Sonoco, one of the largest diversified global packaging companies, has reported financial results for its first quarter, ending 2 April 2017.
First Quarter Highlights
First quarter 2017 GAAP earnings per diluted share were $0.53, compared with $0.59 in 2016.
First quarter 2017 GAAP results included $0.06 per diluted share, after tax, in restructuring costs and acquisition-related expenses. In the first quarter of 2016, GAAP results included$0.06 per diluted share, after tax, in asset impairment and restructuring expenses.
Base net income attributable to Sonoco (base earnings) for first quarter 2017 was $0.59 per diluted share, compared with $0.65 in 2016.Sonoco previously provided first-quarter 2017 base earnings guidance of $0.55 to $0.63 per diluted share.
First-quarter 2017 net sales were $1.17 billion, down from $1.23 billion in 2016.
Cash flow from operations was $67.4 million in the first quarter of 2017, compared with$66.4 million in 2016. Free cash flow for the first quarter was a negative $18.4 million, compared with a negative $22.1 million in 2016. (See free cash flow definition and reconciliation to cash flow from operations later in this release.)
On March 14, 2017, Sonoco completed the acquisition of Peninsula Packaging Company, a leading manufacturer of thermoformed packaging for fresh fruit and vegetables based inExeter, Calif. Sonoco acquired Peninsula Packaging for approximately $230 million, financing the transaction from a combination of available cash and a $150 million three-year term loan.
Second Quarter and Full Year Guidance Update
Base earnings for the second quarter of 2017 are estimated to be in the range of $0.67 to $0.73 per diluted share. This guidance takes into consideration the negative impact of the 2016 divestiture of the Company's blowmolding and other smaller operations, which more than offset the current period acquisition of Peninsula Packaging and several smaller acquisitions made in 2016. Base earnings in the second quarter of 2016 were $0.73 per diluted share.
Full-year 2017 base earnings guidance has been updated to a range of $2.73 to $2.83, which includes a targeted $0.07 per diluted share expected to come from acquisitions, including Peninsula Packaging. This updated guidance is essentially unchanged from the Company's previous guidance range of $2.66 to $2.76 per diluted share, which excluded a targeted $0.06 to $0.08 per diluted share from acquisitions and/or share repurchases.
As previously guided, 2017 operating cash flow and free cash flow are expected to be approximately $470 million and $125 million, respectively.
Note: Second-quarter and full-year 2017 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.
First Quarter Review
Commenting on the Company’s first quarter results, Sonoco President and Chief Executive Officer Jack Sanders said, “Despite an unprecedented and unexpected sharp increase in recovered paper prices, which is the primary raw material used in our Paper and Industrial Converted Products segment, Sonoco was still able to achieve the midpoint of our first- quarter guidance. Overall, compared to the prior-year quarter, the Company's earnings were negatively impacted by lower volume/mix; divestitures, net of acquisitions; a negative price/cost relationship; and higher labor, maintenance, pension and other operating expenses. Partially offsetting the quarter's headwinds were procurement savings, fixed-cost productivity, lower management incentive expense, and a lower effective tax rate.
“Operating profit in our Consumer Packaging segment declined 8 percent from the prior-year quarter; however, operating margin remained at a solid 12 percent. The decline in segment operating profit was due primarily to the November 2016 sale of the Company's blowmolding operations and lower composite can volume in Europe and North America. Segment sales declined by 9 percent, due to the divestiture of the Company's blowmolding operations, net of acquisitions, lower volume and the negative impact of foreign exchange, partially offset by higher selling prices implemented to recover rising raw material costs and other inflation.
"Our Display and Packaging segment's operating profit was essentially flat with last year's quarter. Segment sales declined 21 percent primarily due to discontinuance of the Company's contract packaging center in Mexico, which had little effect on operating profits. Results also reflect lower volume in domestic displays and retail packaging, and the negative impact of foreign exchange.
“Operating profit in our Paper and Industrial Converted Products segment declined approximately 26 percent as the average price for recovered paper in the Company's U.S. andCanada operations increased nearly 90 percent from the prior year's quarter, resulting in a significant negative price-cost relationship as the Company was unable to immediately pass on the higher costs to our paper, tube and core customers.
Higher labor, maintenance, pension and other expenses also negatively impacted operating profit. Current-quarter segment sales grew by 5 percent due primarily to higher recovered paper prices, partially offset by the divestiture of a paperboard mill in France, lower volume and the negative impact of foreign exchange.
“Operating profit in our Protective Solutions segment declined 10 percent from the prior-year quarter, as negative volume/mix, a negative price/cost relationship, and higher labor, maintenance and other operating costs were only partially offset by fixed-cost productivity improvements. Sales improved slightly in the quarter due primarily to acquisitions.”
