Sonoco Products Company (SON)

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Sonoco Products Company (SON)

Q2 2011 Earnings Call

July 21, 2011 11:00 am ET

Executives

Roger Schrum – Vice President, Investor Relations and Corporate Affairs

Barry L. Saunders – Vice President and Chief Financial Officer

Harris E. DeLoach, Jr. – Chairman and Chief Executive Officer

Analysts

George Staphos – Bank of America/Merrill Lynch

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

Philip Ng – Jefferies & Company

Chip Dillon – Vertical Research Partners

Alex Ovshey – Goldman Sachs

Ian Zaffino – Oppenheimer & Co.

Mark Wilde – Deutsche Bank Securities, Inc.

Christopher Manuel – Keybanc Capital Markets

William V. Selesky – Argus Research

David Leibowitz – Horizon Asset Management Inc.

Thomas Mullarkey – Morningstar, Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Sonoco Products Company Earnings Call. My name is Modesta and I'll be your coordinator for today. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) as a reminder this conference is being recorded for replay purposes.

I'd now like to turn the call over to you host for today Mr. Roger Schrum, Vice President of Investor Relations. Please proceed sir.

Roger Schrum

Thank you, Modesta. Good morning everyone and welcome to Sonoco's second quarter 2011 investor call. This call is being conducted on July 21, 2011. Joining me today are Harris DeLoach, Chairman and Chief Executive Officer, and Barry Saunders, Vice President and Chief Financial Officer.

Our financial results for the first quarter were released before the market opened today and are available via our website at 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 estimates 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 introduction, I'll now turn it over to, Barry Saunders.

Barry L. Saunders

Thank you Roger. This morning Sonoco reported that second quarter sales were $1.128 billion, up $117 million or 11.7% over last years first quarter. We reported GAAP earnings up share of $0.52 per diluted share and base EPS of $0.60 per share. The base EPS of $0.60 is $0.01 better than last years base EPS of $0.59.

We were just below the low end of our guidance of $0.61 to $0.65. This short fall than what we expected when our guidance was given was driven by soft patch that we experienced in May in some of our consumer business and due to productivity being larger than what we expected in a few businesses as well. We did see improvement in our consumer businesses in June and we ended the quarter with stronger productivity.

Let me first describe the $0.08 difference between GAAP and base EPS. $0.04 is associated with the unwinding of the Sonoco For-Plas joint venture we had in Brazil where we own 51% of the business that produce Composite Can, metal ends, and injection-molded plastics products. We bought out the former partner’s share of the venture but then sold injection-modeled plastics assets to him and recorded a loss on the sale.

Also included in base EPS was $0.03 per share related to restructuring charges for the quarter, most of which was associated with the announced closure of a Flexibles packaging plant in Winnipeg, Canada. And fees associated with acquisitions divestures cost us $0.01 in the quarter. We acquired a small Tubes and Cores operation in New Zealand and a Composite Can business in the UK.

Last year, we only had $0.01 of restructuring expense as an adjustment to arrive the base earnings for the quarter. All of my comments will be directed towards our base income statement, which excludes the previously mentioned adjustments. You can find the reconciliation of GAAP to base numbers in our press release and on our website.

As I mentioned sales of $1.128 billion are up right at 12% year-over-year. Base income before interest and income taxes or EBIT was $92.8 million essentially unchanged from last year’s second quarter of $92.9 million. I will provide our normal bridge of the drivers of the change in sales and the factors that created flat EBIT in just a moment, but first let me roundup the income statement.

Interest was down slightly to $8.2 million versus $8.6 million last year. Thus base income before income taxes was $84.6 million compared with $84.3 million last year. Base income tax expense was $27 million versus $26.8 million last year as the effective tax rate on base earnings was 31.9% up a tenth of a percent from last year’s 31.8%.

Equity in affiliates net of minority interest was essentially unchanged year-over-year. Thus net income attributable to Sonoco was $60.8 million, very slightly improved over last year’s $60.6 million. However, with fewer average diluted shares outstanding, base EPS was $0.01 higher.

I’ll first walk through the sales and EBIT bridge then discuss the results by segment. As previously mentioned sales increased by $117 million, which can be explained by four drivers. Volume and mix accounted for $21 million of the increase. Price accounted for $33 million of the increase. Acquisitions, net of dispositions drove $34 million of the change. And exchange and other accounted for $29 million of the increase.

Beginning first with volume, the $21 million increase represented roughly a 2% increase in volume for the company as a whole. In the consumer segment, we saw nice improvement in Flexibles which is up about 8% year-over-year, low molded plastics was up in unit terms 12% and unit volume was up 1% in Composite Cans in North America, but other rigid plastics volume was down about 5%.

Volume was essentially flat in the Tubes and Cores paper segment, literally unchanged in North America and Europe. It was up about 5% in South America and 2% in Asia. And as you would expect paper volume in North America was essentially flattish as well.

Packaging Services volume was strong in Poland and we had increased activity in the U.S. some of which was related to a contract manufacturing facility where we previously announced that those activities were been transferred to another service provider beginning July 1.

The volume has also improved in fulfillment operations in the U.S. and in Poland and Mexico. Business is all other Sonoco had overall higher volume, which was up 11% in, molded plastics with significant increases in almost of the markets they serve.

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