Sonoco Products Company (SON)

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Sonoco Products Company (SON)

Q3 2009 Earnings Call

October 22, 2009 11:00 AM ET


Roger P. Schrum - Vice President, Investor Relations and Corporate Affairs

Charles Hupfer - Senior Vice President and Chief Financial Officer

Harris DeLoach - Chairman, President and Chief Executive Officer

Roger Schrum - Vice President, Investor Relations and Corporate Affairs


Joseph Naya - UBS

George Staphos - Banc of America/Merrill Lynch

Ghansham Panjabi - Robert W. Baird & Co., Inc.

Christopher D. Manuel - KeyBanc Capital Markets

Claudia Hueston - JPMorgan Chase & Company

Chip Dillon - Credit Suisse

Steve Chercover - D.A. Davidson

Al Kabili - Macquarie Capital Advisors

Christopher Shunk - Deutsche Bank

David Leibowitz - Horizon Asset Management



Greetings and welcome to the Sonoco Products Company Third Quarter 2009 Earnings Conference Call. At this time all participants are in the listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded.

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

Roger P. Schrum

Thank you Sherry and good morning everyone. Welcome to Sonoco's 2009 third quarter earnings investor call. This call is being conducted on October 22 2009.

Joining me today Harris DeLoach, Chairman, President and Chief Executive Officer and Charlie Hupfer, Senior Vice President and Chief Financial Officer.

Our financial results for the third quarter were released before the market opened today and are available via our website at

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 result 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 I'll turn things over to Charlie Hupfer.

Charles Hupfer

Thank you, Roger. Today Sonoco reported EPS of $0.47 per share for the third quarter of 2009. These are our GAAP earnings and they include restructuring charges and also non operating gains and losses. We reported base EPS of $0.50 a share, which excludes those restructuring charges and in this year's third quarter some non-operating gains.

This was a good quarter for us. Our guidance was $0.43 to $0.47. So at $0.50 we exceeded the high side of the guidance by $0.03 a share. And as I go through my notes, the general theme I believe will be that domestic volume showed some improvement over the second quarter, price cost was positive and productivity was very good for the quarter.

So let me begin by reconciling GAAP net income to base net income. GAAP net income was $47.7 million or $0.47 per share versus base net income of $50.9 million or $0.50 a share. The difference is a net of $3 per share at the charge and that consists of restructuring charges in the quarter net of some one time non-operating income, a little bit confusing so I will walk you through how that affects the P&L.

During the quarter we recorded 7.2 million in restructuring charges, those were expenses. And most of that related to the consolidation of 19 divisions in the six business units. We also recorded, as an offset, income of $7 million. And most of that related to a gain on the sell of properties at our former paper mill in China. So the net amount rounds to an extent of $100,000 as the earnings before interest and tax line.

This is where it starts to get confusing, because the minority interest impact of that is a charge of $3.1 million and that represents our Asian partner share of the gain. And let me reiterate, that gain then is not in base earnings, nor is the minority interest offset that in base earnings.

Now what that tells is, is the minority interest charge of $3.1 million brings the net impact, net income impact to $3.2 million for the quarter or $0.03 a share. So if we add back the $0.03 a share to our GAAP EPS, excuse me, of $0.47 then that brings us to base EPS of $0.50 cents per share. Now last year's our third quarter restructuring totaled $5.5 million. After tax that was 3.3 million or $0.03 cents a share. So if we add back that $0.03 to last year's GAAP EPS of 57 then that brings us to $0.60 a share. So the year-over-year comparison is $0.50 a share this year versus $0.60 a share last year, with $0.08 of that being the incremental pension expense that makes up most of the difference.

So with those restructuring elements in mind, let me just read out to you the full comparative income statement on a base earning basis. And starting at the top, sales for the quarter were $930.6 million and that's 12.5% below last years $1.533 billion. And little bit latter on I'll give you the usual year-over-year reconciliation.

Cost of sales was 757.5 million versus 878.5 last year. The gross profit margin in the quarter was 18.6%, and that compares with 17.4% last year. So up significantly in gross profit margin. In fact the gross profit margin was 18.3% in the second quarter, ended at 17.6% in the first quarter and going back to the fourth quarter of last year, it was 16.9. So we're very pleased with this sequential improvement that we have seen over the last three quarters in the gross profit margin.

And then coming on down the income statement, selling general and administrative cost was 98.1 million versus 93 million last year. That brings us to earnings before interest and tax or EBIT of 75 million in the third quarter versus 91.7 million in last year's third quarter. That's a difference of $16.7 million or 18.2%.

Now, remember of course that that issue is not we've had passed (ph) as incremental pension expense. So added to that incremental pension expense, EBIT would have been down not 18.2 but 3.2%. So generally with that in mind we're pleased with the EBIT performance in the quarter, especially compared with the sales decline of 12.5%.

Walking on down the income statement, interest expense was $9.4 million versus 10.6 million last year. We had lower commercial paper rates and that accounted for some part of the favorable $1.2 million difference. So I think most if the difference was due to the fact that we had a significant debt reduction. And in fact we had no commercial paper outstanding at quarter end.

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