(SON) Sonoco Product’s Earnings and Sales Lag

Sonoco Products Co. (SON) reported first-quarter 2013 adjusted earnings of 50 cents per share, a decrease of 4% from the prior year quarter’s earnings of 52 cents per share. The results narrowly missed the Zacks Consensus Estimate of 53 cents. Earnings came in at the lower end of the company’s guidance range of 50 cents to 54 cents.

The quarter excluded 3 cents per share of after-tax charges related to restructuring activities and the impact of currency devaluation on operations in Venezuela. The year-ago quarter excluded a net after-tax charge of 10 cents per diluted share related to restructuring activities and acquisition-related expenses. Including these items, first-quarter 2013 earnings stood at 47 cents per share compared to 42 cents in the year-ago quarter.

Operational Update

Net sales decreased 3% year over year to $1.179 billion in the reported quarter. The results fell short of the Zacks Consensus Estimate of $1.198 billion. The year-over-year decline in sales was attributable to lower volume and selling prices in Consumer Packaging and Paper and Industrial Converted Products segments partially offset volume improvement and sales price gains in the Display and Packaging and Protective Solutions segments.

Cost of sales decreased 2.2% to $973 million in the reported quarter. Gross profit at Sonoco went down 5% to $206 million. Consequently, gross margin contracted 40 basis points (bps) to 17.4%.

Selling, general and administrative expenses declined 2% to $120 million in the quarter. Sonoco’s adjusted operating income increased 9% to $85 million in the quarter from $94 million in the year-ago quarter. Operating margin contracted 50 bps year over year to 7.2%.

Segment Performance

Net sales at the Consumer Packaging segment dropped 6.6% to $463 million, hurt by lower volume and selling prices. Operating profit of the segment also declined 15% to $42 million. The decline was driven by weakness in many packaged food categories as well as negative LIFO inventory adjustment and a negative price-cost relationship, partly offset by modest productivity improvements.

Net Sales at the Paper and Industrial Converted Products segment dipped 2% to $454 million. Operating profit at the segment declined 4% to $31 million, driven by higher maintenance, labor and other expenses associated with paper mill repair outages and lower volume.

Display and Packaging segment’s net sales increased 4% to $120 million from $115 million in the year-earlier quarter. However, operating profit was flat for the quarter, driven by slightly positive volume and a positive price-cost relationship, partly offset by higher costs.

Protective Solution segment’s net sales went up 3% to $142 million. The increase was mainly driven by increased volume in the expanded foam and temperature-assurance packaging businesses. Operating profit at the segment shot up 22% to $8.5 million in the quarter, primarily due to synergies and strong productivity gains.

Dividend

Sonoco’s Board has approved a 3.3% increase in its regular quarterly dividend. This represents the 31st consecutive year that Sonoco has increased dividend and will mark the 352nd consecutive quarter of paying dividends.

Sonoco will now pay 31 cents per share to its shareholders, a penny more than the prior quarter’s dividend of 30 cents per share. The increased dividend will be paid on Jun 10, 2013, to shareholders of record as of May 17, 2013. The annualized dividend for the company is projected to increase from $1.20 per share to $1.24 per share.

Financial Position

As of Mar 31, 2013, cash and cash equivalents were $163 million, compared with $373 million as of Dec 31, 2012. Cash flow from operating activities was $136.3 million as of Mar 31, 2013 compared with $97.4 million as of Apr 1, 2012. The company’s debt-to-total-capital ratio stood at 38.3% as of Mar 31, 2012 compared with 42.2% as of Dec 31, 2012.

Outlook

Sonoco expects second quarter 2013 earnings per share to lie in the range of 56 to 60 cents per share. It guided full year earnings in the range of $2.26 to $2.32 per share. The company has raised free cash flow guidance to about $150 million, compared with its previous guidance of $130 million

Our View

Organic sales growth, geographic expansion and strategic acquisitions remain growth drivers for the company. However, volatile raw material prices and uncertainty among its customers given the slow recovery in the U.S and ongoing European weakness, higher pension costs are still headwinds for the company. Sonoco currently retains a short-term Zacks Rank #2 (Buy).

Other companies in the packaging and containers industry with favorable Zacks Ranks are Packaging Corporation of America (PKG), Berry Plastics Group, Inc. (BERY) and Graphic Packaging Holding Co. (GPK). While Packaging Corporation holds a Zacks Rank #1 (Strong Buy), Berry Plastics and Graphic Packaging carry a Zacks Rank #2 (Buy).
BERRY PLASTICS (BERY): Free Stock Analysis Report

GRAPHIC PKG HLD (GPK): Free Stock Analysis Report

PACKAGING CORP (PKG): Free Stock Analysis Report

SONOCO PRODUCTS (SON): Free Stock Analysis Report

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