Sonoco, one of the largest diversified global packaging companies, reported financial results for its third quarter, ending September 30, 2018.

Third Quarter Highlights

- Third-quarter 2018 GAAP earnings per diluted share were $0.72, compared with $0.72 in 2017.

- Third-quarter 2018 GAAP earnings included after-tax restructuring and asset impairment charges of $15.0 million related to exiting a packaging center contract; plant closures; and non-base tax-related gains. In the third quarter of 2017, GAAP results included $3.8 million, after tax, in acquisition-related expenses and non-base tax-related charges.

- Base net income attributable to Sonoco (base earnings) for third quarter 2018 was $0.86 per diluted share, compared with $0.76 in 2017. (See base earnings definition, explanation and reconciliation to GAAP earnings later in this release.) Sonoco previously provided third-quarter 2018 base earnings guidance of $0.82 to $0.88 per diluted share.

- Third-quarter 2018 net sales were $1.36 billion, up 3.0 percent from $1.32 billion in 2017.

- Cash flow from operations was $451.5 million in the first nine months of 2018, compared with $281.0 million in 2017. Year-to-date free cash flow was $218.9 million, compared with $25.6 million in 2017. (See free cash flow definition and reconciliation to cash flow from operations later in this release.)

- On October 1, 2018, Sonoco acquired the remaining 70 percent interest in the Conitex Sonoco joint venture and a composite can operation in Spain from Texpack, Inc., for approximately $143 million in cash. Conitex Sonoco is a vertically integrated global leader in the manufacturing of paper-based cones and tubes used in the textile industry. Conitex Sonoco's results will be included in the Company's Paper and Industrial Converted Products segment and the Spanish composite can operation in the Consumer Packaging segment.

Fourth Quarter and Full-Year Guidance Update

- Base earnings for the fourth quarter of 2018 are estimated to be in the range of $.75 to $.81 per diluted share, compared to $.72 per diluted share in the fourth quarter of 2017.

- Full-year 2018 base earnings guidance has been updated to $3.28 to $3.34 per diluted share. Fourth-quarter and full-year guidance reflects the Company's expected solid year-over-year results, despite additional impact from Hurricane Florence; expenses from tariffs on steel, aluminum and other products; along with higher than previously expected resin, freight and other non-material inflation.

- Full-year 2018 operating cash flow and free cash flow guidance has been raised to a range of $580 million to $600 million and $230 million to $250 million, respectively. Previous operating cash flow and free cash flow guidance was a range of $570 million to $590 million and $190 million to $210 million, respectively.

Note: Fourth-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.

Hurricane Florence Impact
As previously reported, Sonoco's paper mill operations in Hartsville, S.C., were temporarily shut down following unprecedented flooding from Hurricane Florence. The storm impact also temporarily idled operations at several recycling operations, tube and core plants and other operations in Virginia, North Carolina and South Carolina. 

All operations impacted by Hurricane Florence are back in production. Mill operations in Hartsville lost approximately 22,300 tons of uncoated recycled paperboard and corrugated medium paper production during the storm outage in the third quarter. Sonoco carries property and business interruption insurance, subject to a $1 million self-insured retention, and is actively working on insurance recovery. The negative earnings impact from Hurricane Florence through the end of the third quarter was approximately $.04 per fully diluted share. This impact was primarily driven by lost production and sales at impacted facilities. The Company has continued to experience additional lost production and higher supply chain costs in the fourth quarter and currently expects the additional fourth-quarter impact will be approximately $.02 to $.03 per diluted share.  

"Up to 350 restoration contractors worked alongside our nearly 500 mill associates and maintenance crews to perform the largest cleanup, restoration and repair operation in our nearly 120-year history," said Sonoco President and Chief Executive Officer Rob Tiede. "Through their dedication, we were able to minimize the impact and bring back most production well in advance of our original expectations."  

