Sonoco's Q2 Earnings Up on Improved Productivity, Lag Ests - Analyst Blog

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Sonoco Products Co. ( SON ) reported second-quarter 2014 adjusted earnings of 63 cents per share, which rose 6.8% from 59 cents earned in the year-ago quarter. However, the bottom line fell short of the Zacks Consensus Estimate of 65 cents. Earnings came in at the lower end of the company's guided range of 63-67 cents per share.

Benefits from improvements in manufacturing productivity, a favorable price/cost relationship, lower pension expense and acquisitions and strong performances in Paper and Industrial Converted Products as well as Display and Packaging segments resulted in the year-over-year growth in earnings. While factors like higher labor, maintenance and other operating costs and lower-than-expected results in Consumer Packaging and Protective Solutions segments caused it to reach just the lower end of the guidance range.

The quarterly results excluded 4 cents per share of an after-tax charge related to restructuring activities and acquisition. Including this, second-quarter 2014 earnings were 59 cents per share, up from 53 cents in the year-ago quarter, which included an after-tax charge of 6 cents per share related to restructuring activities and plant closures.

Operational Update

Net sales increased 2% year over year to $1.25 billion in the quarter driven by higher selling prices and sales from acquisitions. However, revenues fell short of the Zacks Consensus Estimate of $1.26 billion.

Cost of sales increased 1.2% year over year to $1.02 billion. Gross profit went up 4% year over year to $232 million. Gross margin grew 50 basis points (bps) to 18.6%, driven by productivity improvements, a positive price/cost relationship and lower pension expense. These were partially offset by inflation.

Selling, general and administrative expenses increased 4% year over year to $126 million due to higher labor costs. Sonoco's adjusted operating income rose 4.5% to $105.3 million from $100.7 million in the year-ago quarter. Operating margin expanded 20 bps year over year to 8.4%.

Sonoco Products Company - Quarterly EPS (BNRI) | FindTheBest




Segment Performance

The Consumer Packaging segment reported net sales of $474 million, flat compared with $475 million in the prior-year quarter. Benefits from higher selling prices and incremental sales, from the prior-year acquisition of a small graphics management business in the U.K., were offset by the negative impact of foreign exchange rates and volume and mix.

Operating profit declined 10% year over year to $42.8 million due to lower volume and higher labor, maintenance and other operating costs, somewhat offset by modest productivity improvements and lower pension expense.

Net sales at the Paper and Industrial Converted Products segment went up 3.6% year over year to $490 million. Higher selling prices and sales from a small recycling acquisition were partly offset by negative impact of foreign exchange rates.

Operating profit grew 29% year over year to $46.5 million led by positive price/cost relationship, strong productivity improvements and lower pension expense, partly offset by a negative mix of business and higher labor, maintenance and other operating costs.

Display and Packaging segment's net sales increased 3.2% year over year to $162 million from $157 million in the year-earlier quarter. Volume growth in the U.S. display and packaging, packaging fulfillment activity and higher selling prices led to the growth.

Operating profit improved 24% year over year to $7.5 million driven by a positive price/cost relationship and productivity improvements as well as volume gains.

Protective Solution segment's net sales remained flat year over year at $121 million. Operating profit at the segment declined 15% to $9.6 million from $11.4 million in the year-ago quarter, primarily due to negative price/cost relationship and higher maintenance, labor and other operating costs.

Financial Performance

Sonoco ended the quarter with cash and cash equivalents of $199.8 million, down from $217 million as of 2013-end. Cash flow from operations was $60 million in the reported quarter, down substantially compared with $108 million in the prior-year quarter, primarily due to a $15 million payment made to fund proposed settlement of environmental claims and litigation associated with Fox River, in addition to higher cash taxes paid and changes in working capital.

The long-term debt of the company was $947 million, marginally up from $946 million as of 2013-end. Debt-to-capital ratio was 37% as of Jun 29, 2014, expanded 100 bps compared with Dec 31, 2013. During the quarter, Sonoco repurchased 441,000 shares for $18.5 million under a previously announced share buyback plan to repurchase 2 million shares.

Guidance

For full-year 2014, Sonoco reiterated its earnings per share guidance range of $2.43 to $2.53. Free cash flow is anticipated to be around $110 million for 2014.

Sonoco is projecting third-quarter 2014 earnings per share in the range of 66-70 cents. The company expects that normal seasonality, average volume levels in the consumer business and improved productivity, particularly in flexibles will drive growth partly offset by a less favorable price cost relationship in the Paper and Industrial Converted Product segment.

Sonoco will benefit from its continuous effort to drive organic sales growth through the development of innovative solutions. The company remains focused on various projects which utilize its unique i6 Innovation Process. Development of customized solutions through the combination of Sonoco's technical expertise in material science, design, graphics management and supply chain capabilities will also help customers.

Our View

Organic sales growth, geographic expansion and strategic acquisitions remain growth drivers for Sonoco. However, global economic factors and possible increase in raw material prices continue to be 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. The company is also the largest producer of paper-based tubes and cores in North America.

At present, Sonoco carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include Sealed Air Corp. ( SEE ), Graphic Packaging Holding Co. ( GPK ) and MeadWestvaco Corp. ( MWV ). While Sealed Air Corporation hold a Zacks Rank #1 (Strong Buy), Graphic Packaging and MeadWestvaco Corporation carry a Zacks Rank #2 (Buy).


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: SON , MWV , SEE , GPK

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