Business News

Sonoco Reports Strong First Quarter 2010 Results; Raises Full-Year Base EPS Guidance

Friday 23. April 2010 - Sonoco (NYSE: SON), one of the largest diversified global consumer and industrial packaging companies, today reported much improved first quarter 2010 results and raised base earnings per share guidance for full-year 2010.

Highlights

First quarter 2010 GAAP earnings per diluted share were $.48, compared with $.23 in 2009.
Base net income attributable to Sonoco (base earnings) for first quarter 2010 was $.50 per diluted share, compared with $.29 in 2009. (See base earnings definition and reconciliation later in this release.)
First quarter 2010 net sales of $935 million were 17 percent higher than the $801 million in 2009.
Guidance for full-year 2010 base earnings was raised to $2.15 to $2.25 per diluted share, from the previous $2.00 to $2.15.
Commenting on the Company’s performance, Sonoco Chairman, President and Chief Executive Officer Harris E. DeLoach, Jr., said, “Our first quarter results were significantly improved from the last year’s recession impacted period. We exceeded our previous base earnings guidance of $.40 to $.45 per diluted share as we benefited from better than expected volumes in nearly all of our Industrial and Consumer businesses and a slightly lower effective tax rate.”

“On Sonoco’s Consumer side, operating profits from our Consumer Packaging segment showed year-over-year gains for the ninth consecutive quarter due primarily to strong productivity and improved volume. Our Packaging Services segment had a strong quarter due to higher than expected special contract packing and fulfillment activity, and lower operating costs.”

“On our Industrial side, generally improving global economic conditions spurred year-over-year volume growth in our Tubes and Cores/Paper segment. However, this improvement was muted by rising prices for old corrugated containers (OCC), our primary raw material, which have nearly doubled since December 2009. For the majority of our contracted tubes, cores and paperboard accounts, we only reset sales prices at the beginning of each quarter, based on OCC prices at the end of the previous quarter. Due to the magnitude of the increase in OCC costs during the first quarter of 2010, we experienced a significant negative price/cost relationship. Fortunately, we were able to offset this negative impact with higher volume, strong productivity and reduced operating costs. The majority of these factors were considered when we issued our updated guidance in early February.”

First Quarter Results

First quarter net income attributable to Sonoco was $48.6 million, or $.48 per diluted share, compared with $23.1 million, or $.23 per diluted share, in 2009. Base earnings were $51.0 million, or $.50 per diluted share, in the quarter, compared with $29.2 million or $.29 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 2010 quarter were after-tax restructuring charges of $2.4 million, or $.02 per diluted share, related to previously announced cost-reduction initiatives. After-tax restructuring charges of $6.1 million, or $.06 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 measure is provided later in the release.

The Company’s overall gross profit margin in the first quarter improved to 18.8 percent of sales, from 17.6 percent in the same period in 2009, primarily as a result of volume improvements and productivity initiatives.

Net sales for the first quarter were $935 million, compared with $801 million in the same period in 2009. The 17 percent increase during the quarter was due to improved Companywide volumes, higher selling prices and a $37 million favorable impact of foreign currency rates. The higher selling prices were driven by the impact of external sales of recovered paper due to significantly higher OCC prices. New product sales increased 13 percent in the first quarter to nearly $43 million, compared with $38 million in the same period in 2009. New consumer-related products made up $40 million of the new sales during the period.

Cash generated from operations in the first quarter was $73.8 million, compared with $75.5 million in the same period in 2009. Despite stronger earnings, the decline is a result of an increased use of cash needed to fund changes in working capital associated with the higher level of business activity and other items, compared to the same period in 2009. Capital expenditures and cash dividends were $28.5 million and $27.1 million, respectively, during the first quarter of 2010, compared with $34.6 million and $26.9 million, respectively, in the same period in 2009.

At the end of the first quarter of 2010, total debt was $578 million, relatively unchanged from the $581 million at the end of 2009. As of the end of the quarter, cash and cash equivalents totaled $188 million, compared with $185 million at the end of 2009. The Company had no borrowings under its $500 million commercial paper program as of March 28, 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.

