Sonoco Beats Earnings by a Penny

Zacks

Sonoco Products Co. (SON) reported second-quarter 2013 adjusted earnings of 59 cents per share, beating the prior year quarter’s earnings and Zacks Consensus Estimate by a penny. Earnings came in at the higher end of the company’s guidance range of 56 cents to 60 cents.

The quarter excluded 6 cents per share of an after-tax charge of asset impairment and restructuring expenses associated with the expected closure of Sonoco’s Carrickmacross thermoforming plant in Ireland. The year-ago quarter excluded a charge of 8 cents per share related to restructuring activities. Including these items, second-quarter 2013 earnings stood at 53 cents per share compared to 50 cents in the year-ago quarter.

Operational Update

Net sales increased 2% year over year to $1.23 billion in the reported quarter. The results were ahead of the Zacks Consensus Estimate of $1.22 billion.

The year over year sales improvement was attributed to volume growth in the Display and Packaging and Protective Solutions segments, partially offset by decline in volume and selling prices in the Consumer Packaging and Paper and Industrial Converted Products segments.

Cost of sales inched up 1.8% year over year to $1003.6 million in the reported quarter. Gross profit went up 2.8% to $226 million. However, gross margin remained flat at 18%.

Selling, general and administrative expenses declined 2.8% to $121.8 million in the quarter. Sonoco’s adjusted operating income increased 2.8% to $100.7 million in the quarter from $97.8 million in the year-ago quarter. Consequently, operating margin expanded 80 bps year over year to 8.2%.

Segment Performance

The Consumer Packaging segment reported net sales of $475 million compared with $477 million in the prior-year quarter, hurt by lower volume. Operating profit of the segment, however, rose 11% to $47 million. The improvement was mainly because of positive price-cost relationship and productivity improvements, partially offset by higher labor, pension and other operating costs.

Net Sales at the Paper and Industrial Converted Products segment dipped 0.4% to $473 million. Operating profit at the segment also declined 9% to $39.7 million, driven by modest productivity, higher maintenance, labor and other expenses.

Display and Packaging segment’s net sales increased 19% to $129 million from $108 million in the year-earlier quarter. Operating profit increased 34% year over year, driven by volume growth in global display and packaging activities.

Protective Solution segment’s net sales went up 5% to $149 million. The increase was mainly driven by increased volume in the global display and packaging activities. Operating profit at the segment shot up 4% to $12 million in the quarter, primarily due to positive price-cost relationship and productivity improvements, partially offset by negative business mix and higher labor costs.

Financial Position

As of Jun 30, 2013, cash and cash equivalents were $179 million, compared with $373 million as of Dec 31, 2012. Cash flow from operating activities was $108 million in the reported quarter, compared with $42.9 million in the prior-year quarter. The company’s debt-to-total-capital ratio stood at 38% as of Jun 30, 2013, compared with 42.2% as of Dec 31, 2012

Outlook

Sonoco expects third-quarter 2013 earnings per share to lie in the range of 59 to 63 cents per share. However, the company reiterated the full-year earnings in the range of $2.26 to $2.32 per share. It reaffirmed the free cash flow guidance of about $150 million for 2013.

Our View

Organic sales growth, geographic expansion and strategic acquisitions remain growth drivers for the company. However, Sonoco remains optimistic about the increase in prices of uncoated recycled paperboard, tubes and cores in the U.S. and Canada. This will aid Sonoco to counter increasing raw material costs. Optimization of business portfolios by addressing underperforming operations will also continue to be for the company. Conversely, uncertainty among customers given the slow recovery in the U.S, ongoing European weakness and higher pension costs, continue to act as headwinds for the company.

South Carolina-based Sonoco is a global provider of a variety of consumer packaging, industrial products, protective packaging and packaging supply chain services. Sonoco is also the largest producer of paper-based tubes and cores in North America.

Sonoco currently retains a Zacks Rank #3 (Hold). Graphic Packaging Holding Co. (GPK) also belongs to the same industry where Sonoco operates; carrying a Zacks Rank #1 (Strong Buy). Sonoco’s peers, such as Bemis Company, Inc (BMS) and MeadWestvaco Corporation (MWV) are yet to announce their quarterly results.

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