Sonoco Reports Third Quarter 2019 Results

Staff Report From South Carolina CEO

Friday, October 18th, 2019

Sonoco, one of the largest diversified global packaging companies, reported financial results for its third quarter ending September 29, 2019.

Third Quarter Highlights

Third-quarter 2019 GAAP earnings per diluted share were $0.91, compared with $0.72 in 2018.

Third-quarter 2019 GAAP earnings included net after-tax charges of $6.1 million related to restructuring actions, non-operating pension costs, acquisition-related costs and an environmental reserve release. In the third quarter of 2018, GAAP results included net after-tax charges of $14.8 million, for restructuring actions and asset impairment charges related to exiting a packaging center contract, plant closures and non-base tax-related gains.

Base net income attributable to Sonoco (base earnings) for third-quarter 2019 was $0.97 per diluted share, compared with $0.86 in 2018. (See base earnings definition, explanation and reconciliation to GAAP earnings later in this release.) Sonoco previously provided third-quarter 2019 base earnings guidance of $0.88 to $0.94 per diluted share.

Third-quarter 2019 net sales were $1.35 billion, compared with $1.36 billion from 2018.

Cash flow from operations was $238.8 million in the first nine months of 2019, compared with $451.5 million in 2018. Free cash flow was a negative $32.5 million, compared with $218.9 million of free cash flow generated in the first nine months of 2018. Year-to-date 2019 cash flows include a $200 million voluntary contribution to the Company's U.S. defined benefit pension plans. (See free cash flow definition and reconciliation to cash flow from operations later in this release.)

On August 9, 2019, Sonoco completed the acquisition of Corenso Holdings America, Inc, from a company owned by investment funds advised by Madison Dearborn Partners, LLC, for approximately $110 million in cash. Corenso Holdings America is a leading U.S. manufacturer of uncoated recycled paperboard and high-performance cores used in the paper, packaging films, tape and specialty industries.

Fourth Quarter and Full-Year Guidance Update

Base earnings for the fourth quarter of 2019 are estimated to be in the range of $0.72 to $0.76 per diluted share, compared to $0.84 per diluted share in the fourth quarter of 2018. The guidance reflects a more normal effective tax rate in the fourth quarter of 2019 compared to last year's unusually low fourth-quarter effective tax rate which was driven by one-time benefits from the Tax Cuts and Job Act.  Additionally, the Company anticipates a more pronounced year-end slowdown in customer orders in certain served markets.  Finally, 2018 included the receipt of significant insurance proceeds in the fourth quarter that is not expected to repeat in 2019.

Full-year 2019 base earnings guidance has been narrowed to $3.50 to $3.54 per diluted share.  Base earnings for 2018 were $3.37 per diluted share.

Full-year 2019 operating cash flow guidance remains in a range of $435 million to $455 million, which reflects the impact of the Company's voluntary contributions to its U.S. defined benefit pension plans. The Company's free cash flow guidance remains in the range of $60 million to $80 million.

Note: Fourth-quarter and full-year 2019 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 on Third Quarter Results
Commenting on the Company’s third-quarter GAAP and base earnings performance, Rob Tiede, President and Chief Executive Officer, said, "Our strong mix of consumer- and industrial-related packaging businesses did an excellent job navigating slumping global macroeconomic conditions. By focusing our businesses on the areas which we can control, we continued to drive margin expansion as each of our four business segments reported gains in operating profit as compared to last year. With these strong operating results, which included the Corenso acquisition, and a lower effective tax rate, we delivered our best third quarter earnings performance and exceeded the high end of our guidance.

"Overall in the third quarter, net sales declined slightly while GAAP net income attributable to Sonoco improved approximately 27 percent, and base net income gained 12.5 percent to a record $98.1 million as productivity improvements, earnings from acquisitions and a favorable effective tax rate more than offset lower volume/mix and a negative price/cost relationship. GAAP gross profit margin was a solid 19.6 percent, up 58 basis points from last year's quarter. GAAP operating profit improved 36 percent from last year due to improved margins, and lower restructuring and other costs. Base operating profit increased 12.1 percent to $139.1 million, while base operating profit margin increased approximately 120 basis points from last year.

“Our Consumer Packaging segment reported a 3.1 percent decline in sales and a slight improvement in operating profit compared to last year's quarter, however, operating margin improved approximately 45 basis points to 9.8 percent. Sales in our Paper and Industrial Converted Products segment were up 6.9 percent, while operating profit grew 10 percent and operating margin rose 36 basis points to 12 percent. The turnaround in our Display and Packaging segment continued during the quarter with operating margin expanding 390 basis points over the prior-year period, and in our Protective Solutions segment operating profit improved 34.0 percent and operating margin expanded by 293 basis points.”

Third Quarter Review
Net sales for the third quarter were $1.35 billion, down slightly from last year's third quarter sales of $1.36 billion. The sales decline was driven by lower volumes and a stronger U.S. dollar. These negative impacts were mostly offset by increased sales from acquisitions. 

