Sonoco Products Company (SON) reported third quarter earnings of 50 cents per share, beating its own guidance of 43-47 cents and the Zacks Consensus Estimate of 46 cents. However, third quarter EPS was down 17% compared to 60 cents reported last year, primarily due to lower volumes and higher pension expense.

Net sales during the quarter fell 12.5% to $930.6 million from $1,063.3 million a year ago. The decline in sales was primarily led by lower volumes (particularly in the industrial-focused businesses), lower selling prices and an unfavorable foreign currency translation impact. Despite low volumes, the company’s gross margin was up 120 basis points at 18.6% primarily due to favorable selling price/material cost relationship.

Sales in the Consumer Packaging segment were almost flat compared to last year as higher selling prices offset lower volumes and an unfavorable foreign currency translation impact. Operating profit was up a robust 45.5% as the segment benefited from a favorable price/cost relationship and productivity improvements, which more than offset the impact of lower volume and higher pension costs.

Tubes and Cores/Paper segment sales dropped 20.5% due to lower volumes in North America and Europe, a negative foreign currency translation effect and lower selling prices. The segment’s operating profit was down 48.9% as a result of lower volumes, negative price/cost variance and higher pension costs.

Sales in the Packaging Services segment were down 13.3%, while operating income declined 33.6%. The segment sales were down due to lower volumes in the contract packing operations and a negative foreign currency translation effect. Operating profits decreased due to an unfavorable shift in business mix and higher pension costs.

Year-to-date, Sonoco has generated $358 million in cash from operations. The company reduced its debt by $104 million in the first nine months and ended the third quarter with a debt-to-total capital ratio of 31.0%, down from 37.0% as on Dec. 31, 2008. The company generated free cash flow of $194 million in the first nine months and expects to generate full year free cash flow of over $200 million.

Sonoco raised its earnings guidance for the year 2009. The company now expects EPS in the range of $1.62-$1.67, compared to the previous guidance of $1.55-$1.65. For the next reporting quarter, the company anticipates EPS between 42-47 cents, compared to 49 cents reported in the third quarter of previous year. The updated earnings and free cash flow guidance assume that demand will remain near the levels experienced late in the third quarter and ongoing cost-reduction efforts are successful.

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