Press release from the issuing company
HARTSVILLE, S.C. - Sonoco, one of the largest diversified global packaging companies, today reported financial results for its first quarter ending April 3, 2016. As a result of the Company’s accounting calendar, the first quarter of 2016 contained 94 days, six more calendar days and three more business days than in 2015.
First Quarter Highlights
Second Quarter and 2016 Guidance
First Quarter Review
Commenting on the Company’s first quarter results, Sonoco President and Chief Executive Officer Jack Sanders said, “We are extremely pleased to deliver record first quarter base earnings results with each business segment reporting solid year-over-year improvement, including record first quarter performances in our targeted growth segments – Consumer Packaging and Protective Solutions. Overall, the Company benefited from a positive price/cost relationship, productivity improvements, lower pension and post-retirement benefit costs, and gains from volume/mix, which showed improvement even after excluding the positive impact of additional business days. Offsetting these positive factors were higher labor, maintenance and other operating costs, the negative impact of foreign currency translation and a higher effective tax rate.
“For the sixth consecutive quarter, operating profit in our Consumer Packaging segment reached record levels, improving 16 percent year over year due to solid improvement from global composite cans and flexible packaging. Overall, the segment benefited from a positive price/cost relationship, including a favorable change in LIFO inventory reserves, productivity improvements, lower pension costs and improved volume/mix, part of which was due to the additional business days in the quarter. These positive factors were partially offset by higher labor, maintenance and other operating costs, and the negative impact of foreign currency exchange rates. Growth in segment sales was due to the additional business days along with acquisitions, partially offset by lower selling prices and the negative impact of foreign currency translation. Results in the Display and Packaging segment improved significantly in the first quarter due to a positive price/cost relationship, productivity improvements and volume growth in international packaging fulfilment.
“We’re clearly pleased with the turnaround in our Paper and Industrial Converted Products segment, as operating profit grew 20 percent due to solid productivity gains, a positive price/cost relationship, lower pension expense and gains from volume/mix beyond the benefit of additional business days in the quarter. Segment sales were essentially flat in the quarter as volume gains, including the impact of additional days, were offset by the negative impact from foreign currency translation and lower selling prices.
“Finally, our Protective Solutions segment produced record first quarter operating profit, up 24 percent year over year, as strong volume well beyond the impact of the additional business days and a positive price/cost relationship more than offset higher labor, maintenance and other operating costs.”
GAAP net income attributable to Sonoco in the first quarter was $59.9 million, or $.59 per diluted share, compared with $85.8 million, or $.84 per diluted share, in 2015. Base earnings in the first quarter were $66.5 million, or $.65 per diluted share, compared with $54.9 million, or $.54 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 underlying financial performance of the business.
First quarter base earnings exclude after-tax charges of $6.6 million, or $.06 per diluted share, from restructuring activities. Base earnings in first quarter 2015 excluded the following items, on an after tax basis: a benefit of $19.9 million, or $.20 per diluted share, from the reversal of reserves related to Fox River environmental litigation; a benefit of $16.8 million, or $.16 per diluted share, from the sale of two metal ends plants; restructuring charges of $4.8 million, or $.04 per diluted share; and acquisition related expenses of $1.2 million, or $.01 per diluted share. 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 first quarter were $1.23 billion, up $20 million or 1.7 percent from last year’s quarter. This sales growth was due primarily to additional business days and other volume/mix improvements along with acquisition-related sales. These gains were partially offset by a negative translation impact from exchange rate changes of approximately $45 million along with lower selling prices due to lower commodity costs.
Gross profits were a record $245.3 million in the first quarter, up 11 percent, compared with $220.4 million in the same period in 2015. Gross profit as a percent of sales improved to 20.0 percent, compared with 18.3 percent in the same period in 2015, and reached the highest percentage margin level since 2002. The 170 basis point improvement in the quarter was due to a positive price/cost relationship, productivity gains and lower pension expense, which were partially offset by wage inflation and increased operating costs. First-quarter base selling, general and administrative (SG&A) expenses increased 4.5 percent to $133.8 million due primarily to additional days in the quarter, wage inflation and higher management incentive costs, partially offset by lower pension and post-retirement benefit costs and the impact of foreign currency translation. (See base earnings reconciliation later in this release.)
Cash generated from operations in the first quarter was $66.4 million, compared with $60.3 million in the same period in 2015. Free cash flow for the first quarter was a negative $22.1 million, compared with a positive $17.8 million in 2015. Operating cash flow improved in the current quarter due to less significant increases in working capital. During the quarter, net capital expenditures were $53 million, compared to $39 million in the prior year quarter; and cash dividends were $35 million, compared to $32 million in the prior year. In 2015, the Company received cash of $29.1 million from the sale of two metal ends plants which is reflected in prior-year net capital expenditures. During the first quarter of 2016, the Company spent $15.3 million to repurchase 354,000 shares at an average cost of $43.31 per share. These purchases were made under the Company’s previously announced plan to utilize up to $100 million to repurchase shares during 2016. (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.)
