Sonoco Products Co. SON provided its financial outlook for 2016 and reaffirmed the same for 2015 while outlining strategic priorities till 2017, on Dec 4. Shares of Sonoco grew 0.66% on the news and eventually closed at $42.93 on the day.
Maintains Fourth Quarter and 2015 Guidance Ranges
Sonoco reaffirmed its fourth quarter and 2015 earnings per share guidance in the range of 59–64 cents provided during the third-quarter earnings release. Compared to earnings of 61 cents in fourth-quarter 2014, this reflects a year-over-year decline of 3% to growth of 5%.
The 2015 guidance is maintained at $2.46 to $2.51, a projected increase of 2% to 4% from the $2.41 per share earned in the prior year. During its third quarter conference call, Sonoco had lowered its earnings per share guidance to the range of $2.46 to $2.51 from the prior range of $2.48 to $2.58 due to continued global market uncertainty, which may impact demand for its products, as well as a strong U.S. dollar.
Sonoco highlighted that its targeted growth segments – Consumer Packaging and Protective Solutions have performed well despite difficult economic conditions. Through the first three quarters of 2015, sales in the Consumer Packaging segment went up 11% aided by last year’s acquisition of Weidenhammer Packaging Group and operating profits increased 18.5%. For the same period, Protective Solutions sales increased 5% while operating profits were up 44%.
In the U.S, rise in sales of big-ticket items, such as housing, automobiles, appliances, are being offset by a continued decline in manufacturing activity. This is due to lower commodity prices and the strong dollar, which has impacted some of Sonoco’s served industrial markets, dragging its Paper/Industrial Converted Products segment sales down by 9% and operating profit by 21%.
Record 2016 Earnings Expected
For 2016, Sonoco projects earnings per share in the range of $2.61 to $2.71. The midpoint at $2.66 per share, if achieved, would mark a record performance. It is based on an assumption of 15 cents per share improvement in earnings from the company’s base operations. This will be driven by volume growth, net of higher depreciation associated with growth initiatives, while productivity is projected to offset wage inflation and other cost changes.
Pension expense is expected to be lower by approximately 7 cents per share, due to a change in accounting estimate affecting the interest rates used to determine the interest and service cost components of pension expense. However, a 3 cents per share impact that a stronger dollar is expected to have on translation of earnings in foreign currencies will offset the benefit from lower pension expense.
Updates on Cash Flow Forecasts
Sonoco expects to generate approximately $450 million in cash from operations in 2015. Capital expenditure is projected at $170 million and the company will pay out $138 million as dividends. Free cash flow of approximately $140 million will be utilized to reduce debt. Sonoco plans to end the year with a net debt to EBITDA ratio of 1.6 times.
For 2016 Sonoco expects to achieve cash from operations of around $485 million and free cash flow of approximately $140 million. Fee cash flow will be flat year over year due to higher capital expenditures, higher pension contributions and expected increase in cash dividends.
The company will continue to return cash to its shareholders through increased dividends and share repurchases. If a share repurchase is activated, Sonoco added that this would result in a 4 cents per share accretion in earnings to its 2016 guidance of $2.61 to $2.71 per share.
Innovation is the Key to Success
Sonoco intends to continue investing capital and other resources to meaningfully expand the Consumer Packaging scale and remains committed to its Grow and Optimize strategy. Its priorities remain focused on achieving higher than market average growth; improving operating margins. The company will also strive to optimize its structure through simplification and improved efficiency while maximizing free cash flow and targeting capital deployment to grow its businesses and return cash to shareholders
Sonoco provided an update on its systematic approach to drive market-focused growth- i6 Innovation Process. The company recently opened a new $12 million iPS Studio on its Hartsville, S.C., campus to work directly with its customers on new innovative packaging. Sonoco also announced the launch of a TruVue can, a new ground-breaking substitute for traditional metal cans, which is being developed at the iPS Studio. TruVue uses Sonoco’s patented Freshlock technology and is made of a highly engineered, multilayer plastics substrate which enables consumers to view inside of the product.
Growth Projects Lined up till 2017
Sonoco has capital growth projects in the pipeline through 2017 that will help expand its global production capability in composite cans, flexible packaging and rigid plastic containers. These projects include investment around $13 million to $15 million to augment its composite can production capacity in Poland. Sonoco will make a further $20 million in investment in a new composite can facility in Kuala Lumpur, Malaysia, which opened in Sep 2015 and will ramp up production through the first half of 2016.
The company plans to add a new composite can line at its new plant in Shanghai, China, and follow with the development of a second new plant in South China in wither of the next two years. Sonoco plans to develop a new rigid paper product technology engineered by its European rigid packaging operations for commercial development at its West Chicago, IL, can plant.
Sonoco will spend $22 million to purchase a new rotogravure press and triplex laminator in its flexible packaging facilities in Waco, TX, and Franklin, OH. Over the next two years, Sonoco plans to add new extrusion and increased thermoformed portion control capacity at its Franklin Park, IL, plant, addition of capacity for new polypropylene tray production for microwavable food trays. The company also has plans for a new blowmolding capacity at its New Albany, OH, plant in 2016.
South Carolina-based Sonoco is a global provider of a variety of consumer packaging, industrial products, protective packaging and packaging supply chain services. The company is also the largest producer of paper-based tubes and cores in North America.
Sonoco currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include Berry Plastics Group, Inc. BERY, Sappi Ltd. SPPJY and Svenska Cellulosa Aktiebolaget SCA SVCBY. While Berry Plastics and Sappi sport a Zacks Rank #1 (Strong Buy), Svenska Cellulosa Aktiebolaget holds a Zacks Rank #2 (Buy).
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