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Sonoco Beats Estimates in 3Q

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Sonoco Products Co.’s (SON) third-quarter 2012 adjusted earnings were 55 cents per share compared with 66 cents in the year-ago quarter. Earnings exceeded the previous guidance range of 51 cents to 53 cents provided by the company. Earnings were ahead of the Zacks Consensus Estimate of 52 cents per share.

The quarter excluded benefits of 2 cents per share on the sale of closed facilities and insurance recoveries, partially offset by charges stemming from restructuring activities. The year-ago quarter excluded benefits of 17 cents per share pertaining to net release of valuation allowances on deferred tax assets and 7 cents of expenses related to restructuring and acquisition. Including these items, third-quarter 2012 earnings were 57 cents per share compared to 76 cents in the year-ago quarter.

Net sales increased 6.3% to $1.196 billion, beating the Zacks Consensus Estimate of $1.188 billion. The improvement in sales was attributable to incremental revenues of $121 million from acquisitions completed last year, mostly related to the Tegrant acquisition and higher volumes especially from Packaging Services and Paper and Industrial Converted Products segments. These benefits were however partially offset by lower selling price and unfavorable foreign currency translation of $30 million.

Costs and Margins

Cost of sales increased 5.5% to $989.3 million in the reported quarter. Gross profit at Sonoco went up 10.4% to $206.2 million, thereby, expanding gross margin by 70 basis points (bps) to 17.3%.

Selling, general and administrative expenses increased 22.7% to $110.3 million in the quarter. Sonoco’s adjusted operating income dipped 5.9% to $92.7 million in the quarter from $98.6 million in the year-ago quarter. Operating margin edged down year over year 100 bps to 7.8%.

Segment Performance

Net sales at the Consumer Packaging segment dropped 5.4% to $475.9 million. The decline was brought about by lower volumes in global composite can, flexible packaging and rigid plastic businesses coupled with lower sales price and negative impacts of foreign currency translation.

Operating profit of the segment also declined 16% to $43.8 million. The decline was driven by a negative volume and mix change in addition to higher pension, labor as well as other expenses, partially offset by improvements in productivity and positive price/cost mix. Consequently, operating margin contracted 120 bps to 9.2% in the quarter.

Net Sales at the Paper and Industrial Converted Products segment decreased 6.3% to $453.6 million due to lower recovered paper price and currency translation.

Operating profit at the segment decreased 12.8% to $33.2 million. Operating profit declined because of higher pension expenses, labor expenses, freight expenses and other costs in addition to temporary operating problems in certain North American paperboard mills, partially offset by productivity gains and positive price/cost mix. Operating margins fell 60 bps year over year to 7.3%.

Packaging Services segment's net sales increased 10% to $124.6 million from $112.9 million in the year-earlier quarter. The improvement was attributable to volume gains mostly in international packaging fulfillment activities, partially offset by unfavorable foreign currency translation.

Operating profit rose 6% to $5.1 million in the quarter, driven by higher volumes related to international packaging fulfillment activities, partially offset by a negative business mix and impact of strong dollar. However, operating margin dropped 20 bps year over year to 4.1%.

Protective Packaging segment’s net sales jumped 494.3% to $141.4 million. The increase was mainly driven by Tegrant acquisition.

Operating profit at the segment saw a whopping increase of 216.6% to $10.6 million as a result of the acquisition of Tegrant. However, operating margins contracted 660 bps year over year to 7.5% in the quarter.

Financial Position

As of September 30, 2012, cash and cash equivalents were $201.1 million, up from $175.5 million as of September 30, 2011. Cash flow from operating activities was $152.2 million during the third-quarter 2012 compared with $99.8 million in the prior year quarter.

The company’s debt-to-total-capital ratio improved to 44.6% as of September 30, 2012, from 47.4% as of July 1, 2012 and 45.8% as of April 1, 2012.


Sonoco guides its full year earnings in the range of $2.17 to $2.21 per share. It expects free cash flow of $90 million, up from the previous guidance of $70 million.

Our View

Sonoco is experiencing weak volumes in its Consumer Packaging segment in North America as well as in Asia. Moreover, lower recycled paper prices remain a major concern for the company affecting the Paper and Industrial Converted Products segment.

Sonoco retains a short-term Zacks #5 Rank (Strong Sell). We have a long-term Underperform recommendation on the stock.

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