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Sonoco posts Q2 2019 financial results
Jul 18, 2019 (MarketLine via COMTEX) -- Copyright (C) 2019 Datamonitor. All rights reserved

Sonoco has reported financial results for their second quarter ending June 30, 2019.

Second Quarter Highlights

Second-quarter 2019 GAAP earnings per diluted share were $0.80, compared with $0.88 in 2018.Second-quarter 2019 GAAP earnings included after-tax charges of $15.3 million related to restructuring actions, non-operating pension costs and acquisition costs. In the second quarter of 2018, GAAP results included net after-tax charges of $4.2 million, as after-tax restructuring charges were mostly offset by a tax benefit from the U. S. Tax Cuts and Jobs Acts of 2017.Base net income attributable to Sonoco (base earnings) for second quarter 2019 was $0.95 per diluted share, compared with $0.93 in 2018. (See base earnings definition, explanation and reconciliation to GAAP earnings later in this release.) Sonoco previously provided second-quarter 2019 base earnings guidance of $0.93 to $0.99 per diluted share.Second-quarter 2019 net sales were $1.36 billion, essentially flat when compared with $1.37 billion from 2018.Cash flow from operations shows $40.1 million in the first six months of 2019, compared with $251.2 million in 2018. Free cash flow was a use of cash of $144.9 million, compared with $88.8 million of free cash flow generated in the first six months of 2018. Year-to-date cash flows reflect a $190 million voluntary contribution to the Company's U.S. defined benefit pension plans. (See free cash flow definition and reconciliation to cash flow from operations later in this release.)On May 20, 2019, Sonoco signed a definitive agreement to acquire Corenso Holdings America, Inc, from a company owned by investment funds advised by Madison Dearborn Partners, LLC, for approximately $110 million in cash. Corenso Holdings America is a leading U.S. manufacturer of uncoated recycled paperboard and high-performance cores used in the paper, packaging films, tape and specialty industries. The acquisition is expected to close by the end of the third quarter of 2019. Third Quarter and Full-Year Guidance Update

Base earnings for the third quarter of 2019 are estimated to be in the range of $0.88 to $0.94 per diluted share, compared to $0.86 per diluted share in the third quarter of 2018.Full-year 2019 base earnings guidance remains at $3.52 to $3.62 per diluted share.

As a result of the after-tax cash flow impact from the voluntary contribution to the Company's U.S. defined benefit pension plans, full-year 2019 operating cash flow guidance has been lowered to a range of $435 million to $455 million, down from the previous range of $600 million to $620 million. Also, the Company now expects free cash flow to be $60 million to $80 million, compared with previous guidance of $225 million to $245 million.

Note: Third-quarter and full-year 2019 GAAP guidance are not provided in this release due to the likely occurrence of one or more of the following, the timing and magnitude of which we are unable to reliably forecast: possible gains or losses on the sale of businesses or other assets, restructuring costs and restructuring-related impairment charges, acquisition-related costs, and the income tax effects of these items and/or other income tax-related events.  These items could have a significant impact on the Company's future GAAP financial results.

CEO Comments on Second Quarter Results

Commenting on the Company’s second-quarter GAAP and base earnings performance, Rob Tiede, President and Chief Executive Officer, said, "Sonoco's diverse mix of businesses produced solid operating results during the quarter, despite challenging global macroeconomic conditions, where we saw further slowing in demand in many of our served markets. In addition, we experienced unforeseen fires, floods and other events which damaged four of our operations resulting in insurance deductible and other business losses of approximately 2 cents per share. Overall in the second quarter, net sales were essentially flat and GAAP net income attributable to Sonoco declined primarily due to our targeted restructuring efforts, which are focused on reducing costs and improving operating margin. Base net income gained 3.0 percent to a record $96.5 million as improvements in productivity and earnings from acquisitions more than offset lower volume/mix. GAAP gross profit margin was a strong 20.2 percent, unchanged from last year's quarter and approximately 25 basis points higher than first quarter, while GAAP operating profit declined from last year due to higher restructuring and other costs. Base operating profit increased 4.4 percent to a record $144.3 million, while base operating margin increased approximately 50 basis points from last year.

“Our Consumer Packaging segment reported lower sales and operating profit compared to last year's quarter, however, operating margin improved slightly to 10.4 percent. Sales in our Paper and Industrial Converted Products segment were up 3.6 percent, while operating profit was essentially flat with last year's record results and operating margin declined 52 basis points. Also, our Display and Packaging segment continued its turnaround with operating margin expanding 477 basis points over the prior-year period, and in our Protective Solutions segment operating profit improved 4.8 percent and operating margin expanded by 66 basis points.”

Second Quarter Review

Net sales for the second quarter were $1.36 billion, down slightly from last year's second quarter sales of $1.37 billion. The sales decline was driven by lower volumes and a stronger US dollar. These negative impacts were largely offset by increased sales from acquisitions. 

