Sonoco Products Company (SON)

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Sonoco Products Company (SON)

Q2 2009 Earnings Call

July 16, 2009; 11:00 am ET

Executives

Harris DeLoach - Chairman, President & Chief Executive Officer

Charlie Hupfer - Senior Vice President, Chief Financial Officer & Corporate Secretary

Roger Schrum - Vice President of Investor Relations

Analysts

Claudia Hueston - J.P. Morgan/ Jason Company

George Staphos - Bank of America/ Merrill Lynch

Ghansham Panjabi - Robert W. Baird & Company

Chris Manuel - KeyBanc Capital Markets

Al Kabili - Macquarie Capital Advisors

David Leibowitz - Horizon Asset Management

Dan Khoshaba - KSA Capital Advisors

Amy Norflus - Pilot Advisors

Tim Petrycki - Jesup & Lamont Securities

Joshua Zaret - Longbow Security

Presentation

Operator

Greetings and welcome to the Sonoco Products Company second quarter earning conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

It is now my pleasure to introduce your host Mr. Roger Schrum, Vice President of Investor Relations for Sonoco Products Company. Thank you Mr. Schrum, you may now begin.

Roger Schrum

Thank you, Jacky. Good morning everyone and welcome to Sonoco’s 2009 second quarter earnings investor call. This call is being conducted on July 16, 2009. Joining me today are Harris DeLoach, Chairman, President and Chief Executive Officer; and Charlie Hupfer, Senior Vice President and Chief Financial Officer.

Our financial results for the second quarter were released before the market opened today and are available on our website at www.sonoco.com. Let me begin by stating that today’s investor call may contain a number of forward-looking statements that are based on current expectations, estimates and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties; therefore actual results may differ materially.

Additional information about factors that could cause different results and information about the use by the company of non-GAAP financial measures is available in our annual report and on the company’s website.

With that brief introduction, I’ll now turn it over to Charlie Hupfer.

Charlie Hupfer

Okay thank you Roger. Today Sonoco reported second quarter EPS of $0.33 a share and base EPS of $0.41 a share. Base EPS of $0.41 a share compares with our guidance of $0.34 to $0.38, so we were very pleased with the quarter. We were especially pleased with the added strength we saw in June in our US tube and paper operation.

Let me begin by reconciling GAAP net income to base net income. GAAP net income was $33.6 million or $0.33 per share, versus a base net income of $40.9 million or $0.41 a share. The difference is restructuring. During the quarter we took a $10.4 million pre-tax charge related to several announced plant closure and a reduction in force. The after-tax charge was $7.3 million. So if we add that $7.3 million to GAAP net income of $33.6 million, you will arrive at $40.9 million or $0.41 a share, net of base EPS.

Last year’s net income included a pre-tax restructuring charge of $10.8 million or $4.6 million after tax and after minority interest. So if we add back $4.6 million to last year’s net income of $58 million, you arrive at $62.6 million or $0.62 a share. On a based earnings basis, EPS is $0.41 this year versus $0.62 last year, and incremental pension expense accounts for $0.08 of that different.

With these restructuring adjustments in mind, let me read out now for you the full comparative income statement. First starting at the top, sales were $864.2 million or 20.5% below last years $1.866 million. Volume and foreign exchange were the big drivers of the year-over-year short fall.

Positive sale is $705.9 million versus last year’s $891.9 million. The gross profit margin, if you make that calculation is 18.3% and that compares with 17.9% last year, and that’s a 40 basis points year-over-year improvement. You have to go back to the second quarter of 2007 to find the higher gross profit margin. My take on all this is that our plants and mills have adjusted very well to running at these lower levels of volume.

Selling and administrative and other costs are $90.6 million versus $100.9 last year; that is a $10.3 million reduction and I think that speaks to the tight control we’ve had for well over a year over discretionary spending.

Base EBIT, Earnings before Interest and Tax then is $67.7 million compared with $93.8 million last year. That’s a $26.1 million year-over-year shortfall, and $13.2 million of that is incremental pension expanse. In percentage terms, EBIT is down year-over-year by 27.8%, but after that incremental pension expense EBIT will be down only 13.7%.

Coming on down the income statement, interest expense is $10.1 million versus $12.1 last for a table with a difference of $2 million. Total debt is down year-over-year by $180 million and our commercial paper interest rate averaged only 78 basis points in this second quarter versus 2.76% last year.

Taxes are $17.8 million versus $22.8 million last year. The effective tax rate is 30.9% this year, versus 27.8% last year; so about a three percentage point different. Last year we were able to take advantage of the change in the Italian tax law that resulted in a one time credit of about $3 million and that pulled down last year’s effective tax rate. We had no similar credit in this year’s quarter.

Read the rest of this transcript for free on seekingalpha.com