Sonoco Products Company CEO Discusses Q3 2011 Results - Earnings Call Transcript

Sonoco Products Company ( SON)

Q3 2011 Earnings Conference Call

October 19, 2011 11:00 AM ET

Executives

Roger Schrum – VP, IR and Corporate Affairs

Harris DeLoach – Chairman and CEO

Jack Sanders – President and COO

Barry Saunders – VP and CFO

Analysts

George Staphos – Bank of America/Merrill Lynch

Bill Gresh – JP Morgan

Ghansham Panjabi – Robert W. Baird & Co., Inc.

Chip Dillon – Vertical Research Partners

Philip Ng – Jefferies & Company

Alex Ovshey – Goldman Sachs

Chris Manuel – Wells Fargo

William Selesky – Argus Research

Presentation

Operator

Good day, and welcome to the third quarter 2011 Sonoco Products Corporation earnings teleconference. My name is Caddis, and I'll be your coordinator for today. At this time all participants are in listen-only mode. After management’s remarks, we will conduct a Q&A session. (Operator instructions)

I'd now like to turn the presentation over to you host for today’s conference, Vice President of Investor Relations, Mr. Roger Schrum. You may proceed sir.

Roger Schrum

Thank you, Caddis. Good morning and welcome to Sonoco's third quarter investor call. This call is being conducted on October 19, 2011. Joining me today are Harris DeLoach, Chairman and Chief Executive Officer; Jack Sanders, President and Chief Operating Officer; and Barry Saunders, Vice President and Chief Financial Officer.

The news release discussing the company’s third-quarter financial results was released after the market closed on Tuesday, October 18, and is available on our investor relations section of our website at sonoco.com.

Let me begin by stating that today's call may contain a number of forward-looking statements that are based on current expectations, estimates, and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties. Therefore, actual results may differ materially. Additional information about factors that could cause different results and information of the use by the company of non-GAAP financial measures is available in today’s news release and on the company's website.

And with that, I'll turn it over to Barry Saunders.

Barry Saunders

Thank you Roger. After the close of the market yesterday, Sonoco reported that third quarter sales were $1.124 billion, up $72 million or 7% over last year’s third quarter. We reported GAAP earnings per diluted share or EPS of $0.76 per share and base EPS of $0.66 per share. The base EPS of $0.66 is $0.01 better than last year’s base EPS of $0.65, and within our guidance of $0.64 to $0.68.

Let me first describe why our GAAP EPS was $0.10 higher than base EPS. The most significant item impacting this is the net $18 million reduction in tax expense, or $0.18 per share associated with the reduction in the valuation allowance against deferred tax assets. This was comprised of two separate events, the first being a 24 million release of valuation allowance against deferred tax assets in Europe. The deferred tax assets results from cumulative net operating loss carry forwards in one legal entity that had been fully reserved for through the valuation allowance due to the uncertainty of being able to use NOLs.

However, due to improved operating results in that entity, we are comfortable that the NOLs will be usable, and thus have released the full reserve. Partially offsetting this is the increase in the valuation reserve by $5 million in Canada as a result of the decision to close a thermoforming plant. The business will be transitioned to other plants in the US to better leverage capacity and be closer to the customer base. But since this was the primary activity of this particular legal entity, we have to create a valuation reserve against the deferred tax assets that were on the book.

Restructuring and asset impairment charges of 12 million pre-tax, or $0.07 per share after-tax is primarily related to the closure of a Tubes and Cores plant in Europe, the close of the thermoforming plant in Canada that I just mentioned, along with additional charges related to previously announced restructuring actions.

Fees associated with acquisitions and divestitures cost us about 1.5 million after tax in the quarter or $0.01 a share. This the net impact of the lower income tax from the net release to valuation reserve, partially offset by the restructuring expense and acquisition fees accounting for the $0.10 benefit that has been excluded from base EPS. Last year we just had $0.07 of restructuring and asset impairment charges, and $0.01 of acquisition related costs.

All of my comments will be directed towards our base income statement, which excludes the previously mentioned adjustment, and as Roger mentioned you can find the reconciliation of GAAP to base numbers in our press release, and on our website. As usual, I will first walk through the P&L, then talk about the drivers of the change. As I just mentioned, sales of 1.124 billion were up 72 million year-over-year. base income before interest and income taxes or EBIT was 98.6 million, unchanged from the prior year as gross profit was lower by $13 million, offset by favorable variance of the same amount in selling, general and administrative expenses both of which will be discussed when we review the bridge.

Interest was essentially unchanged at 8.3 million, thus base income before income taxes was also unchanged at $90.2 million. Base income tax expense was 26.3 million versus 26.6 million last year as the effective tax rate on base earnings dropped to 29.1% for the quarter, versus 29.6% last year.

Let me take a moment to explain the change in the effective tax rate, and why it was lower than what we expected when we provided our third quarter guidance last year. During the quarter we recognized about $2 million in income from some company owned life insurance policies, and such income comes without tax expense. Equity in affiliates and other minority interests of 3.2 million was about 400,000 less than last year. Thus net income attributable to Sonoco was 67.1 million and with slightly fewer average shares outstanding and rounding EPS was $0.01 higher.

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