GAAP net income attributable to Sonoco in the second quarter was $81.2 million, or $0.80 per diluted share, a decrease of $8.3 million, compared with $89.4 million, or $0.88 per diluted share, in 2018. Second-quarter GAAP earnings included after-tax non-base charges totaling $15.3 million, $10.0 million of which were after-tax charges related primarily to restructuring activities. The remaining $5.3 million was related almost exclusively to non-operating pension costs. In the second quarter of 2018, GAAP earnings included $4.2 million of after-tax non-base net charges, $2.5 million of which were after-tax charges related primarily to previously initiated restructuring activities. The remaining $1.7 million is primarily costs related to acquisitions and contemplated acquisitions. Adjusted for these items, base earnings in the second quarter of 2019 were $96.5 million, or $0.95 per diluted share, an increase of $2.8 million, compared with $93.6 million, or $0.93 per diluted share, in 2018. Base earnings and base earnings per diluted share are non-GAAP financial measures adjusted to remove restructuring-related items, asset impairment charges, acquisition expenses, non-operating pension costs, and certain income tax-related events and other items, if any, the exclusion of which the Company believes improves comparability and analysis of the ongoing operating performance of the business. (See base earnings definition, explanation and reconciliation to GAAP earnings later in this release.)

Gross profit was $275.3 million in the second quarter, which was down slightly from $276.5 million reported in the same period in 2018. Gross profit as a percentage of sales was 20.2 percent, unchanged from 20.2 percent in the same period in 2018. Second-quarter selling, general and administrative expenses decreased $8.8 million from the prior year to $132.2 million. This decrease was driven by a significant focus across the business on lowering controllable costs which was partially offset by the addition of expenses from acquisitions.

Segment Review

Sonoco reports its financial results in four operating segments: Consumer Packaging, Display and Packaging, Paper and Industrial Converted Products, and Protective Solutions. Segment operating results do not include restructuring and asset impairment charges, acquisition expenses, interest income and expense, income taxes or certain other items, if any, the exclusion of which the Company believes improves comparability and analysis.

Consumer Packaging

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

Second-quarter 2019 sales for the segment were $602.8 million, compared with $616.1 million in 2018. Segment operating profit was $62.9 million in the second quarter, compared with $63.7 million in the same quarter of 2018. 

Segment sales declined 2.2 percent compared to the prior year's quarter due to lower volume/mix and the negative impact of foreign exchange. Rigid Paper Containers sales volume declined in North America as well as Flexible Packaging and Rigid Plastics as many served markets experienced slowing customer demand. Segment operating profit decreased 1.1 percent compared to the prior year's quarter as the benefit of productivity improvements and a positive price/cost relationship was more than offset by weaker volume. Segment operating margin improved slightly to 10.4 percent in the quarter from 10.3 percent in 2018.

Display and Packaging

The Display and Packaging segment includes the following products and services: designing, manufacturing, assembling, packing and distributing temporary, semi-permanent and permanent point-of-purchase displays; supply chain management services, including contract packing, fulfillment and scalable service centers; retail packaging, including printed backer cards, thermoformed blisters and heat sealing equipment; and paper amenities, such as coasters and glass covers.

Second-quarter 2019 sales for this segment were $134.8 million, compared with $143.3 million in 2018. The segment reported an operating profit of $5.9 million in the current quarter, compared with an operating loss of $(0.6) million in the prior year's quarter.

Sales declined 5.9 percent compared to last year’s quarter as volume growth in domestic displays and international pack centers was more than offset by reduced revenue from exiting a pack center contract late in the third quarter of 2018. Segment operating profit improved $6.5 million due to higher volume/mix, improved productivity and the non-recurrence of operating losses at the exited pack center.

Paper and Industrial Converted Products

The Paper and Industrial Converted Products segment includes the following products: paperboard tubes, cones, and cores; fiber-based construction tubes; wooden, metal and composite wire and cable reels and spools; and recycled paperboard, linerboard, corrugating medium, recovered paper and material recycling services.

Second-quarter 2019 sales for the segment were $491.3 million, up from $474.1 million in 2018. Segment operating profit was $61.2 million in the quarter, compared with $61.5 million in 2018. During the quarter, the Company's Trent Valley, Ontario, Canada, paper mill was flooded by the Trent River, resulting in a six-day production outage, temporarily higher operating costs, and an expense incurred for the insurance deductible.

Segment sales increased 3.6 percent from the prior year's quarter due to sales added by the 2018 acquisition of Conitex. This was partially offset by lower volume/mix and the negative impact of changes in foreign exchange rates. Current quarter paperboard, corrugated medium and tube and core volumes were weak across all geographies. Segment operating profit was essentially flat with the prior year's quarter as earnings from the Conitex acquisition, productivity improvements and a slightly positive price/cost relationship effectively offset negative volume/mix. Segment operating margin declined 52 basis points to 12.5 percent.

Protective Solutions

The Protective Solutions segment includes the following products: custom-engineered, paperboard-based and expanded foam protective packaging and components; and temperature-assured packaging.