CEO Comments on Third Quarter Results
Commenting on the Company’s third-quarter GAAP and base results, Tiede added, "Sonoco produced a solid quarter, despite the impacts of Hurricane Florence, accelerating inflation and sluggish consumer-served market demand. Overall, net sales grew by 3.0 percent while GAAP net income attributable to Sonoco was flat. Base net income attributable to Sonoco gained 14.0 percent, primarily due to a lower effective tax rate and higher earnings from affiliates. Base operating profit declined slightly in the third quarter as a positive price/cost relationship and acquisitions were more than offset by operating cost inflation, the impact from the hurricane, and the negative impact of foreign exchange. The earnings contribution from slightly higher volume was essentially offset by an unfavorable change in sales mix. Finally, year-to-date cash flow from operations and free cash flow were extremely strong, improving approximately $170.5 million and $193.3 million, respectively, over the prior-year period."

Third Quarter Review
Net sales for the third quarter were $1.36 billion, an increase of $40.1 million, or 3.0 percent, from last year’s quarter. The improvement reflects an increase in sales added by acquisitions; higher volumes, particularly in our Display and Packaging businesses; and higher selling prices implemented to recover rising freight and other operating cost inflation.

GAAP net income attributable to Sonoco in the third quarter was $72.4 million, or $0.72 per diluted share, a decrease of $0.4 million, compared with $72.8 million, or $0.72 per diluted share, in 2017. Third-quarter GAAP earnings included after-tax charges of $15.0 million related to the previously mentioned exit of a packaging center contract and restructuring and impairment charges associated with plant closures and non-base tax related gains. In the third quarter of 2017, GAAP earnings included $3.8 million, after tax, in acquisition and acquisition-related charges and non-base tax related charges. Adjusted for these items, base earnings in the third quarter were $87.4 million, or $0.86 per diluted share, an increase of $10.8 million, compared with $76.6 million, or $0.76 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.)

Gross profits were $259.6 million in the third quarter, an increase of $6.8 million or 2.7 percent, compared with $252.9 million in the same period in 2017. Gross profit as a percentage of sales was 19.0 percent, compared with 19.1 percent in the same period in 2017. Third-quarter selling, general and administrative expenses increased $6.9 million from the prior year to $136.0 million. This increase was driven by expenses related to acquired businesses, wage inflation and higher management incentives.

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.

Third-quarter 2018 sales for the segment were $600.2 million, compared with $565.8 million in 2017. Segment operating profit was $56.0 million in the third quarter, compared with $68.9 million in the same quarter of 2017.

Segment sales increased 6.1 percent compared to the prior-year quarter due to sales added from acquisitions and higher selling prices, partially offset by the negative impact of foreign exchange and lower volume. Higher sales volume in flexible packaging was more than offset by lower composite can sales volume in North America, Latin America and Europe as well as global rigid plastics. Segment operating profit declined 18.7 percent compared to the prior-year quarter as the benefit of acquisitions was more than offset by higher-than-anticipated resin, freight and other operating expenses, along with lower volume and negative manufacturing productivity. These items, together with changes in the mix of business, resulted in segment operating margin declining to 9.3 percent in the quarter from 12.2 percent in 2017.

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.

Third-quarter 2018 sales for this segment were $165.2 million, compared with $135.6 million in 2017. The segment reported an operating profit of $3.7 million in the current quarter, compared with an operating profit of $2.0 million in the prior-year quarter.

Sales increased 21.8 percent compared to last year’s quarter due primarily to increased sales in the packaging center near Atlanta, partially offset by the negative impact of foreign exchange. Segment operating profit improved $1.7 million as higher volume, improved manufacturing productivity and a higher price/cost relationship were partially offset by higher operating costs associated with the Atlanta packaging center. Despite the continued improvements at the packaging center near Atlanta, the Company decided that it could not achieve acceptable margins under the single-customer contract associated with this facility. As of September 30, 2018 the Company has exited this contract.

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.

Third-quarter 2018 sales for the segment were $463.7 million, down from $483.4 million in 2017. Segment operating profit was $53.9 million in the quarter, compared with $43.7 million in 2017.

