Sonoco Reports Strong First Quarter 2018 Results
Friday, April 20th, 2018
Sonoco, one of the largest diversified global packaging companies, reported financial results for its first quarter, ending April 1, 2018.
First Quarter Highlights
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First-quarter 2018 GAAP earnings per diluted share were $0.73, compared with $0.53 in 2017.
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First-quarter 2018 GAAP earnings included after-tax charges of $0.01 per diluted share related to restructuring and acquisition-related expenses, which were mostly offset by the effect of the change in the U.S. corporate tax rate on adjustments to deferred taxes. In the first quarter of 2017, GAAP results included $0.06 per diluted share, after tax, in restructuring and acquisition-related charges.
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Base net income attributable to Sonoco (base earnings) for first quarter 2018 was $0.74 per diluted share, compared with $0.59 in 2017. (See base earnings definition, explanation and reconciliation to GAAP earnings later in this release.) Sonoco previously provided first-quarter 2018 base earnings guidance of $0.69 to $0.75 per diluted share.
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First-quarter 2018 net sales were $1.30 billion, up 11.2 percent, from $1.17 billion in 2017.
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Cash flow from operations was $119.8 million in the first quarter of 2018, compared with $67.4 million in 2017. Free cash flow for the first quarter was $44.9 million, compared with $(18.4) million in 2017. (See free cash flow definition and reconciliation to cash flow from operations later in this release.)
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On April 12, 2018, Sonoco completed the acquisition of Highland Packaging Solutions, a Plant City, Fla.-based, leading manufacturer of thermoformed packaging for fresh fruits, vegetables and eggs for approximately $150 million in cash.
Second Quarter and Full-Year Guidance Update
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Base earnings for the second quarter of 2018 are estimated to be in the range of $0.83 to $0.89 per diluted share, compared to $0.71 per diluted share in the second quarter of 2017.
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Full-year 2018 base earnings guidance has been raised to $3.22 to $3.32 per diluted share, from the previous guidance of $3.16 to $3.26 per diluted share, to reflect a downward revision in the expected effective tax rate to approximately 26 percent and expected earnings accretion from the Highland Packaging acquisition.
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Full-year 2018 operating cash flow and free cash flow guidance remain in the range of $560 million to $580 million and $180 million and $200 million, respectively.
Note: Second-quarter and full-year 2018 GAAP guidance are not provided in this release due to the likely occurrence of one or more of the following, the timing and magnitude of which we are unable to reliably forecast: possible gains or losses on the sale of businesses or other assets, restructuring costs and restructuring-related impairment charges, acquisition-related costs, and the income tax effects of these items and/or other income tax-related events. These items could have a significant impact on the Company's future GAAP financial results.
CEO Comments
Commenting on the Company’s first-quarter GAAP and base results, Sonoco President and Chief Executive Officer Rob Tiede said, “Sonoco's growing diversified mix of Consumer- and Industrial-related packaging businesses achieved record consolidated top-line and bottom-line results in the first quarter, with each improving by double-digits over prior-year consolidated results. Net sales grew by 11.2 percent, while operating profit improved 17.6 percent and net income attributable to Sonoco gained 37.8 percent compared to last year. Base operating profit and base net income attributable to Sonoco improved 12.8 percent and 24.6 percent, respectively. First-quarter GAAP and base operating profit benefitted from a positive price/cost relationship and improvements to productivity, which were partially offset by a negative mix of business and operating cost inflation. Overall volume was up slightly compared to the prior-year quarter, despite the impact of one fewer business day. GAAP operating profit was further aided by less restructuring asset impairment charges in 2018 compared to 2017.”
“Net sales in our Consumer Packaging segment grew 18.2 percent over the prior year, while operating profit improved by approximately 2.7 percent. Improved productivity, a positive price/cost relationship and the benefit of acquisitions drove the first quarter operating profit increase and more than offset higher operating inflation and lower volume/mix.
“Our Paper and Industrial Converted Products segment reported its strongest first-quarter operating profit in 10 years, improving 48.2 percent from last year, while net sales grew 4.1 percent. The improvement in segment operating profit was primarily driven by a positive price/cost relationship, which more than offset higher operating costs and lower volume/mix which was driven by the current period having one less day than the prior period.