Second Quarter and Full-Year 2010 Outlook

Sonoco expects second quarter 2010 base earnings to be in the range of $.52 to $.56 per diluted share. Base earnings in the second quarter of 2009 were $.41 per diluted share. For the full-year 2010, base earnings are currently projected to be in the range of $2.15 to $2.25 per diluted share, an increase over the guidance given on February 10, 2010, of $2.00 to $2.15 per diluted share. The increase is due primarily to better than expected performance in the first quarter, resulting from slightly stronger business conditions than when the previous guidance was issued. 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 recover higher raw material prices, primarily in OCC, through higher selling prices. Although the Company believes the assumptions reflected in the range of guidance are reasonable, it cautions the reader that the outlook, given the global economic climate, remains uncertain, and actual results could vary substantially.

Commenting on the Company’s outlook, DeLoach said, “Clearly, we are seeing steady improvement in our Consumer and Industrial volumes, which match modest gains seen in general consumer spending and industrial production over the past several months. Much of Sonoco’s year-over-year improvement is tied to the rebound in our Tubes and Cores/Paper segment and continued growth in our Consumer businesses. While we expect these trends to continue, we remain cautious about the pace of the global recovery and will continue to run our businesses conservatively and manage our cost structure.”

Segment Review

Segment operating results do not include restructuring and asset impairment charges, interest income and expense, or income taxes. These items are reported under Corporate.

Consumer Packaging

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

First quarter 2010 sales for the segment were $382 million, compared with $355 million in the same period in 2009. Segment operating profit was $45.7 million in the first quarter, compared with $39.4 million in the same period in 2009.

Sales grew 8 percent during the first quarter due to improved volumes for rigid plastic containers, composite cans, closures and flexible packaging along with the favorable impact of foreign currency translation. Operating profit benefited from productivity improvements and volume growth. Partially offsetting these favorable factors were higher raw material and labor costs, and lower selling prices.

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.

First quarter 2010 sales for the segment were $370 million, compared with $288 million in the same period in 2009. Operating profit for this segment was $21.5 million, compared with $6.7 million in 2009.

The 28 percent increase in segment sales was due to an improvement in volume of global industrial converted products and North American paperboard along with the favorable impact of foreign currency translation. Higher selling prices for OCC had a favorable impact on recovered paper sold externally. Operating profit for the segment improved significantly during the quarter due to volume growth and productivity improvements, which were partially offset by an unfavorable price/cost relationship.

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.

First quarter 2010 sales for this segment were $112 million, compared with $93 million in the same period in 2009. Segment operating profit was $5.1 million, compared with $.7 million in 2009.

The 21 percent gain in sales in this segment was due primarily to improved volume in the Company’s contract packaging and fulfillment business along with the favorable impact of foreign currency translation. Operating profit increased as a result of volume improvements.

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, molded and extruded plastics, custom-designed protective packaging and paper amenities such as coasters and glass covers.

First quarter 2010 sales in All Other Sonoco were $72 million, compared with $65 million reported in the same period in 2009. Operating profit for the quarter was $7.4 million, compared with $5.1 million in 2009.

Sales in All Other Sonoco increased due to volume gains in molded plastics and protective packaging. These gains were partially offset by volume and sales price declines in wire and cable reels. Operating profit in All Other Sonoco increased from productivity improvements and volume growth, which more than offset lower selling prices, particularly in wire and cable reels.

Corporate

Net interest expense for the first quarter of 2010 declined to $8.4 million, compared with $9.6 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 first quarter of 2010 was 29.6 percent, compared with 32.5 percent for the same period in 2009. The lower effective tax rate in the first quarter of 2010 was primarily due to an increase in the U.S. federal manufacturing deduction. This was also the primary factor in the effective tax rate on base earnings decreasing from 33.2 percent to 30.4 percent.