GAAP net income attributable to Sonoco in the third quarter was $92.1 million, or $0.91 per diluted share, an increase of $19.6 million, compared with $72.4 million, or $0.72 per diluted share, in 2018. Third-quarter GAAP earnings included net after-tax non-base charges totaling $6.1 million, $4.8 million of which were after-tax charges related primarily to restructuring activities. Current quarter after-tax non-base charges also included $8.3 million of non-operating pension costs and acquisition-related expenses, offset by a gain related to a release of certain environmental reserves. In the third quarter of 2018, GAAP earnings included $14.8 million of after-tax non-base net charges, $16.6 million of which were after-tax charges and asset impairments related to exiting a packaging center contract and plant closures. Adjusted for these items, base earnings in the third quarter of 2019 were $98.1 million, or $0.97 per diluted share, an increase of $10.9 million, compared with $87.2 million, or $0.86 per diluted share, in 2018. Base earnings and base earnings per diluted share are non-GAAP financial measures adjusted to remove restructuring-related items, asset impairment charges, acquisition expenses, non-operating pension costs, 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 profit was $265.5 million in the third quarter, which was up from $259.6 million reported in the same period in 2018. Gross profit as a percentage of sales was 19.6 percent, an improvement from 19.0 percent in the same period in 2018. Third-quarter selling, general and administrative expenses decreased $15.7 million from the prior year to $120.3 million. This decrease was driven by a gain related to the reversal of an environmental reserve and significant focus across the business on lowering controllable costs which were partially offset by the addition of expenses from acquisitions.

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 2019 sales for the segment were $581.4 million, compared with $600.2 million in 2018. Segment operating profit was $56.7 million in the third quarter, compared with $56.0 million in the same quarter of 2018. 

Segment sales declined 3.1 percent compared to the prior year's quarter due to lower volume/mix and the negative impact of foreign exchange. Rigid Paper Containers sales volume declined in North America which was partially offset by higher revenues in Europe, Latin America, and all other international operations. Flexible Packaging and Rigid Plastics experienced slowing customer demand in many served markets. Segment operating profit increased 1.3 percent compared to the prior year's quarter as the benefit of productivity improvements and cost controls more than offset weaker volume. Segment operating margin improved to 9.8 percent in the quarter from 9.3 percent in 2018.

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 2019 sales for this segment were $145.0 million, compared with $165.2 million in 2018. The segment reported an operating profit of $8.9 million in the current quarter, compared with an operating profit of $3.7 million in the prior year's quarter.

Sales declined 12.2 percent compared to last year’s quarter as volume growth in international pack centers and domestic displays was more than offset by reduced revenue from exiting a pack center contract at the end of the third quarter of 2018. Segment operating profit improved $5.2 million due to higher volume/mix, a positive price/cost relationship and the favorable impact on earnings of exiting the previously mentioned pack center contract.

Paper and Industrial Converted Products
The Paper and Industrial Converted Products segment includes the following products: paperboard tubes, cones, 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 2019 sales for the segment were $495.8 million, up from $463.7 million in 2018. Segment operating profit was $59.4 million in the quarter, compared with $53.9 million in 2018.

Segment sales increased 6.9 percent from the prior year's quarter due to sales added by the 2018 acquisition of Conitex and the August 2019 acquisition of Corenso. This was partially offset by lower volume/mix, declining selling prices, due primarily to historic weakness in the recovered paper market, and the negative impact of changes in foreign exchange rates. Segment operating profit improved 10.2 percent above the prior year's quarter as earnings from the Conitex and Corenso acquisitions and productivity improvements were partially offset by lower volume/mix and a negative price/cost relationship. Segment operating margin improved 36 basis points to 12.0 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 2019 sales were $131.7 million, down from $135.7 million in 2018. Operating profit was $14.0 million, a 34.0 percent increase from the third quarter of 2018. 

This segment’s sales declined 2.9 percent due to lower volume/mix as strong sales growth for temperature-assured packaging was offset by declines in molded foam and consumer fiber packaging. Despite the sales decline, segment operating profit improved on strong productivity improvements and a favorable mix of business compared to the previous year. Segment operating margin, compared to the prior-year quarter, improved 293 basis points to 10.6 percent.

Corporate/Tax
Net interest expense for the third quarter of 2019 increased slightly to $14.8 million, compared with $14.5 million during the same period in 2018, primarily due to higher debt balances and reduced interest income on lower offshore cash balances. The 2019 third-quarter effective tax rates on GAAP and base earnings were 22.4 percent and 22.3 percent, respectively, compared with 21.0 percent and 23.7 percent, respectively, in the prior year’s quarter. Although both the current-quarter GAAP and base effective tax rates benefited from a lesser impact from the Global Intangible Low Taxed Income (GILTI) tax, the effective rate on GAAP earnings was slightly higher in 2019 due primarily to the favorable benefit of one-time adjustments in 2018 related to the U.S. Tax Cuts and Jobs Act of 2017. 

Year-to-date Results
For the first nine months of 2019 net sales were $4.1 billion, up $30.0 million, compared with $4.0 billion in the same period in 2018. Sales grew 0.7 percent in the first nine months of the year due to acquisitions and higher selling prices implemented to recover higher input and operating costs, which were partially offset by lower volume/mix and a $93 million negative impact of foreign exchange.

