Sonoco Products Company (SON)
Q3 2012 Earnings Call
October 18, 2012 11:00 AM ET
Roger Schrum – VP, IR
Barry Saunders – VP and CFO
Harris DeLoach – Chairman and CEO
Jack Sanders – President and COO
George Staphos – Bank of America
Ghansham Panjabi – Robert Baird
Scott Gaffner – Barclays
Phil Ng – Jefferies
Chip Dillon – Vertical Research Partners
Adam Jesse Josephson – KeyBanc
Phil Gresh – JP Morgan
Mark Wilde – Deutsche Bank
Chris Manuel – Wells Fargo Securities
Al Kabili – Credit Suisse
Alex Ovshey – Goldman Sachs
Previous Statements by SON
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I would now like to turn the call over to Mr. Roger Schrum, Vice President of Investor Relations. Please proceed sir.
Thank you very much, and good morning and welcome to Sonoco’s 2012 third quarter investor call. This call is being conducted on October 18, 2012. Joining me today are: Harris DeLoach, Chairman and Chief Executive Officer; Jack Sanders, President and Chief Operating Officer, and Barry Saunders, Vice President and Chief Financial Officer.
A news release reviewing the company’s financial results was issued before the market opened today and is available on the Investor Relations section of our website at sonoco.com. In addition, we will refer to a presentation that is posted on the Investors site during the call.
I’ll briefly remind you that today’s 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 today’s news release and on our company’s website.
Now with that introduction, I’ll turn it over to Barry.
Thank you, Roger. I will begin on slide three where you see that this morning we reported third quarter earnings per diluted share on a GAAP basis of $0.57 and base EPS of $0.55, which compares to $0.66 for the same quarter last year. These results were slightly better than our updated guidance issued on September 10 of $0.51 to $0.53 per share, primarily due to a slightly lower than expected effective tax rate for the quarter.
Before reviewing the base P&L for the quarter, I’ll mention that a reconciliation of GAAP to base earnings is in today’s press release and on our website and is summarized on this slide. Restructuring charges of $5.5 million primarily related to previously announced restructuring initiatives, were essentially offset by gains on the sale two vacated properties. The remaining $0.02 and other represents recoveries from property insurance claims. Last year, in addition to restructuring charges, we also had a $0.17 benefits in taxes from the release of evaluation reserve against deferred tax asset.
Turning to slide four, you find our base P&L, where you see that sales were $1.196 billion, which represented a 6% increase over the prior year. But as you’ll see in the sales bridge, this was driven by the Tegrant acquisition. Gross profit was $206.2 million, which was $19.5 million higher than last year, also driven by the Tegrant acquisition.
Selling and administrative and other charges were $113 million, which were up $25 million year-over-year. Much of that increase was due to Tegrant, but the balance was due to the impact of wage inflations, higher pension cost, and the lack of having benefit of $3 million in life insurance proceeds and $2 million foreign exchange gain in the third quarter last year.
Debt-to-EBIT was $92.7 million, which was down $5.8 million or 6% from last year, and you’ll see the drivers that change in the EBIT bridge in just a moment. Interest expense was $14.8 million, which was higher than last year due to the additional debt issued for the financing of the Tegrant acquisition. Income taxes of $24.4 million were just $1.9 million below last year as the impact of the lower earnings before taxes was partially offset by a higher effective tax rate of 31.3%, which was up from 29.1% last year where the rate was lower due to the benefit of the tax exempt life insurance proceeds. Equity and affiliates and minority interest was in line with last year. Thus base net income was $56.3 million or $0.55 per share as compared to $0.66 last year.
Turning to the sales bridge on slide five which reconciles the year-over-year change in sales, you see that volume was just marginally positive by $9.8 million for the company as a whole. In the consumer businesses, overall volume was down 3.5%, unit volume in composite cans in North America was down 3.5%, while in the associated metal closures business total units were down 2%, as the trade sales shortfall of about 7% was partially offset by an increase in inter-company sales.
Flexibles volume was down 3%, blow-molded plastics volume down 3% and thermoforming plastic unit sales were down 4%. In the industrial businesses, overall trade volume was actually up 2%, but this was driven by an increase in recycling activity and the sale of paper externally. Volume in tubes and cores in North America was only 1% lower year-over-year. Volume in Europe was actually surprising as it was essentially flat, as an 11% increase in the sales in the frontier countries to the east, offset the 3% decline in legacy countries in Western Europe. Overall in Europe, volume would have been down about 4% due to market demand, but we had a net share gain of a similar amount, thus our volume was, again, just down slightly year-over-year.
Asia volume was down 11%, but that was driven by continued lower sales in China and in Thailand due to the impact of last year’s flood. We did see a nice improvement of 14% in Tubes and Cores South America, but that was largely due to a fairly weak third quarter comparison last year, but also some share pickup.