Second-quarter 2019 sales were $130.8 million, down from $132.9 million in 2018. Operating profit was $14.3 million, a 4.8 percent increase from the second quarter of 2018.  

This segment’s sales were modestly lower year over year due primarily to lower volume/mix as strong sales growth for temperature-assured packaging was offset by declines in molded foam and consumer fiber packaging. Segment operating profit improved modestly as strong productivity improvements were partially offset by a negative price/cost relationship. Segment operating margin, compared to the prior-year quarter, improved 66 basis points to 10.9 percent.

Corporate/Tax

Net interest expense for the second quarter of 2019 increased to $16.0 million, compared with $15.1 million during the same period in 2018, primarily due to higher non-U.S. debt balances and reduced interest income on lower offshore cash balances. The 2019 second-quarter effective tax rates on GAAP and base earnings were 26.3 percent and 25.9 percent, respectively, compared with 26.1 percent and 26.8 percent, respectively, in the prior year’s quarter. The effective tax rate on GAAP earnings for the second quarter of 2019 was slightly higher due primarily to one-time adjustments in the second quarter of 2018 related to the U.S. Tax Cuts and Jobs Act of 2017. The lower base effective tax rate for the second quarter of 2019 was primarily attributable to a decreased impact from the Global Intangible Low Taxed Income (GILTI) tax. 

Year-to-date Results

For the first six months of 2019 net sales were $2.7 billion, up $40.9 million, compared with $2.7 billion in the first six months of 2018. Sales grew 1.5 percent in the first half of the year due to acquisitions and higher selling prices implemented to recover higher input and operating costs, which were partially offset by lower volume/mix and a $65 million negative impact of foreign exchange.

GAAP net income attributable to Sonoco for the first half of 2019 was $154.8 million or $1.53 per diluted share, compared with $163.5 million or $1.62 per diluted share in the first half of 2018. Earnings in the first half of 2019 included $27.8 million in after-tax charges largely consisting of restructuring and non-operating pension charges. Earnings in the first half of 2018 included after-tax charges totaling $4.6 million largely related to restructuring, acquisition costs and the effect of income tax rate changes on deferred tax items.

Base earnings for the first six months of 2019 were $182.7 million, or $1.81 per diluted share, compared with $168.1 million, or $1.66 per diluted share, in the same period in 2018, an 8.7 percent and 8.5 percent increase, respectively. (See base earnings definition, explanation and reconciliation to GAAP earnings later in this release.)

Current year-to-date gross profit was a record $545.5 million, compared with $527.1 million in 2018. Year-to-date gross profit as a percentage of sales in 2019 was 20.1 percent, compared with 19.7 percent in 2018. Selling, general and administrative expenses decreased $3.7 million, driven by a significant focus across the business on lowering controllable costs, which was partially offset by the addition of expenses from acquisitions. Base operating profit for the first six months of 2019 increased 8.2 percent to $272.3 due primarily to acquisitions and productivity improvements which were partially offset by volume declines.

Cash Flow and Free Cash Flow

For the first half of 2019 cash generated from operations was $40.1 million compared with $251.2 million in 2018, a decrease of $211.2 million. Pension plan contributions, net of non-cash expense, increased by $193.2 million from last year's six-month period due to the Company's voluntary $190 million contribution to the the Company's U. S. defined benefit pension plans in the second quarter of 2019.  An increased consumption of cash for working capital of $20.8 million also contributed to the period-over-period decease in operating cash flow. While the seasonal changes in business activity consumed cash in both periods; this increase was more meaningful in 2019 due to greater year-over-year increases in business activity from the prior year's end.

Free cash flow for the first six months of 2019 was a use of cash that totaled $144.9 million, compared with a provision of cash of $88.8 million in the same period last year, a decrease of $233.6 million mostly attributable to the $211.2 million decrease in cash flow from operations discussed above. The remaining decrease in free cash flow was driven by higher year-to-date net capital expenditures and cash dividends, which totaled $100.8 million and $84.2 million, respectively, compared with $82.7 million and $79.8 million, respectively, in 2018. (See free cash flow description and reconciliation later in this release. Free cash flow is defined as cash flow from operations minus net capital expenditures and cash dividends. Net capital expenditures are defined as capital expenditures minus proceeds from, and/or plus costs incurred in, the disposition of capital assets.)

As of June 30, 2019, total debt was approximately $1.55 billion, compared with $1.39 billion as of December 31, 2018, and the Company had a total-debt-to-total-capital ratio of 45.5 percent at the end of the second quarter compared to 43.9 percent at the end of 2018. The increase in total debt from year-end was driven by a new $200 million term loan drawn during the second quarter which was used to fund a $190 million voluntary pension contribution to the Sonoco U.S. defined benefit pension plans. Cash and cash equivalents were $96.3 million as of June 30, 2019, compared with $120.4 million at December 31, 2018.


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