GAAP net income attributable to Sonoco in the first quarter was $53.7 million, or $0.53 per diluted share, compared with $59.9 million, or $0.59 per diluted share, in 2016. Base earnings in the first quarter were $59.9 million, or $0.59 per diluted share, compared with $66.5 million, or $0.65 per diluted share, in 2016. Base earnings and base earnings per diluted share are non-GAAP financial measures adjusted to remove restructuring-related items, asset impairment charges, acquisition expenses and other items, if any, the exclusion of which the Company believes improves comparability and analysis of the ongoing operating performance of the business.
First quarter GAAP earnings include after-tax restructuring costs and acquisition-related expenses of $6.1 million, or $0.06 per diluted share. In the first quarter of 2016, GAAP results included $0.06 per diluted share, after tax, in restructuring-related charges.
Net sales for the first quarter were $1.17 billion, down $54.0 million, or 4.4 percent, from last year’s quarter. The decline in sales was a result of the previously mentioned divested businesses, net of acquisitions; the discontinuation of the Company's contract packaging business in Mexico; and the negative impact of foreign exchange, partially offset by higher selling prices, primarily attributed to rising recovered paper costs.
Gross profits were $220.2 million in the first quarter, down $25.1 million, compared with $245.3 million in the same period in 2016. Gross profit as a percent of sales declined to 18.8 percent, compared with 20.0 percent in the same period in 2016. The gross profit percentage reduction in the quarter was due primarily to an unfavorable price/cost relationship, most notably in our Industrial Segment. First-quarter selling, general and administrative expenses were down $8.1 million from the prior year at $126.1 million, driven by the previously mentioned divested businesses, net of acquisitions, lower management incentives and fewer fiscal days, partially offset by wage and other inflation.
Cash generated from operations in the first quarter was $67.4 million, compared with $66.4 million in the same period in 2016. This $1.0 million improvement was a combination of several mostly offsetting factors. Net working capital provided $65.0 million more year over year, driven by enhanced collections of items outstanding at the end of 2016 and timing of payments to suppliers. This year-over-year improvement was offset by increases in cash paid for income taxes, higher cash contributions to the Company's pension plan, timing of various collections and payments of miscellaneous receivables and liabilities, as well as lower net income.
During the quarter, net capital expenditures were $49.0 million, compared to $53.1 million in the prior year quarter; and cash dividends paid were $36.8 million, compared to $35.4 millionin the prior year.
Free cash flow for the first quarter was a negative $18.4 million, compared with a negative$22.1 million in the same quarter last year. Free cash flow is a non-GAAP financial measure which may not represent the amount of cash flow available for general discretionary use because it excludes non-discretionary expenditures, such as mandatory debt repayments and required settlements of recorded and/or contingent liabilities not reflected in cash flow from operations.
At April 2, 2017, total debt was approximately $1.25 billion, compared with $1.05 billion as ofDecember 31, 2016. At the end of the first quarter, the Company had a total debt-to-total-capital ratio of 43.8 percent, compared with 40.4 percent at December 31, 2016. Cash and cash equivalents were $212.8 million as of April 2, 2017, compared with $257.2 million at December 31, 2016. The increase in the debt ratio as well as the reduction in cash was due to the $230 million acquisition of Peninsula Packaging, which was partially financed by a new $150 millionthree-year term loan.
Corporate
Net interest expense for the first quarter of 2017 declined to $12.1 million, compared with $13.8 million during the same period in 2016, primarily due to lower average borrowings in the current-year quarter. The 2017 first-quarter effective tax rates on GAAP and base earnings were 32.8 percent and 30.9 percent, respectively, compared with 33.2 percent and 33.0 percent, respectively, in the prior year’s quarter. The year-over-year decrease in the GAAP tax rate was due to the adoption of FASB Accounting Standards Update 2016-9 regarding accounting for share-based compensation, which requires excess tax benefits to be utilized as an offset to tax expense beginning in the 2017 period. This guidance was not retroactively applied to 2016.
This benefit was mostly offset by expenses related to the settlement of an audit in Canada. The expense related to the audit settlement is a non-base item. The absence of this expense caused the change in the base rate to be more favorable year over year.
Second Quarter and Full-Year 2017 Outlook
Sonoco expects second-quarter 2017 base earnings to be in the range of $0.67 to $0.73 per diluted share. This guidance takes into consideration the negative impact of the previously mentioned 2016 divestitures, partially offset by the current-period acquisition of Peninsula Packaging and other acquisitions completed in 2016. Base earnings in the second quarter of 2016 were $0.73 per diluted share.