At April 3, 2016, total debt was approximately $1.13 billion, unchanged from December 31, 2015, and the debt-to-total capital ratio was 42 percent, compared to 43 percent at December 31, 2015. No commercial paper was outstanding at either date. Cash and cash equivalents were $152.3 million at the end of the first quarter, compared with $182.4 million at year end 2015.
Corporate
Net interest expense for the first quarter of 2016 increased to $13.8 million, compared with $13.2 million during the same period in 2015. This increase was due to the additional days in the current-year quarter, partially offset by lower year-over-year debt levels. The 2016 first-quarter effective tax rates on GAAP and base earnings were 33.2 percent and 33.0 percent, compared with a 23.7 percent and 32.0 percent rate for GAAP and base earnings, respectively, in the prior year’s quarter. The main driver in the year-over-year increase in the GAAP income tax rate is related to the 2015 tax benefit associated with the loss on stock of the underlying subsidiary associated with the sale of the two metal end plants.
Second Quarter and Full-Year 2016 Outlook
Sonoco expects second quarter 2016 base earnings to be in the range of $.65 to $.70 per diluted share. The Company’s second quarter 2015 base earnings were $.68 per diluted share. Full-year 2016 base earnings remain unchanged at the previously announced range of $2.64 to $2.74 per diluted share. The Company’s 2016 guidance anticipates a 32 percent effective tax rate for the year. Free cash flow is expected to be approximately $140 million in 2016, compared to $155 million in 2015.
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, “As a result of our strong start to 2016, we feel confident reiterating our previously communicated annual earnings guidance even though we expect to continue facing headwinds from a strong U.S. dollar and generally flat to weak economic conditions around the world. As we enter the second quarter, we remain optimistic that we should be able to achieve our volume growth objectives, particularly with the many new commercial development opportunities we are actively working on in our Consumer Packaging and Protective Solutions businesses. In our Paper and Industrial Converted Products segment we face a difficult year-over-year comparison in the second quarter due to weak market conditions affecting our corrugating medium paperboard operation. As we work to overcome this obstacle, we remain focused on further improving our cost competitiveness by optimizing our supply chain, enhancing productivity, and streamlining our corporate and business unit structures.”
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.
First quarter 2016 sales for the segment were $527 million, compared with $520 million in 2015. Segment operating profit was $62.9 million in the first quarter, compared with $54.0 million in the same quarter of 2015.
Segment sales grew 1.4 percent over the prior-year quarter due to the additional business days along with acquisitions, partially offset by lower selling prices, stemming primarily from lower raw material costs, and the negative impact of foreign currency translation. Excluding the estimated benefit of additional business days, volume/mix showed improvement in global composite cans and flexible packaging, but showed a decline in rigid plastic containers. Segment operating profit increased 16.4 percent over the prior year quarter and operating margins improved to 11.9 percent of sales during the quarter. Overall, the segment benefited from a positive price/cost relationship, including a favorable change in LIFO inventory reserves, productivity improvements and lower pension costs. These positive factors were partially offset by higher labor, maintenance and other operating costs, and the negative translation impact of foreign currency exchange rate changes.
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.
First quarter 2016 sales for this segment were $144 million, compared with $146 million in 2015. Segment operating profit was $3.3 million in the quarter, compared with $0.8 million in 2015.
Sales declined 1.0 percent compared to last year’s quarter due primarily to the negative translation impact of foreign exchange rate changes, largely offset by the impact of additional business days. Absent the impact of days, lower volume stemming from packaging center operations was partially offset by an increase in international packaging fulfilment. The significant improvement in operating profit in the first quarter was primarily driven by an improved price/cost relationship.
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.
First quarter 2016 sales for the segment were $423 million, up modestly from $422 million in 2015. Segment operating profit was $33.3 million in the first quarter, compared with $27.8 million in 2015.
Segment sales were essentially flat with the prior-year quarter as volume gains, including the impact of additional business days, were offset by the negative impact from foreign currency translation and lower selling prices stemming from reduced recovered fiber costs. Volume/mix, excluding additional business days, showed improvement in our international tube and core operations, while in our paper operations, gains in North America and Europe were partially offset by lower corrugating medium results. Operating profit improved 19.8 percent on solid productivity gains, a positive price/cost relationship, lower pension expense and the benefit from additional days in the quarter, which were partially offset by inflation in labor and other operating expenses.
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.
First quarter 2016 sales were $132 million, compared with $118 million in 2015. Operating profit was $12.0 million, compared with $9.7 million in the first quarter of 2015.
This segment’s 11.4 percent year-over-year increase in first quarter sales came from strongly higher volume beyond the impact of additional business days, partially offset by the negative impact of foreign exchange translation and lower selling prices. Operating profit was up 24 percent as higher volume, including the impact of additional days, and a positive price/cost relationship was only partially offset by higher labor, maintenance and other operating costs.
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