Business News

Sonoco Reports Much Improved Second Quarter 2010 Results; Base Earnings Exceed Guidance and First Call Consensus

Thursday 22. July 2010 - Sonoco (NYSE: SON), one of the largest diversified global consumer and industrial packaging companies, today reported strong second quarter 2010 results and raised full-year 2010 base earnings per share guidance for the third time this year.

Highlights

Second quarter 2010 GAAP earnings per diluted share were $.58, compared with $.33 in 2009.
Base net income attributable to Sonoco (base earnings) for second quarter 2010 was $.59 per diluted share, compared with $.41 in 2009. (See base earnings definition and reconciliation later in this release.)
Second quarter 2010 net sales of $1.01 billion were 17 percent higher than the $864 million in 2009.
Acquisition of Associated Packaging Technologies, Inc. for $120 million on June 29 is expected to add approximately $150 million in annual sales and modest earnings accretion in the second half of 2010.
Guidance for full-year 2010 base earnings is raised to $2.27 to $2.34 per diluted share, from the previously forecast $2.15 to $2.25.
Commenting on the Company’s performance in the second quarter, Chairman, President and Chief Executive Officer Harris E. DeLoach Jr. said, “For the third consecutive quarter, Sonoco produced significantly improved year-over-year earnings as we continued to see a steady recovery in global economic conditions in nearly all of our consumer and industrial businesses, leading to improved volumes and higher productivity. Our second quarter base earnings were three cents per share above the high side of our guidance and above First Call consensus of $.56 per diluted share due to a combination of volume, productivity and price/cost.”

“Our Consumer Packaging segment recorded year-over-year gains in operating profits for the tenth consecutive quarter on volume growth and strong productivity. In addition, our Packaging Services segment produced better year-over-year results due to the continuation of special contract packing, higher fulfillment activity and productivity improvements.”

“On our Industrial side, the Tubes and Cores/Paper segment experienced significant global volume growth and continued strong productivity, which led to an 82 percent improvement in year-over-year segment operating profits. Finally, our businesses which constitute All Other Sonoco experienced stronger volumes and productivity gains.”

Second Quarter and First Half Results

Second quarter net income attributable to Sonoco was $59.0 million, or $.58 per diluted share, compared with $33.6 million, or $.33 per diluted share, in 2009. Base earnings were $60.6 million, or $.59 per diluted share, in the quarter, compared with $40.9 million or $.41 per diluted share in 2009. Base earnings and base earnings per diluted share are non-GAAP financial measures adjusted to remove restructuring charges, asset impairment charges, and other items, if any, the exclusion of which the Company believes improves comparability and analysis of the underlying financial performance of the business. Excluded from base earnings in the second quarter of 2010 were after-tax restructuring charges of $1.6 million, or $.01 per diluted share, related to previously announced cost-reduction initiatives. After-tax restructuring charges of $7.3 million, or $.08 per diluted share, were excluded from base earnings in the 2009 quarter. Additional information about base earnings and base earnings per share along with reconciliations to the most closely applicable GAAP financial measures is provided later in this release.

The Company’s overall gross profit margin in the second quarter improved to 19.1 percent of sales, from 18.3 percent in the same period in 2009, as productivity gains resulting from higher volume and various initiatives, were only partially offset by an unfavorable price/cost relationship.

Net sales for the second quarter were $1.01 billion, compared with $864 million in the same period in 2009. This 17 percent increase during the quarter was due to improved Companywide volumes, higher selling prices, open-market sales of corrugating medium previously produced under a cost-plus-fixed-management-fee arrangement, and the favorable impact of foreign currency rates. The impact of higher selling prices was realized almost exclusively in the Tubes and Cores/Paper segment, where the gains were principally driven by higher recovered paper prices.

Cash generated from operations in the second quarter was $41.6 million, compared with $106.4 million in the same period in 2009. The significantly higher level of business activity compared to the year-earlier quarter resulted in a greater use of cash to fund working capital requirements. Similarly, higher expected income tax liabilities associated with increased profitability resulted in increased tax payments of approximately $46 million during second quarter 2010. Capital expenditures and cash dividends paid to shareholders were $30.5 million and $28.2 million, respectively, during the second quarter of 2010, compared with $22.7 million and $27.0 million, respectively, in the same period in 2009.

For the first six months of 2010, net sales increased 17 percent to $1.95 billion, compared with $1.66 billion in first half of 2009. Net income attributable to Sonoco for the first six months of 2010 was $107.5 million ($1.05 per diluted share), compared with $56.7 million ($.56 per diluted share) in the same period in 2009. Earnings for the first half of 2010 were negatively impacted by after-tax restructuring charges of $4.1 million ($.04 per diluted share), compared with $13.4 million ($.14 per diluted share) in the 2009 period.

Base earnings for the first half of 2010 were $111.6 million ($1.09 per diluted share), compared with $70.1 million ($.70 per diluted share) during the same period in 2009. Significantly higher Companywide volumes and productivity improvements drove the 59 percent, year-over-year gain in base earnings. Gross profit as a percent of sales was 18.9 percent, compared with 18.0 percent in the first half of 2009.

For the first six months of 2010, cash generated from operations was $115.4 million, compared with $181.9 million in the same period in 2009. Capital expenditures and cash dividends were $59.0 million and $55.2 million, respectively, for the first half of 2010, compared with $57.4 million and $53.9 million, respectively, in the same period in 2009. At the end of the second quarter of 2010, total debt was $582 million, substantially unchanged in comparison to December 31, 2009. Cash and cash equivalents totaled $167 million, compared with $185 million at the end of 2009. The Company had no borrowings outstanding under its $500 million commercial paper program as of June 27, 2010. The commercial paper program is fully supported by a bank credit facility provided by a syndicate of banks that is committed until May 2011.

