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Sonoco Reports Second Quarter 2017 Results

Thursday, July 20, 2017

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 second quarter, ending July 2, 2017.

Second Quarter Highlights

  • Second quarter 2017 GAAP earnings per diluted share were $0.43, compared with $0.55 in 2016.
  • Second quarter 2017 GAAP results included $0.28 per diluted share, after tax, in charges for pension settlement distributions, restructuring-related activities and acquisitions expenses. In the second quarter of 2016, GAAP results included $0.18 per diluted share, after tax, in asset impairment and restructuring expenses primarily related to the divestiture of a paper mill in France and a retail packaging business in Puerto Rico.
  • Base net income attributable to Sonoco (base earnings) for second quarter 2017 was $0.71per diluted share, compared with $0.73 in 2016. (See base earnings definition, explanation and reconciliation to GAAP earnings later in this release.) Sonoco previously provided second-quarter 2017 base earnings guidance of $0.67 to $0.73 per diluted share.
  • Second-quarter 2017 net sales were $1.24 billion, up 2.9 percent, from $1.21 billion in 2016.
  • Cash flow from operations was $104.3 million in the first half of 2017, compared with $186.0 million in 2016. Free cash flow for the first six months of 2017 was negative $68.2 million, compared with positive $9.8 million in 2016. (See free cash flow definition and reconciliation to cash flow from operations later in this release.)
  • On July 11, 2017, the U.S. Trade Commission granted Sonoco early termination of the waiting period for its acquisition of Clear Lam Packaging, Inc., a leading developer, manufacturer and converter of innovative flexible and forming film packaging materials used with fresh and processed foods, personal health care products, electronics, household products and industrial products, based in Elk Grove Village, Ill. The approximately $170 million transaction is expected to close by the end of July 2017.

Third Quarter and Full Year Guidance Update

  • Base earnings for the third quarter of 2017 are estimated to be in the range of $0.71 to $0.77per diluted share. This guidance takes into consideration the impact of acquisitions, net of divestitures, and elevated recovered paper prices during the third quarter. Base earnings in the third quarter of 2016 were $0.72 per diluted share.
  • Full-year 2017 base earnings guidance has been narrowed to a range of $2.73 to $2.80, which includes a targeted $0.07 per diluted share expected to come from acquisitions.
  • 2017 operating cash flow and free cash flow have been updated to approximately $445 million and $100 million, respectively, due to higher than expected increases in working capital primarily due to higher selling prices and higher material costs.

Note: Third-quarter and full-year 2017 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.

Second Quarter Review
Commenting on the Company’s second quarter GAAP and base results, Sonoco President and Chief Executive Officer Jack Sanders said, “Sonoco's balanced portfolio of consumer-related, industrial and protective packaging businesses continues to produce consistent results despite generally weak market demand and fluctuating raw material costs. Compared to the prior-year quarter, the Company benefited from a positive price/cost relationship, manufacturing productivity improvements, and lower management incentives. However, these positive factors were offset by lower volume/mix, operating cost inflation and higher taxes on our base operating results.

“Operating profit in our Consumer Packaging segment was essentially flat with last year's quarter as total productivity and a slightly positive price/cost relationship essentially offset lower volume. Segment sales rose 2.0 percent due to acquisitions, net of divestitures, and higher selling prices implemented to recover rising raw material costs which was partially offset by the negative impact of foreign exchange.

"Our Display and Packaging segment's operating profit declined from last year's quarter on lower volume/mix and manufacturing productivity declines. Segment sales declined 11.7 percent due to loss of the Company's contract packaging business in Mexico and Brazil, as well as lower volumes in our domestic display and retail packaging businesses.

“Operating profit in our Paper and Industrial Converted Products segment improved 16.1 percent to the highest level in nearly three years as operating margin increased 70 basis points to 9.3 percent. The segment benefited from strong manufacturing productivity improvements and a positive price/cost relationship which were only partially offset by higher labor, maintenance and other expenses. Current-quarter segment sales grew by 8.3 percent due primarily to higher selling prices implemented to recover escalating recovered paper costs, partially offset by the prior-year divestiture of a paperboard mill in France, lower volume and the negative impact of foreign exchange.

“Our Protective Solutions segment's operating profit declined 23.0 percent from the prior-year quarter, as a negative price/cost relationship and declining manufacturing productivity resulting from lower volume were only partially offset by fixed-cost productivity improvements. Sales improved 3.2 percent in the quarter due primarily to acquisitions and higher selling prices, which offset lower volume.”

GAAP net income attributable to Sonoco in the second quarter was $43.1 million, or $0.43 per diluted share, compared with $56.3 million, or $0.55 per diluted share, in 2016. Base earnings in the second quarter were $71.8 million, or $0.71 per diluted share, compared with $74.7 million, or $0.73 per diluted share, in 2016. 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.)