Segment sales declined 4.1 percent from the prior-year quarter as selling prices declined due to lower recovered paper prices and a negative impact from changes in foreign exchange rates. Volume/mix was essentially flat as lower global tube and core volume and the impact of the hurricane on domestic paper operations were offset by improved volume in wire and cable reels, recycling and Europe paper operations. Segment operating profit improved 23.4 percent over the prior year, driven by a positive price/cost relationship across the segment, excluding recycling operations. Segment operating margin improved 258 basis points to 11.6 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.

Third-quarter 2018 sales were $135.7 million, down from $139.9 million in 2017. Operating profit was $10.4 million, a 7.9 percent decline from the third quarter of 2017.

This segment’s sales were modestly lower year over year due primarily to the negative impact of declining foreign exchange rates and softer demand. Volume/mix declined as increased sales for temperature-assured packaging and molded foam transportation components were more than offset by declines in molded foam and paper-based consumer packaging. Segment operating profit declined slightly due primarily to higher operating inflation. Segment operating margin decreased slightly to 7.7 percent.

Corporate/Tax
Net interest expense for the third quarter of 2018 increased to $14.5 million, compared with $13.6 million during the same period in 2017, primarily due to higher borrowings in the current-year quarter stemming from acquisitions. The 2018 third-quarter effective tax rates on GAAP and base earnings were 21.0 percent and 23.6 percent, respectively, compared with 33.4 percent and 31.8 percent, respectively, in the prior year’s quarter. The GAAP and base effective tax rates were lower in 2018 primarily due to the decrease in U.S. federal tax rate as well as other changes in the 2017 U.S. Tax Cuts and Jobs Act (Tax Act). The 2018 GAAP and base rates also benefited from the release of tax reserves on uncertain tax positions as a result of the expiration of the statute of limitations. In addition, the current year GAAP rate benefited from adjustments related to finalization of the 2017 federal tax return while the prior year's GAAP tax rate benefited from a favorable distribution of earnings between low- and high-tax jurisdictions.   

Note: In regards to the effect of the Tax Act, Sonoco has not yet fully completed 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 third quarter and first nine months 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.

Year-to-date Results
For the first nine months of 2018 net sales were $4.04 billion, up $297.7 million, compared with $3.74 billion in the first nine months of 2017. Sales grew 8.0 percent in the first nine months of the year due to acquisitions, volume growth, higher selling prices implemented to recover higher freight and operating cost inflation and certain rising material costs and the positive impact of foreign exchange.

GAAP net income attributable to Sonoco for the first nine months of 2018 was $235.9 million or $2.34 per diluted share, compared with $169.7 million or $1.68 per diluted share in the first nine months of 2017. Earnings in the first nine months of 2018 included after-tax charges totaling $19.9 million largely related to restructuring and asset impairment charges, acquisition costs and the effect of income tax rate changes on deferred tax items. Earnings in the first nine months of 2017 included net after-tax charges of $38.6 million primarily related to lump-sum pension settlements, restructuring charges and acquisition-related expenses.

Base earnings for the first nine months of 2018 were $255.8 million, or $2.53 per diluted share, compared with $208.3 million, or $2.07 per diluted share, in the same period in 2017, a 22.8 percent and 22.6 percent increase, respectively. (See base earnings definition, explanation and reconciliation to GAAP earnings later in this release.)

Current year-to-date gross profit was $786.7 million, compared with $714.2 million in 2017. Gross profit as a percentage of sales in 2018 was 19.5 percent, compared with 19.1 percent in 2017.  Selling, general and administrative expenses increased $34.8 million, driven by acquisitions and increased management incentives. Non-operating pension costs decreased $41.0 million as the previously disclosed 2017 settlement charges did not recur in 2018. Base operating profit for the first nine months of 2018 increased 9.0 percent to $375.6 million due primarily to a positive price/cost relationship and productivity improvements. 

