Sonoco Beats 2Q Earnings Estimates and Raises Guidance

Jul.26.10 | About: Sonoco Products (SON)

Click to enlargeSonoco Products Co. (NYSE:SON) delivered earnings per share (EPS) of 59 cents in its second quarter ended June 27, 2010, surpassing the Zacks Consensus Estimate of 56 cents and year-earlier earnings of 41 cents. The quarter’s earnings were also well ahead of the upper-end of its guidance range. The outperformance is attributable to signs of improvement in the macro economy, which boosted volumes and productivity.

The reported and year-ago quarters’ earnings exclude after-tax restructuring charges of a penny and 8 cents, respectively, related to Sonoco’s cost-reduction initiatives.

Revenues for the company increased 17% year over year to $1.0 billion and outpaced the Zacks Consensus Estimate of $961 million, driven by improved volumes, higher selling prices open-market sales of corrugating medium (which were previously produced under a cost-plus-fixed-management-fee arrangement) and a favorable impact of foreign currency rates.

Costs amd Margin Performance

In dollar terms, cost of sales increased 16% year over year to $817.6 million in the quarter, but as a percentage of revenues it declined 74 basis points to 80.9%. Gross profit surged 22% to $192.5 million on an annualized basis and gross margin expanded 74 basis points to 19.1%. Productivity gains from higher volume and other initiatives were partially mitigated by an unfavorable price/cost relationship.

Selling, general, administrative and engineering (SGA&E) expenses increased 10% year over year to $99.6 million, whereas as a percentage of sales SGA&E dipped 60 basis points to 9.9%. Sonoco’s operating income upped 37% year over year to $92.9 million with operating margin soaring 140 basis points to 9.2%.

Segment Performance

Tubes and Cores/Paper segment was the star performer, in terms of revenues and margins. The segment posted the highest year-over-year growth of 29% with revenues increasing to $415.6 million and segment margin shooting up 260 basis points to 8.9%.

The revenue outperformance was a result of higher selling prices, volume recovery in global industrial converted products and paperboard, increased sales of the corrugating medium and the favorable impact of foreign currency translation. Volume growth and productivity improvements, in turn, led to the operating margin expansion.

The Packaging Services segment delivered revenues of $114 million, a growth of 20%, driven by improved volumes and the favorable impact of foreign currency translation, which were somewhat offset by lower selling prices. Segment margin expanded a whopping 210 basis points to 3.1% due to higher volume and productivity improvements, which were somewhat offset by lower selling prices.

Revenues at the Consumer Packaging segment went up 4% to $392.5 million on improved demand for rigid plastic containers and flexible packaging, and the favorable impact of foreign currency translation. Segment margin improved modestly by 40 basis points to 10.7% as productivity improvement and volume growth were partially offset by higher raw material, labor, freight and other costs.

The All Other Sonoco segment’s revenues increased 27% to $88 million, attributable to volume gains in molded plastics, protective packaging and reels and spools, along with acquisition sales and higher selling prices. The segment’s margin was 11.6%, up 90 basis points as a result of volume and productivity gains, partially affected by rising resin, paper and wood costs, which were not covered by higher selling prices.

Financial Position

Sonoco had cash and cash equivalents of $167.4 million as of June 27, 2010, down from $188.2 million as of March 28, 2010. The company generated cash flows of $41.6 million from operating activities in the quarter, significantly lower than $106.4 million in the year-ago quarter. The increased level of business activity, entailing greater use of cash to fund working capital requirements and a hike in income tax liabilities as a result of increased profitability, led to the increase in outflow during the quarter.

Sonoco expects operating cash flow to be approximately $375 million in fiscal 2010. Capital expenditures are estimated at $160 million, up from their previous guidance of $125 million due to new business gains, particularly in rigid plastic containers.

As of June 27, 2010, debt-to-capitalization ratio was virtually flat at 24.8% compared to 24.9% as of March 28, 2010. Sonoco 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.


Sonoco expects earnings per share to be around 50 cents for the third quarter of fiscal 2010. The company increased its guidance range to $2.27–$2.34 per share from the previous range of $2.15–$2.25, driven by better-than-expected second-quarter earnings, synergies from the Associated Packaging acquisition as well as expectations of a steady recovery in the global economy.

After the second quarter, Sonoco completed the acquisition of Associated Packaging Technologies Inc. for $120 million. The all-cash purchase price includes debts of the acquired company. Associated Packaging is the largest North American manufacturer and supplier of Crystallized Polyethylene Terepthalate (CPET) containers for the frozen food industry. Its annual production of CPET containers amounts to almost 3 billion. The acquisition of Associated Packaging is expected to add approximately $150 million in annual sales.

Our Take

Sonoco is now strongly positioned and is anticipated to deliver solid growth with the help of Associated Packaging’s material formulations and rotary thermoforming technology. Moreover, Sonoco’s development of multilayer barrier polypropylene food containers will gain pace following the acquisition.

Robust performance at Sonoco comes from expanded volumes in nearly all of its Industrial and Consumer businesses. The company has also implemented various restructuring initiatives to align its manufacturing capacity and fixed cost structure with current market conditions to reap higher profits. With these positives and synergies from the acquisition, we expect Sonoco to perform better in the upcoming quarters.

Hartsville, South Carolina-based Sonoco is a global manufacturer of consumer and industrial packaging products. The company has more than 300 operations in 35 countries throughout North and South America, Europe, Australia, and Asia . It operates through four reportable segments: Tubes and Cores/Paper, Consumer Packaging, Packaging Services and All Other Sonoco segment.

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