“Operating profit from our Protective Solutions segment was down slightly from last year as productivity improvements helped offset lower volume/mix, primarily in the segment’s automotive components business. Display and Packaging segment operating profit was lower than last year due to higher operating costs and a negative mix of business associated with the segment’s domestic pack center and display businesses. However, both of these segments registered sequential quarterly improvement as efforts to address the current challenges in these businesses are beginning to show positive results.”
First Quarter Review
Net sales for the first quarter were $1.30 billion, an increase of $131.9 million, or 11.2 percent, from last year’s quarter. The improvement reflects an increase in sales added by acquisitions, the positive impact of foreign exchange, higher selling prices implemented to recover rising freight, wages and operating inflation, and modest volume growth.
GAAP net income attributable to Sonoco in the first quarter was $74.1 million, or $0.73 per diluted share, an increase of $20.3 million, compared with $53.7 million, or $0.53 per diluted share, in 2017. Base earnings in the first quarter were $74.6 million, or $0.74 per diluted share, an increase of $14.8 million compared with $59.9 million, or $0.59 per diluted share, in 2017. Base earnings and base earnings per diluted share are non-GAAP financial measures adjusted to remove restructuring-related items, asset impairment charges, acquisition expenses and certain income tax-related events and other items, if any, the exclusion of which the Company believes improves comparability and analysis of the ongoing operating performance of the business. (See base earnings definition, explanation and reconciliation to GAAP earnings later in this release.)
First-quarter GAAP earnings included after-tax charges of $2.4 million, or $0.02 per diluted share, related to restructuring and acquisition-related expenses. These charges were mostly offset by the effect of the change in the US corporate tax rate on deferred tax adjustments and a gain from a casualty loss insurance settlement totaling $1.8 million, or $0.02 per diluted share. In the first quarter of 2017, GAAP earnings included $6.1 million or $0.06 per diluted share, after tax, in restructuring charges and acquisition-related expenses.
Gross profits were a record $250.6 million in the first quarter, an increase of $27.6 million or 12.4 percent, compared with $223.0 million in the same period in 2017. Gross profit as a percentage of sales increased to 19.2 percent, compared with 19.0 percent in the same period in 2017. The gross profit percentage increase was primarily due to manufacturing and procurement productivity mostly offsetting higher raw material and other operating costs.
First-quarter selling, general and administrative expenses increased $12.2 million from the prior year to $137.4 million. This increase was driven by expenses related to acquired businesses, wage inflation and higher management incentive accruals.
Segment Review
Sonoco reports its financial results in four operating segments: Consumer Packaging, Display and Packaging, Paper and Industrial Converted Products, and Protective Solutions. Segment operating results do not include restructuring and asset impairment charges, acquisition expenses, interest income and expense, income taxes or certain other items, if any, the exclusion of which the Company believes improves comparability and analysis.
Consumer Packaging
Sonoco’s Consumer Packaging segment includes the following products and services: round and shaped rigid containers and trays (both composite and thermoformed plastic); extruded and injection-molded plastic products; printed flexible packaging; global brand artwork management; and metal and peelable membrane ends and closures.
First-quarter 2018 sales for the segment were $570 million, compared with $482 million in 2017. Segment operating profit was $61.1 million in the first quarter, compared with $59.5 million in the same quarter of 2017.
Segment sales increased 18.2 percent compared to the prior-year quarter due to sales added from acquisitions, the positive translation impact of changes in foreign exchange rates, and higher selling prices. Segment operating profit grew 2.7 percent compared to the prior-year quarter due to productivity improvements, a positive price/cost relationship and the benefit of acquisitions, partially offset by a negative change in volume/mix, higher wages and operating costs. Higher sales volume/positive sales mix in global plastics and international composite can operations were more than offset by lower composite can volume in North America. Segment operating margin declined to 10.7 percent in the quarter from 12.3 percent in 2017 due to higher operating costs, certain resin material inflation and changes in mix of business, including acquisitions.