GAAP net income attributable to Sonoco for the first three quarters of 2019 was $246.9 million or $2.44 per diluted share, compared with $235.9 million or $2.34 per diluted share in the same period of 2018. Earnings in the first three quarters of 2019 included $33.9 million in after-tax charges largely consisting of restructuring and non-operating pension charges partially offset by a gain relating to the release of an environmental reserve. Earnings in the first three quarters of 2018 included after-tax charges totaling $19.4 million largely related to restructuring and asset impairment charges involving the exit of a packaging center contract, plant closures, and the effect of income tax rate changes on deferred tax items.

Base earnings for the first nine months of 2019 were $280.8 million, or $2.78 per diluted share, compared with $255.3 million, or $2.53 per diluted share, in the same period in 2018, a 10.0 percent and 9.8 percent increase, respectively. (See base earnings definition, explanation and reconciliation to GAAP earnings later in this release.) Current year-to-date gross profit was a record $810.9 million, compared with $786.7 million in 2018. Year-to-date gross profit as a percentage of sales in 2019 was 19.9 percent, compared with 19.5 percent in 2018. Selling, general and administrative expenses decreased $19.4 million, driven by a gain related to the reversal of an environmental reserve and significant focus across the business on lowering controllable costs which were partially offset by the addition of expenses from acquisitions. Base operating profit for the first nine months of 2019 increased 9.5 percent to $411.4 million due primarily to productivity improvements and acquisitions which were partially offset by volume declines.

Cash Flow and Free Cash Flow
For the first nine months of 2019 cash generated from operations was $238.8 million, compared with $451.5 million in 2018, a decrease of $212.7 million. Pension plan contributions, net of non-cash expense, increased by $202.1 million from last year's nine-month period due to the Company's voluntary $200 million contribution to the U.S. defined benefit pension plans.  An increased consumption of cash for working capital of $19.3 million also contributed to the period-over-period decrease in operating cash flow.

Free cash flow for the first nine months of 2019 was a use of cash of $32.5 million, compared with a provision of cash of $218.9 million in the same period last year, a decrease of $251.4 million mostly attributable to the $212.7 million decrease in cash flow from operations discussed above. The remaining decrease in free cash flow was driven by higher year-to-date net capital expenditures and cash dividends, which totaled $144.1 million and $127.2 million, respectively, compared with $112.0 million and $120.7 million, respectively, in 2018. (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 29, 2019, total debt was approximately $1.55 billion, compared with $1.39 billion as of December 31, 2018, and the Company had a total-debt-to-total-capital ratio of 45.6 percent at the end of the third quarter 2019 compared to 43.9 percent at the end of 2018. The increase in total debt from year-end was driven by a new $200 million term loan drawn during the second quarter which was used to fund the Company's voluntary pension contribution to the Sonoco U.S. defined benefit pension plans. Cash and cash equivalents were $115.9 million as of September 29, 2019, compared with $120.4 million at December 31, 2018.

Fourth Quarter and Full-Year 2019 Outlook
Sonoco expects fourth-quarter 2019 base earnings to be in the range of $0.72 to $0.76 per diluted share. Base earnings in the fourth quarter of 2018 were $0.84 per diluted share. Full-year 2019 base earnings per diluted share is now expected to be in a range of $3.50 to $3.54, compared with previous guidance of $3.52 to $3.62. The Company's fourth-quarter base earnings guidance assumes a negative impact of $0.08 per diluted share due to a projected 26.0 percent effective tax rate compared to 17.8 percent in the fourth quarter of 2018. For additional comparison purposes, Sonoco received approximately $0.06 per diluted share in business interruption insurance proceeds in the fourth quarter of 2018, approximately $0.04 of which related to the third quarter of 2018. No such proceeds are expected  to repeat this year. Finally, the company is projecting a more pronounced year-end slowdown in customer orders in several of our served markets due to continued deteriorating global macroeconomic conditions. 

Operating cash flow for 2019 is still expected to be in the range of $435 million to $455 million, including the after-tax cash flow impact from the Company's $200 million voluntary contributions to its U.S. defined benefit pension plans. Additionally, free cash flow is expected to be $60 million to $80 million. Free cash flow guidance includes total expected 2019 cash dividend payments to shareholders of approximately $170 million.

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, 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 extremely pleased with how our team has managed our business during challenging conditions while achieving the best first nine months earnings performance in our history. For the past year, we have observed many of our customers taking a very conservative approach to managing their businesses during these uncertain times by aggressively destocking inventory and holding back on new product launches, which is impacting the efficiency of our operations. As we enter the last calendar quarter of the decade, we also are taking a conservative outlook and focusing on further controlling the levers that we can. Despite market challenges, we remain intensely focused on doing what we need to do to drive profitable growth, margin expansion and solid free cash flow. The rigor and discipline we apply to focusing on what we can control, while being flexible when needed, has and will serve us well as we move into the next decade."