Sonoco's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Sonoco Products Co. (SON)

Q2 2012 Earnings Call

July 19, 2012 11:00 am ET

Executives

Roger Schrum - VP, IR

Barry Saunders - VP and CFO

Jack Sanders - President and CEO

Analysts

Scott Gaffner - Barclays

George Staphos - Bank of America/Merrill Lynch

Phil Gresh - JPMorgan

Chip Dillon - Vertical Research Partners

Philip Ng - Jefferies

Ghansham Panjabi - Robert W. Baird

Alex Ovshey - Goldman Sachs

Adam Josephson - KeyBanc

Mark Wilde - Deutsche Bank

Chris Manuel - Wells Fargo Securities

Steve Chercover - D. A. Davidson

Albert Kabili - Credit Suisse

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Sonoco Earnings Conference Call. My name is Tahesha, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Roger Schrum, Vice President of Investor Relations. Please proceed, sir.

Roger Schrum

Thank you, Tahesha. Good morning and welcome to Sonoco’s 2012 second quarter earnings investor call. This call is being conducted on July 19, 2012.

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 reviewing the company’s financial results was released before the market opened today, and is available on our Investor Relations website at sonoco.com. In addition, we will be referring to a presentation that was also posted on the investor relations site during this call.

I’ll briefly remind you 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 about the use by the company of non-GAAP financial measures is available in today’s news release and on our company’s website.

With that, I’ll turn it over to Barry Saunders.

Barry Saunders

Thank you, Roger. I will begin on Slide 3 where you see that this morning we reported second quarter earnings per diluted share on a GAAP basis of $0.50 and base EPS of $0.58, which compares to base EPS of $0.60 for the same quarter last year.

Given the relative softness in economic activity globally and the headwinds we were facing in terms of higher pension cost, a higher effective tax rate, and a negative impact of foreign currency translation we considered this to be a reasonably good quarter and are pleased that our results are within our previously issued guidance of $0.55 to $0.60 per share.

Before reviewing the base P&L for the quarter, I will mention that a reconciliation of GAAP to base earnings is in today's press release and on our website. The $0.08 difference between GAAP and base is due to restructuring charges with most charges related to previously announced closures including a paper mill in Germany, a tube and core plant in France, a thermoforming facility in Canada, and other smaller cost reduction initiatives.

Turning to Slide 4, you'll find our base P&L where you see that sales were $1.202 billion, which were 6.6% higher than last year. As you'll see in the sales bridge the favorable variance to last year was driven entirely by Tegrant, the Tegrant acquisition, partially offset by slightly lower volume and lower sales dollars due to the translation of sales in foreign currency due to the notable appreciation of the dollar against most global currencies.

Gross profit of $216 million was 13% better than last year, with our gross profit percent at 18%, which was improved over 16.9% for the same quarter last year, with the improvement driven by Tegrant, which has an overall higher gross profit percent but also notably improved by favorable price cost relationships in many businesses and improved manufacturing productivity, partially offset by negative mix and higher fixed costs.

Selling and administrative expenses and other net charges were $118.5 million, which were up $20 million year-over-year with most of the increase due to the Tegrant acquisition. Thus, EBIT was $98 million, which was 5.7% higher than last year and you'll see the drivers of the change in the EBIT bridge in just a moment.

Interest expense of $15.2 million was higher than last year due to the impact of the financing for the Tegrant acquisition. Thus, income before income taxes was $82.8 million. Taxes were $27.1 million, which were higher than last year due to a higher effective tax rate as expected, which was 32.8% on base earnings this year versus 31.9% last year.

Equity and affiliates and minority interest was slightly improved from last year. Thus base net income was $59.7 million or $0.58 per share compared to $0.60 last year.

Before moving onto the specifics where you will see that there are many moving pieces, the lower year-over-year earnings can really be attributed to $0.02 due to higher pension expense, $0.01 due to a higher effective tax rate, $0.02 due to foreign currency translation, $0.02 due to the loss of a contract packaging account and packaging services mid-year last year, partially offset by $0.02 in earnings accretion from the Tegrant acquisition and $0.03 improvement in all other businesses.

But turning to specifics on the sales bridge on Slide 5, which reconciles the year-over-year change in sales you see that volume was slightly negative for the company as a whole impacting sales negatively by $12 million. In the consumer businesses, volume was down 3% for the segment as a whole. Unit volume in composite cans in North America was down 1.6%, and the associated closures business intercompany units were down 4% but trade units were down 12%. Flexibles volume improved by 1.3% versus the same quarter last year while blow molded plastics was up 3%. Thermoforming was down 4% and injection and extrusion molding down 4%.

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