Second quarter GAAP earnings include after-tax charges of $28.7 million, or $0.28 per diluted share, related to pension settlement distributions, restructuring costs from previously announced plant closures and acquisition expenses. During the quarter, the Company made lump sum pension settlement payments to certain pension plan participants not yet receiving benefits. By settling these accounts, the Company should have a modest reduction in Pension Benefit Guarantee Corporation premiums as well as lower administrative costs, while reducing some pension volatility to future earnings. There was no reported cash impact from the settlements as the payments were made from existing pension assets. In the second quarter of 2016, GAAP results included $0.18 per diluted share, after tax, in asset impairment and restructuring expenses primarily related to the divestiture of a paper mill in France and a retail packaging business in Puerto Rico.

Net sales for the second quarter were $1.24 billion, an increase of $35.0 million, or 2.9 percent, from last year’s quarter. The improvement in sales was a result of higher selling prices, particularly from rising raw material prices, and sales added from acquisitions, net of divestitures. These positive factors were partially offset by lower volume and the negative impact of foreign exchange.

Gross profits were $235.9 million in the second quarter, down $6.1 million, compared with $242.0 million in the same period in 2016. Gross profit as a percent of sales declined to 19.0 percent, compared with 20.1 percent in the same period in 2016. The gross profit percentage reduction in the quarter was due primarily to lower volume/mix and the impact of rising raw material prices, partially offset by manufacturing productivity gains. Second-quarter selling, general and administrative expenses were up $30.6 million from the prior year at $157.2 million. This increase was driven by the previously mentioned charges related to lump sum pension settlements, acquisition and acquisition-related costs and wage inflation. These increases were partially offset by lower management incentives.

Year-to-date Results

For the first six months of 2017, net sales were $2.41 billion, down $19.0 million, compared with $2.43 billion in 2016. Sales declined during the period due to lower volume, the loss of contract packaging business in Mexico and Brazil, the negative impact of foreign exchange and divestitures, net of acquisitions. These negative factors were partially offset by higher selling prices implemented to recover rising raw material costs.

GAAP net income attributable to Sonoco for the first half of 2017 was $96.9 million or $0.96 per diluted share, compared with $116.2 million or $1.14 per diluted share in 2016. Earnings in the first half of 2017 included $34.9 million, or $0.35 per diluted share, related to the previously discussed lump sum pension settlements, after-tax restructuring charges and acquisition expenses. These charges were partially offset by non-base insurance settlement gains. Earnings in the first half of 2016 included $25.0 million, or $0.24 per diluted share, in after-tax asset impairment and restructuring charges related to the sales of the Company's paper mill in Franceand retail packaging business in Puerto Rico, along with other previously announced restructuring actions.

Base earnings in the first half of 2017 were $131.7 million, or $1.31 per diluted share, compared with $141.2 million, or $1.38 per diluted share in the same period in 2016, a 6.7 percent decline. In addition, current year-to-date gross profit was $456.1 million, compared with $487.3 million in the first half of 2016. These declines stemmed from lower volume/mix and divestitures, net of acquisitions, partially offset by fixed-cost productivity gains.  (See base earnings definition, explanation and reconciliation to GAAP earnings later in this release.) Gross profit as a percent of sales in the first half of 2017 was 18.9 percent, compared with 20.0 percent in 2016. 

For the first half of 2017, cash generated from operations was $104.3 million compared with $186.0 million in 2016, a decline of $81.8 million. The year-to-date decrease in net income attributable to Sonoco of  $19.3 million was offset by a decrease in year-to-date net pension and post-retirement plan expenses and contributions of $20.1 million. However, changes in tax accounts consumed $38.3 million more cash in the first six months of 2017 compared to 2016. This increased consumption was partially driven by the settlement of outstanding taxes payable at the end of 2016 related to the disposal of the Company's blow molded plastics business. Asset impairment charges/losses on dispositions of assets was $13.7 million less of a benefit in the current period compared to 2016. The benefit in 2016 included non-cash losses related to dispositions of a paper mill in France. In addition, changes in other operating activity consumed $36.9 million more cash in 2017 than in the first six months of 2016. 2017 saw increased cash consumption due to the timing of various collections and payments of miscellaneous receivables and liabilities. Net capital expenditures and cash dividends were $96.8 million and $75.6 million, respectively, during the first half of 2017, compared with $103.6 million and $72.7 million, respectively in 2016.

Free cash flow for the first half of 2017 was a negative $68.2 million, compared with positive $9.8 million in the same period 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.)

At July 2, 2017, total debt was approximately $1.31 billion, compared with $1.05 billion as of December 31, 2016. At the end of the second quarter, the Company had a total-debt-to-total-capital ratio of 43.7 percent, compared with 40.4 percent at December 31, 2016. Cash and cash equivalents were $207.6 million as of July 2, 2017, compared with $257.2 million at December 31, 2016. The increase in the debt, debt ratio as well as the reduction in cash are primarily due to the $230 million acquisition of Peninsula Packaging, Inc., a thermoforming business, in March 2017. 

