Sonoco President and Chief Executive Officer M. Jack Sanders and Vice President and Chief Financial Officer Barry L. Saunders today provided the investment community in New York with an overview of the Company's strategic initiatives and details of its financial outlook.
Company Reaffirms 2013 Estimates; Expects Record Base Earnings in 2014
Sonoco expects fourth quarter and full-year 2013 base earnings to be unchanged from the Company's previously announced guidance of $.55 to $.59 and $2.27 to $2.31 per diluted share, respectively. Last year, the Company reported fourth quarter and full-year 2012 base earnings of $.56 and $2.21 per diluted share, respectively. 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.
"Despite the uncertainty involving the government shutdown in October, we have not seen any significant changes in business conditions in the fourth quarter that would cause us to change our previously communicated guidance," said CFO Barry Saunders. "That said, business activity in the last few weeks of the year is always uncertain and we are hearing of normal plans by some of our customers to take holiday downtime. We are preparing accordingly."
Commenting on 2013 results, CEO Jack Sanders said, "We are pleased with our overall performance thus far in 2013, and expect to meet our full-year financial targets. Through the first nine months of 2013, sales, gross profits and cash flow from operations were running at record levels. Although we got off to a bit of a slow start in the first quarter, by September year-to-date base earnings were up about 5 percent, despite higher pension expenses. Operating profits in our Consumer Packaging, Display and Packaging, and Protective Solutions segments were up year over year, while results from our Industrial businesses were essentially flat despite tough economic conditions in Europe and South America."
Sonoco estimates 2014 base earnings per diluted share to be in the range of $2.45 to $2.53, with a projected midpoint of $2.49 per diluted share. According to CFO Barry Saunders, the Company's midpoint guidance assumes a $.31 per share improvement over 2013 expected results stemming primarily from a combination of modest volume growth, lower pension and post-retirement expenses and productivity gains. Offsetting these improvements is $.11 per share in negative items, driven by an estimated $.07 per share impact from higher depreciation expenses, a modest increase in the effective tax rate and higher information technology and other expenses.
"These projections suggest that Sonoco should have record base earnings in 2014, surpassing the $2.38 per diluted share achieved in 2007," Saunders said.
Strong Free Cash Flow Outlook Provided; 2 Million Share Repurchase Announced
Saunders pointed out that through the first nine months of 2013 cash flow from operations has increased 44 percent from the same period of 2012 to a record $421 million, due to lower cash tax payments, lower pension and post retirement contributions and higher earnings. For 2013, the Company expects to generate free cash flow of approximately $190 million, after paying approximately $125 million in dividends to shareholders. (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 the disposal of capital assets.) Much of this year's free cash flow has been used to reduce debt. Sonoco expects to end 2013 with net debt of approximately $810 million which would give the Company a net debt to total capitalization ratio of approximately 34 percent and a net debt to EBITDA ratio of approximately 1.4 times.
Looking forward, Sonoco is projecting that annual cash flow from operations should average approximately $450 million over the next two years. For 2014, free cash flow is estimated to be approximately $130 million, a decrease from 2013 levels due primarily to anticipated higher pension contributions and cash tax payments, CFO Saunders said.
President and CEO Jack Sanders outlined Sonoco's anticipated capital deployment plans saying, "Following the pay down of more than $300 million in debt over the past two years, we are now focused on diversifying capital deployment to grow the Company and return value to our shareholders."
"Our first priority will be to invest the capital necessary to grow our businesses and improve productivity while maintaining an investment grade credit rating. Furthermore, we expect to continue rewarding shareholders with dividends that should grow commensurate with earnings," he said, noting that Sonoco has paid cash dividends to shareholders for 89 consecutive years and increased dividends for 31 years in a row.
"In addition, we plan to make targeted, bolt-on acquisitions and to return additional cash to shareholders through the buy back of shares from time to time to reduce dilution. During 2014, we expect to repurchase at least 2 million shares through open market purchases beginning in January," he said, pointing out that Sonoco's Board of Directors has previously authorized the repurchase of up to 5 million shares.
Strategy Focusing Resources to Targeted Growth Markets
Sanders said that Sonoco is focusing capital investments and other resources in those businesses that serve faster growing markets, including the Company's Consumer Packaging and Protective Solutions businesses and selected emerging market opportunities for composite cans and tubes and cores.
"Our targeted growth areas include flexible packaging in Brazil, Southeast Asia and North America; Protective Solutions, particularly in Consumer and Industrial molded foam markets serving growing appliance and automotive sectors in North America; the global expansion of temperature assurance packaging serving life science markets; and finally to grow tubes and cores in Eastern Europe, Russia and the Middle East and composite cans in Poland,Malaysia and China," he said.
Despite the slow growth in consumer demand over the past several years, Sanders said that Sonoco is targeting aggressive, market-focused organic growth strategies and opportunities that should allow the Company to generate sales at up to twice the current growth rates for packaged consumer foods.
"We are beginning to systematically drive change at Sonoco to enhance innovation and pave the way for faster growth. To spur organic growth, we are using our new customized solutions process in three market-focused pilots in shaving, pet food and a food category we have termed 'Fresh & Natural.' If these pilots are successful, they should provide us a path toward achieving our accelerated organic sales growth targets."
Sanders concluded the Company's outlook by saying, "While there remains uncertainty in the global economy, we are projecting that 2014 should be a record year. Today, our focus is on optimizing our existing portfolio versus adding new technologies. By that I mean we are working to create capabilities inside our existing technologies as well as to build depth and volume through strategic acquisitions. To guide us forward, we will focus on maximizing cash flow from all operations, disproportionally investing in those businesses that have significant growth opportunities and optimizing our portfolio."