Third Quarter and Full-Year 2010 Outlook

Sonoco expects third quarter 2010 base earnings to be in the range of $.62 to $.65 per diluted share. Base earnings in the third quarter of 2009 were $.50 per diluted share. For the full-year 2010, base earnings are currently projected to be in the range of $2.27 to $2.34 per diluted share, an increase over the guidance given on April 22, 2010, of $2.15 to $2.25 per diluted share. The increase is due primarily to better than expected operating performance in the second quarter and projected earnings from the June 29, 2010, acquisition of Associated Packaging Technologies, Inc., (APT) a leading provider of rigid plastic food packaging serving the frozen food industry in North America, Europe and Australia/New Zealand. The Company’s 2010 earnings guidance reflects an expected effective tax rate of approximately 30 percent.

The Company’s earnings guidance assumes sales demand will remain near the levels experienced during the past several quarters, adjusted for seasonality, and that it will be able to achieve a neutral price/cost relationship, primarily in old corrugated containers and plastic resins. Although the Company believes the assumptions reflected in the range of guidance are reasonable, it cautions the reader that the outlook, given the uncertain global economic conditions, remains equally uncertain, and actual results could vary substantially.

Commenting on the Company’s outlook, DeLoach said, “Our guidance is based on our view that the global economy will continue to realize steady, but not spectacular, improvement during the second half of the year. We also expect full-year guidance for operating cash flow to be approximately $375 million, which is lower than our earlier guidance due to increased use of cash needed to fund changes in working capital associated with an expected higher level of business activity and tax payments. We will continue to put this cash to work to grow our Company while returning value to shareholders. We are revising our projection of 2010 capital expenditures up to $160 million, up from our previous guidance of $125 million, due largely to new business gains, particularly in rigid plastic containers. Finally, as illustrated by the recent acquisition of APT, we are continuing to look at opportunities to expand our existing businesses through targeted, accretive acquisitions.”

Segment Review

Segment operating results do not include restructuring and asset impairment charges, interest income and expense, or income taxes.

Consumer Packaging

Sonoco’s Consumer Packaging segment includes the following products and services: round and shaped rigid containers and trays (both composite and plastic); printed flexible packaging; metal and peelable membrane ends and closures; and global brand artwork management.

Second quarter 2010 sales for the segment were $392 million, compared with $376 million in the same period in 2009. Segment operating profit was $42.1 million in the second quarter, compared with $39.1 million in the same period in 2009.

Sales grew 4 percent during the second quarter due to improved volumes for rigid plastic containers and flexible packaging, along with the favorable impact of foreign currency translation. Operating profit benefited from productivity improvements and volume growth. These improvements were partially offset by higher raw material, labor, freight and other costs.

Tubes and Cores/Paper

The Tubes and Cores/Paper segment includes the following products: high-performance paper and composite paperboard tubes and cores; fiber-based construction tubes and forms; recycled paperboard, linerboard, corrugating medium, recovered paper and other recycled materials.

Second quarter 2010 sales for the segment were $416 million, compared with $323 million in the same period in 2009. Operating profit for this segment was $36.9 million, compared with $20.2 million in 2009.

The 29 percent increase in segment sales was due largely to increased selling prices, an improvement in volume of global industrial converted products and paperboard, the addition of sales of corrugating medium and the favorable impact of foreign currency translation. The year-over-year increase in selling prices was primarily a result of higher selling prices for OCC, which had a favorable impact on recovered paper sold externally. Operating profit for the segment improved significantly during the quarter due to global volume growth and productivity improvements.

Packaging Services

The Packaging Services segment includes the following products and services: designing, manufacturing, assembling, packing and distributing temporary, semipermanent and permanent point-of-purchase displays; and supply chain management services, including contract packing, fulfillment and scalable service centers.

Second quarter 2010 sales for this segment were $114 million, compared with $95 million in the same period in 2009. Segment operating profit was $3.6 million, compared with $0.9 million in 2009.

The 20 percent improvement in sales in this segment was due primarily to improved volume in the contract packaging and fulfillment business along with the favorable impact of foreign currency translation. These favorable factors were partially offset by lower selling prices. Operating profit increased as a result of higher volume and productivity improvements, partially offset by lower selling prices.

All Other Sonoco

All Other Sonoco includes businesses that are not aggregated in a reportable segment and includes the following products: wooden, metal and composite wire and cable reels and spools, molded and extruded plastics, custom-designed protective packaging and paper amenities, such as coasters and glass covers.

Second quarter 2010 sales in All Other Sonoco were $88 million, compared with $70 million reported in the same period in 2009. Operating profit for the quarter was $10.3 million, compared with $7.4 million in 2009.

Sales in All Other Sonoco increased 27 percent due to volume gains in molded plastics, protective packaging and reels and spools, along with acquisition sales and higher selling prices. Operating profit in All Other Sonoco increased as a result of volume and productivity gains in all businesses. These favorable factors were partially impacted by rising resin, paper and wood costs, which were not covered by higher selling prices.

Corporate

Net interest expense for the second quarter of 2010 declined to $8.6 million, compared with $10.1 million during the same period in 2009. The decrease was due to lower debt levels and lower interest rates. The effective tax rate for the second quarter of 2010 was 31.6 percent, compared with 31.9 percent for the same period in 2009, while the effective tax rate on base earnings was 31.8 percent and 30.9 percent in the second quarters of 2010 and 2009, respectively.