Corporate
Net interest expense for the second quarter of 2017 declined to $12.8 million, compared with $13.5 million during the same period in 2016, due to higher interest income on cash deposits as well as lower average borrowings in the current-year quarter at lower average interest rates. The 2017 second-quarter effective tax rates on GAAP and base earnings were 29.6 percent and 32.0 percent, respectively, compared with 31.5 percent and 29.6 percent, respectively, in the prior year’s quarter. The GAAP and base tax rates were both affected by favorable 2016 discrete tax adjustments including a benefit from the release of reserves for uncertain tax positions, along with more favorable benefit from the manufacturer’s deduction and other federal tax adjustments in that year.  In addition, the 2017 GAAP rate reflects a more favorable distribution of earnings between low and high tax jurisdictions, primarily from the pension settlement expense occurring in the U.S., which together with the 2016 sale of the French paper mill on which no tax benefit was generated, are the primary drivers of the overall GAAP rate decrease. 

Third Quarter and Full-Year 2017 Outlook
Sonoco expects third-quarter 2017 base earnings to be in the range of $0.71 to $0.77 per diluted share. This guidance takes into consideration the impact of acquisitions, net of divestitures, and elevated recovered paper prices during the third quarter. Base earnings in the third quarter of 2016 were $0.72 per diluted share.

Full-year 2017 base earnings guidance is expected to be a range of $2.73 to $2.80, which includes a targeted $0.07 per diluted share expected to come from current-year acquisitions. This updated guidance slightly narrows the range of the Company's previous guidance range of $2.73 to $2.83. The Company’s 2017 base earnings guidance anticipates a 31.7 percent effective tax rate for the year, up slightly from previous guidance.

Operating cash flow in 2017 is expected to be approximately $445 million, and free cash flow is expected to be approximately $100 million, due to higher than expected increases in working capital primarily due to higher selling prices and higher material costs.

Note: Third-quarter and full-year 2017 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, “We are cautious entering the second half of 2017 as consumer preferences for packaged food continues to evolve and raw material costs remain unpredictable. We believe our diverse mix of consumer-related, industrial and protective packaging businesses are proving we can deliver consistent results in the midst of challenging markets. Our focus remains squarely on our Grow and Optimize strategy. For example, we are working to develop new packaging to serve the faster-growing perimeter of the store. The complementary acquisitions of Clear Lam Packaging and Peninsula Packaging significantly expand our flexible packaging and thermoforming plastics capabilities to build a strong position for developing and producing high-barrier structures necessary to meet growing consumer demand for more fresh and healthy foods.

Finally, while we have been very effective adjusting to the current environment, we realize we must continue to improve our operating structure.  In order to do so, we are taking a more holistic look at each business to ensure we are serving the right customers with the right cost structure to ensure we improve our competitiveness and drive long-term margin improvement."

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.

Second-quarter 2017 sales for the segment were $521 million, compared with $511 million in 2016. Segment operating profit was $59.1 million  in the second quarter, compared with $59.5 million in the same quarter of 2016.

Segment sales increased 2.0 percent compared to the prior-year quarter due to acquisitions, net of divestitures, and higher selling prices, which more than offset lower volume and the negative impact of foreign exchange. Segment operating profit was essentially flat compared to the prior-year quarter, reflecting modest gains from total productivity and positive price/cost offset by lower volume, primarily in composite cans in Europe and metal ends in North America, and wage inflation.  As a result, operating margin declined 30 basis points to 11.3 percent.

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.

Second-quarter 2017 sales for this segment were $116 million, compared with $131 million in 2016. Segment operating profit was $1.4 million in the quarter, compared with $5.0 million in the prior-year quarter.

Sales declined 11.7 percent compared to last year’s quarter due primarily to the loss of the Company's contract packaging business in Mexico and Brazil, lower volume in domestic displays and retail packaging, and the negative impact of foreign exchange. Operating profit in the segment declined year over year due to negative volume/mix in domestic displays and negative manufacturing productivity in retail packaging.

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.

Second-quarter 2017 sales for the segment were $469 million, up from $433 million in 2016. Segment operating profit was $43.5 million in the second quarter, compared with $37.5 millionin 2016.

Segment sales grew approximately 8.3 percent during the quarter due to higher selling prices implemented to recover higher raw material costs, partially offset by the divestiture of a paperboard mill in France, lower volume and the negative impact of foreign exchange. Segment operating profit improved 16.1 percent compared to the prior year quarter due to manufacturing productivity improvements and a positive price/cost relationship, including the Company's corrugating medium operations. Partially offsetting these positive results were higher labor, maintenance and other operating expenses. Lower volume in North America tubes and cores was partially offset by improvements in Europe.

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.

Second-quarter 2017 sales were $135 million, compared with $130 million in 2016. Operating profit was $11.0 million, compared with $14.2 million in the second quarter of 2016.

This segment’s 3.2 percent increase in second-quarter sales came from acquisitions and higher selling prices offset by negative volume/mix. Operating profit was down 23.0 percent in the quarter due to unfavorable manufacturing productivity and a negative price/cost relationship. These detriments were only partially offset by fixed-cost productivity improvements.

 

 

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Jennifer Matt

David Zwang, Editor/Analyst
David travels the globe helping companies increase their productivity, margins and market reach.

 

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