Full-year 2017 base earnings guidance is expected to be a range of $2.73 to $2.83, which includes a targeted $0.07 per diluted share expected to come from acquisitions, including Peninsula Packaging. This updated guidance is essentially unchanged from the Company's previous guidance range of $2.66 to $2.76 per diluted share, which excluded a targeted $0.06 to $0.08 per diluted share from acquisitions and/or share repurchases. The Company’s 2017 base earnings guidance anticipates a 31.0 percent effective tax rate for the year.
Operating cash flow in 2017 is expected to be approximately $470 million, and free cash flow is expected to be approximately $125 million, each of which remains unchanged from previous guidance.
Note: Second-quarter and full-year 2017 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.
Although the Company believes the assumptions reflected in the range of guidance are reasonable, given uncertainty regarding the future performance of the overall economy and potential changes in raw material prices and other costs, as well as other risks and uncertainties, including those described below, actual results could vary substantially.
Commenting on the Company’s outlook, Sanders said, “While we are starting the second quarter somewhat behind the price/cost curve, we have announced necessary price increases, along with contractual resets in nearly all of our businesses that should allow us to recover as the year progresses from the significant raw material inflation we experienced in the first quarter.
"As we manage these headwinds, we continue to be pleased with the performance of our consumer-related businesses, which accounted for nearly two-thirds of our operating profit in the quarter. We continue to see consumer demand lag for processed foods sold in the center of the store, while demand for fresh foods sold on the perimeter continues to show solid growth. Our recognition of this changing consumer behavior is exactly what led us to our recent acquisition of Peninsula Packaging. Our expansion to capture share at the perimeter of the store is just one example of how we are executing our strategy to grow our fresh and prepared food packaging offerings in thermoformed containers and flexible packaging.
This broadening of our consumer portfolio offers new growth opportunities that will complement our existing innovative offerings for processed food packaging. Combined, we will significantly expand our presence at retail, as well as expanding the solutions we have to offer our customers.
"Overall, we remain optimistic for the rest of 2017. We are focused on launching new consumer-based customer initiatives, such as our new packaging center for Duracell inAtlanta, and the continued commercial expansion of our TruVue clear can. We also are actively exploring further growth opportunities through rational, strategic acquisitions in Consumer Packaging and Protective Solutions.
Finally, we will continue to look at ways to further optimize our portfolio, while aggressively pursuing new and different alternatives to improve performance in our Industrial businesses and continuing to manage our cost structure throughout the Company."
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.
First-quarter 2017 sales for the segment were $482 million, compared with $527 million in 2016. Segment operating profit was $58.0 million in the first quarter, compared with $62.9 million in the same quarter of 2016.
Segment sales declined 8.6 percent compared to the prior-year quarter due to the divestiture of the Company's blowmolding operations, net of acquisitions, lower volume and the negative impact of foreign exchange, partially offset by higher selling prices. Segment operating profit decreased 7.7 percent over the prior-year quarter due to the sale of the blowmolding operations, net of acquisitions, and lower composite can volume in Europe and North America. In addition, results were negatively impacted by higher labor, maintenance, pension and other operating expenses. Partially offsetting these negative factors were fixed-cost productivity improvements and a positive price/cost relationship.
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.
First quarter 2017 sales for this segment were $115 million, compared with $144 million in 2016. Segment operating profit was $3.2 million in the quarter, compared with $3.3 million in the prior-year quarter.
Sales declined 20.5 percent compared to last year’s quarter due primarily to the discontinuance of the Company's contract packaging center in Mexico, lower volume in domestic displays and retail packaging, and the negative impact of foreign exchange. Operating profit in the segment was essentially flat year over year, as negative volume/mix in domestic display and retail packaging was nearly offset by fixed-cost productivity.
Paper and Industrial Converted Products
The Paper and Industrial Converted Products segment includes the following products: paperboard tubes 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.
First-quarter 2017 sales for the segment were $443 million, up from $423 million in 2016. Segment operating profit was $24.7 million in the first quarter, compared with $33.3 million in 2016.
Segment sales grew approximately 4.6 percent during the quarter due to higher recovered paper prices, partially offset by the divestiture of a paperboard mill in France, lower volume and the negative impact of foreign exchange. Segment operating profit declined 25.8 percent compared to the prior year quarter due to a negative price/cost relationship and higher labor, maintenance, pension and other operating expenses.
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.
First quarter 2017 sales were $133 million, compared with $132 million in 2016. Operating profit was $10.9 million, compared with $12.0 million in the first quarter of 2016.
This segment’s 1.1 percent increase in first quarter sales came from acquisitions and was partially offset by negative volume/mix. Operating profit was down 9.7 percent in the quarter, as negative volume/mix and price/cost were partially offset by fixed-cost productivity improvement.
