense for the third quarter of 2016 declined slightly to $12.4 million, compared with $13.7 million during the same period in 2015. The 2016 third quarter effective tax rates on GAAP and base earnings were 32.1 percent and 30.7 percent, compared with a 37.7 percent and 30.8 percent for GAAP and base earnings, respectively, in the prior year’s quarter. The main driver in the year-over-year decrease in the GAAP income tax rate is related to the 2015 unfavorable adjustment for hyperinflationary accounting in Venezuela.

Fourth Quarter and Full-Year 2016 Outlook
Sonoco expects fourth quarter 2016 base earnings to be in the range of $.60 to $.65 per diluted share. This guidance takes into consideration the expected closing on the sale of the Company's rigid plastic blow molding operations at the end of October. Furthermore, as a result of the Company's accounting calendar, the fourth quarter of 2016 contains five fewer calendar days and four fewer business days than in 2015. The Company’s fourth quarter 2015 base earnings were $.64 per diluted share.

Full-year 2016 base earnings guidance has been raised to $2.70 to $2.75 per diluted share, compared with previous guidance of $2.68 to $2.74 per diluted share. The Company’s 2016 base earnings guidance anticipates a 31.0 percent effective tax rate for the year. Free cash flow expectations are unchanged at approximately $140 million in 2016, compared to $155 million in 2015.

Note: Fourth-quarter and full-year 2016 GAAP guidance are not provided in this release due to the likely occurrence of one or more of the following, the timing and magnitude of which we are unable to reliably forecast: possible gains or losses on the sale of businesses or other assets, restructuring costs and restructuring-related impairment charges, acquisition related costs, and the income tax effects of these items and/or other income tax-related events. These items could have a significant impact on the Company's future GAAP financial results.

Although the Company believes the assumptions reflected in the range of guidance are reasonable, given uncertainty regarding the future performance of the overall economy and 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, Sanders said, “Our ability to grow base earnings by 12 percent through the first nine months of 2016 is a testament to our focused strategy of growing our businesses by providing our customers with innovative packaging solutions and optimizing our portfolio to produce consistent earnings and improved returns. As a result of our solid performance to date and our expectations for the rest of 2016, we are raising our full-year guidance despite continued headwinds from slow global economic conditions. Our focus for the rest of 2016 is to gain market share by introducing new commercial products and achieving new customer awards. To further grow, we are actively pursuing rational, strategic acquisitions focused on growing our flexible packaging, thermoforming rigid plastics and protective packaging platforms. At the same time we are looking to further optimize our portfolio and pursue alternatives to address the weak performance in corrugating medium operations while continuing to improve our cost structure.”

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); extruded and injection-molded plastic products; printed flexible packaging; global brand artwork management; and metal and peelable membrane ends and closures.

Third-quarter 2016 sales for the segment were $520 million, compared with $521 million in 2015. Segment operating profit was $63.8 million in the third quarter, compared with $55.3 million in the same quarter of 2015.

Segment sales declined 0.3 percent compared to the prior-year quarter due to lower selling prices, stemming primarily from lower raw material costs, partially offset by positive volume/mix. Segment operating profit increased 15.3 percent over the prior year quarter and operating margins improved to 12.3 percent of sales. Overall, the segment benefited from a positive price/cost relationship, manufacturing productivity improvements and lower pension expense, which more than offset higher labor, maintenance and other operating costs. The segment also gained from a modest volume/mix as solid rigid plastics and flexible packaging growth was partially offset by lower global composite can volume.

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.

Third quarter 2016 sales for this segment were $132 million, compared with $163 million in 2015. Segment operating profit was $5.2 million in the quarter, compared with $5.4 million in 2015.

Sales declined 19.0 percent compared to last year’s quarter due primarily to the previously mentioned loss of contract packaging business in Mexico. Operating profit in the segment declined slightly in the quarter as fixed-cost and manufacturing productivity and a positive price/cost relationship were more than offset by negative volume/mix in retail security packaging along with higher labor and other operating costs.

Paper and Industrial Converted Products
The Paper and Industrial Converted Products segment includes the following products: paperboard tubes and cores; fiber-based construction tubes; wooden, metal and composite wire and cable reels and spools; and recycled paperboard, linerboard, corrugating medium, recovered paper and material recycling services.

Third quarter 2016 sales for the segment were $425 million down from $428 million in 2015. Segment operating profit was $33.2 million in the third quarter, compared with $32.3 million in 2015.

Segment sales declined approximately 0.7 percent during the quarter as lower corrugating medium prices and the divestiture of a paperboard mill in France were only partially offset by higher selling prices. Segment operating profit improved 2.9 percent compared to the prior year quarter as manufacturing and fixed-cost productivity improvements and lower pension expense more than offset a negative price/cost relationship stemming from lower corrugating medium paper prices, and higher labor, maintenance and other operating costs. Volume/mix was essentially flat as growth in North America paper operations and Europe and Asia tubes and cores essentially offset declines in reels and domestic tubes and cores.

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.

Third quarter 2016 sales were $132 million, compared with $130 million in 2015. Operating profit was $12.6 million, compared with $12.9 million in the third quarter of 2015.

This segment’s 1.5 percent increase in third quarter sales came from gains in volume/mix, partially offset by lower selling prices. Operating profit was down 2.6 percent in the quarter as volume growth and a positive price/cost relationship were more than offset by higher labor, maintenance and other operating costs and a negative mix of business.

 

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