Cash Flow and Free Cash Flow
For the first nine months of 2018, cash generated from operations was $451.5 million, compared with $281.0 million in 2017, an increase of $170.5 million. This increase reflects the improvement in GAAP net income of $66.0 million and the following year-over-year changes. Pension and post-retirement plan contributions, net of non-cash expenses, had a negative year-over-year impact of $15.3 million. This change is composed of a $25.2 million year-over-year decrease in cash contributions that was more than offset by a $40.5 million decrease in non-cash expense which was largely driven by 2017 non-base pension settlement charges of $31.6 million that did not recur in 2018. Year-to-date increases in working capital, driven largely by seasonal changes in business activity, consumed cash in both periods; however, this increase consumed $34.5 million less cash in 2018 due to improved collection efforts of trade accounts receivables in the first nine months of 2018 as well as current-year increases in Accounts Payable due to the timing of payments. Operating cash flow further benefited in the first nine months of 2018 from collections of various other items outstanding at December 31, 2017 and increased accruals related to management incentives in 2018 compared to 2017.

Free cash flow for the first nine months of 2018 was $218.9 million, compared with $25.6 million in the same period last year, reflecting the items impacting cash flow from operations discussed above. Additionally, during the first nine months of 2018, net capital expenditures and cash dividends were $112.0 million and $120.7 million, respectively, compared with $141.0 million and $114.4 million, respectively, in 2017. (See free cash flow description and 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 September 30, 2018, total debt was approximately $1.39 billion, compared with $1.45 billion as of December 31, 2017. At the end of the first nine months of 2018, the Company had a total-debt-to-total-capital ratio of 43.1 percent, compared with 45.6 percent at December 31, 2017. Cash and cash equivalents were $250.4 million as of September 30, 2018, compared with $254.9 million at December 31, 2017.

Fourth Quarter and Full-Year 2018 Outlook
Sonoco expects fourth-quarter 2018 base earnings to be in the range of $.75 to $.81 per diluted share. Base earnings in the fourth quarter of 2017 were $.72 per diluted share. Full-year 2018 base earnings per diluted share are expected to be in a range of $3.28 to $3.34, which narrows the previous estimate of $3.27 to $3.37 per diluted share. The Company anticipates additional lost production and higher supply chain costs associated with Hurricane Florence could impact base fourth-quarter results by up to $.03 per diluted share; of which, $0.02 per diluted share is included in the fourth-quarter base earnings guidance. This guidance assumes no recovery from business interruption insurance in the fourth quarter. Operating and free cash flow guidance for 2018 is expected to be in the range of $580 million to $600 million and $230 million to $250 million, respectively. Previous operating cash flow and free cash flow guidance was a range of $570 million to $590 million and $190 million to $210 million, respectively. Stronger than anticipated operating cash flow and proceeds from asset disposals in excess of prior expectations drove these increases in guidance.

Although the Company believes the assumptions reflected in the range of guidance are reasonable, given uncertainty regarding the impact of new and potential tariffs, the future performance of the overall economy, potential changes in raw material prices and other costs, timing and amounts related to business interruption insurance recoveries, 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, “The third quarter certainly presented some challenges for us, not the least of which was the negative impact of Hurricane Florence on our Hartsville mill complex. Like many companies, we saw and continue to see inflationary cost pressures from higher materials, particularly resins, along with freight, energy and other operating costs. Because of this inflation, we are driving cost recovery through proactive price increases in many of our businesses. Despite challenges, our growth and margin improvement targets for 2018 remain on track. Looking ahead, we are also optimistic about the contribution from our Conitex Sonoco acquisition, which creates opportunities for us to grow our Paper/Industrial Converted Products segment in the fast-growing Asia markets. Sonoco is a resilient company with a 120-year track record of overcoming obstacles through our strong diversified mix of industrial, consumer and protective packaging businesses. We expect a solid fourth quarter and are projecting a year-over-year improvement in full-year base earnings of between 17 percent and 20 percent and a significant improvement in free cash flow."