Display and Packaging
The Display and Packaging segment includes the following products and services: designing, manufacturing, assembling, packing and distributing temporary, semi-permanent and permanent point-of-purchase displays; supply chain management services, including contract packing, fulfillment and scalable service centers; retail packaging, including printed backer cards, thermoformed blisters and heat sealing equipment; and paper amenities, such as coasters and glass covers.
First-quarter 2018 sales for this segment were $143 million, compared with $115 million in 2017. The segment reported an operating profit of $1.7 million in the current quarter, compared with an operating profit of $3.2 million in the prior year.
Sales increased 24.4 percent compared to last year’s quarter due primarily to volume growth from a new pack center near Atlanta and the positive impact of foreign exchange. Segment operating profit declined $1.5 million largely due to inefficiencies and higher operating costs associated with the ramp up of production at the new pack center. While results from the new pack center showed sequential quarterly improvement, the Company is continuing to work to resolve these and other operational issues and remains optimistic that over time the pack center will be able to achieve efficiency and cost levels in line with expectations.
Paper and Industrial Converted Products
The Paper and Industrial Converted Products segment includes the following products: paperboard tubes and cores; fiber-based construction tubes; wooden, metal and composite wire and cable reels and spools; and recycled paperboard, linerboard, corrugating medium, recovered paper and material recycling services.
First-quarter 2018 sales for the segment were $461 million, up from $443 million in 2017. Segment operating profit was $39.8 million in the quarter, compared with $26.9 million in 2017.
Segment sales grew 4.1 percent from the prior-year quarter due to the positive impact of foreign exchange and higher selling prices implemented to recover higher freight and other operating costs, partially offset by lower volume/mix. Volume/mix gains in wire and cable reels as well as North America and European paper operations were more than offset by declines in North America tube and core and recycling volumes. Segment operating profit surged 48.2 percent over the prior year driven by a positive price/cost relationship across most of the segment, including continued improvement in the Company's corrugating medium operations. Segment operating margin improved 250 basis points to 8.6 percent.
Protective Solutions
The Protective Solutions segment includes the following products: custom-engineered, paperboard-based and expanded foam protective packaging and components; and temperature-assured packaging.
First-quarter 2018 sales were $131 million, down slightly from $133 million in 2017. Operating profit was $10.7 million, essentially flat with the first quarter of 2017.
This segment’s sales declined slightly year over year as the positive impact of foreign exchange and higher selling prices was offset by lower volume/mix, primarily in the segment’s automotive components business. While first-quarter segment operating profit was flat compared to the 2017 quarter, it improved sequentially as the segment is focused on reducing fixed costs in response to lower automotive component volume. Segment operating margin was 8.2 percent, essentially flat with the prior-year quarter.
Corporate/Tax
Net interest expense for the first quarter of 2018 increased to $13.4 million, compared with $12.1 million during the same period in 2017, primarily due to higher average borrowings in the current-year quarter stemming from acquisitions made in 2017. The 2018 first-quarter effective tax rates on GAAP and base earnings were 24.1 percent and 25.9 percent, respectively, compared with 32.8 percent and 30.9 percent, respectively, in the prior year’s quarter. Although the 2017 U.S. Tax Cuts and Jobs Act (Tax Act) lowered the year-over-year effective tax rate on both GAAP and base earnings, it had a more meaningful impact on certain non-base items resulting in a larger decrease in the GAAP rate.
Note: In regards to the effect of the Tax Act, Sonoco has not yet been able to fully complete its accounting. For certain of the Tax Act's provisions, the Company has made reasonable estimates and has included any measurement period adjustments in its first quarter earnings accordingly. In other cases, the Company has not been able to make a reasonable estimate due either to complexity or uncertainty and, as such, continues to account for those items consistent with their pre-Tax Act accounting. The Company believes any adjustments remaining to be made upon the completion of its accounting will not have a material impact on the Company's financial position.
Cash Flow and Free Cash Flow
For the first quarter of 2018, cash generated from operations was $119.8 million, compared with $67.4 million in 2017, an increase of $52.4 million. The $20.6 million improvement in GAAP net income along with a decrease in cash contributions to pension and post-retirement plans, net of non-cash expenses, of $21.0 million drove the year-over-year increase. Increased business activity from year-end in both periods consumed cash through increases in working capital; however, 2018 consumed more cash than 2017. This was partially offset by collections of various items outstanding at December 31, 2017. During 2018 first quarter, net capital expenditures and cash dividends were $36.0 million and $38.8 million, respectively, compared with $49.0 million and $36.8 million, respectively, in 2017.
Free cash flow for first 2018 quarter was $44.9 million, compared with a negative $18.4 million in the same period last year, reflecting the items impacting cash flow from operations discussed above. Free cash flow is a non-GAAP financial measure that may not represent the amount of cash flow available for general discretionary use because it excludes non-discretionary expenditures, such as mandatory debt repayments and required settlements of recorded and/or contingent liabilities not reflected in cash flow from operations. (See free cash flow reconciliation later in this release. Free cash flow is defined as cash flow from operations minus net capital expenditures and cash dividends. Net capital expenditures are defined as capital expenditures minus proceeds from, and/or plus costs incurred in, the disposition of capital assets.)
As of April 1, 2018, total debt was approximately $1.46 billion, compared with $1.45 billion as of December 31, 2017. At the end of 2018 first quarter, the Company had a total-debt-to-total-capital ratio of 44.9 percent, compared with 45.6 percent at December 31, 2017. Cash and cash equivalents were $305.3 million as of April 1, 2018, compared with $254.9 million at December 31, 2017. On April 12, 2018, in conjunction with the previously mentioned purchase of Highland Packaging Solutions, the Company entered into a new $100.0 million Term Loan Facility.
Second Quarter and Full-Year 2018 Outlook
Sonoco expects second-quarter 2018 base earnings to be in the range of $0.83 to $0.89 per diluted share. Base earnings in the second quarter of 2017 were $0.71 per diluted share.
Full-year 2018 base earnings per diluted share are expected to be in a range of $3.22 to $3.32, which is an increase from the previous estimate of $3.16 to $3.26. The increase in the Company’s 2018 base earnings guidance is due to a reduction in the expected annual effective tax rate to approximately 26 percent, compared to the previous estimate of 27 percent, and expected earnings accretion from the recent acquisition of Highland Packaging Solutions.
Operating and free cash flow guidance remains unchanged for 2018 and is expected to be in the range of $560 million to $580 million and $180 million to $200 million, respectively.
Although the Company believes the assumptions reflected in the range of guidance are reasonable, given uncertainty regarding the future performance of the overall economy and potential changes in raw material prices and other costs, potential changes in the estimated impact of the Tax Act on the Company's effective tax rate, as well as other risks and uncertainties, including those described further below, actual results could vary substantially.
Commenting on the Company’s outlook, Tiede said, “We’re off to a good start to 2018 as our two largest segments, Consumer Packaging and Paper/Industrial Converted Products, showed solid improvement in the first quarter and we’re beginning to gain traction in improving the performance of our Protective Solutions and Display and Packaging segments."
“Overall, we’re projecting a strong second quarter for Sonoco as our Consumer Packaging segment will benefit from the recently completed acquisition of Highland Packaging Solutions, which further complements our growing thermoformed plastic packaging strategy serving fresh fruits, vegetables and dairy products found in the fast-growing perimeter of the supermarket. We also expect strong second-quarter performance from our Paper/Industrial Converted Products segment as we believe demand should be good and expect to continue to benefit from a favorable price/cost relationship. As a result, along with our expectations for a lower effective tax rate, we have raised full-year 2018 base earnings guidance by six cents per share and now target annual base earnings to improve more than 17 percent, year over year.
“But we still have work to do to meet our growth and margin improvement targets in 2018. Inflationary cost pressures in freight, labor, energy and material costs, particularly resins, are requiring us to drive recovery through price increases in many of our businesses. Furthermore, we must work to find effective solutions for our packaged food customers to help them reverse recent headwinds as consumers focus on fresh food alternatives and expanding e-commerce options. Finally, we must continue to drive a turnaround of our Display and Packaging and Protective Solutions segments. We remain confident that our blend of paper, polymer and protective packaging businesses will continue to produce consistent earnings, improved returns and greater rewards for our shareholders.”