Sonoco (SON) Reaffirms FY15 EPS Outlok, Guides FY16 Base EPS Flat with Expectations

Sonoco (NYSE: SON) President and Chief Executive Officer Jack Sanders and members of the Company’s senior leadership team today provided the investment community in New York with an overview of the Company’s financial outlook and strategic priorities.

Company Reaffirms 2015 Base EPS Guidance; Projecting Record 2016 Base EPS

Sonoco expects fourth quarter and full-year 2015 base earnings to be within its previously stated guidance of $.59 to $.64 and $2.46 to $2.51 per diluted share, respectively. (The Street is at $0.62 and $2.49, respectively.) Last year, the Company reported fourth quarter and full-year 2014 base earnings of $.61 and $2.41 per diluted share. Base earnings and base earnings per diluted share are non-GAAP financial measures adjusted to remove restructuring charges, asset impairment charges, acquisition expenses and other items, if any, the exclusion of which the Company believes improves comparability and analysis of the underlying financial performance of the business.

Commenting on 2015’s performance, Sanders said, “Our targeted growth segments – Consumer Packaging and Protective Solutions – are demonstrating they can innovate and grow, despite difficult economic conditions. Through the first nine months of 2015, sales in our Consumer Packaging segment are up about 11 percent, aided by last year’s acquisition of Weidenhammer Packaging Group, while operating profits are up 18.5 percent. Likewise, Protective Solutions sales for the first nine months of 2015 are up about 5 percent and operating profits are up 44 percent.

“It is my belief we are seeing a divergence in the U.S. economy where improvements in sales of big-ticket items, such as housing, automobiles, appliances and even smartphones, are being offset by a continued decline in manufacturing activity, much of it related to lower commodity prices and the strong dollar. This divergence is clearly impacting some of our served industrial markets, as sales through the first nine months of 2015 in our Paper/Industrial Converted Products segment are down nearly 9 percent and operating profit is down just under 21 percent.”

Sonoco estimates 2016 base earnings per diluted share to be in the range of $2.61 to $2.71 (consensus estimates at $2.67), with a projected record midpoint target of $2.66 per diluted share. According to Barry Saunders, senior vice president and chief financial officer, the Company’s midpoint guidance assumes a $.15 per share improvement in earnings from the Company’s base operations stemming primarily from volume growth, net of higher depreciation associated with growth initiatives, while productivity is projected to offset wage inflation and other cost changes. The Company is also projecting pension expense should be lower by approximately $.07 per share, partially offset by an expected $.03 per share impact that a stronger dollar is expected to have on translation of earnings in foreign currencies.

Although many of the variables that determine next year’s pension expense will not be finalized until December 31, the Company expects the year-over-year expense to be lower due to a change in accounting estimate affecting the interest rates used to determine the interest and service cost components of pension expense.

Strong Cash Flow, Free Cash Flow Forecasted

Sonoco is projecting to generate approximately $450 million in cash from operations in 2015 and spend approximately $170 million on capital investments and $138 million on cash dividends to shareholders. Free cash flow of approximately $140 million is primarily being deployed to reduce debt, with the Company projecting to end the year with a net debt to total capitalization ratio of 1.6 times. (Free cash flow is defined as cash flow from operations minus capital expenditures and cash dividends.)

For 2016, Sonoco is projecting cash from operations of nearly $485 million and free cash flow of approximately $140 million. The Company expects free cash flow to be essentially flat year over year due to higher capital expenditures, higher pension contributions and expected increased cash dividends.

In discussing capital deployment strategies, Sonoco CEO Sanders pointed out that the Company has a 90-year history of returning substantial amounts of free cash flow to shareholders, including nearly $1.5 billion in the past decade. “Barring acquisition, we favor returning a substantial amount of free cash flow in 2016 to shareholders through increased dividends and share repurchases. If a share repurchase is activated utilizing essentially all free cash flow in 2016, it could add up to $.04 per share in increased earnings to our previously mentioned 2016 guidance $2.61 to $2.71 per share,” he said.

*** The Street sees FY16 EPS of $2.67.

Strategy Focusing Resources on Growing and Optimizing Targeted Businesses In discussing the Company’s future priorities, CEO Sanders said, “Sonoco expects to continue investing capital and other resources to meaningfully expand the Company’s Consumer Packaging scale, while further shifting our business mix to deliver more consistent earnings along with improved returns.”

“We remain firmly committed to our Grow and Optimize strategy, with our priorities focused on achieving higher than market average growth; improving operating margins; optimizing our structure through simplification and improved efficiency; maximizing free cash flow and targeting capital deployment to grow our businesses and return cash to shareholders; and finally, optimizing our portfolio.”

To accelerate organic sales growth, Sanders provided an update on Sonoco’s i6 Innovation Process™, the Company’s systematic approach to drive market-focused growth. To help drive innovation with its customers, Sonoco recently opened a new $12 million iPS Studio on the Company’s Hartsville, S.C., campus, where Sonoco can work directly with its customers on new innovative packaging. In addition, Sanders announced the launch of a new revolutionary alternative to traditional metal cans, called the TruVue™ can, 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, allowing consumers to see the product inside. More detailed information on Sonoco’s iPS Studio and the new TruVue product are available at www.sonoco.com.

Finally, the Company provided an update on capital growth projects through 2017 to expand the Company’s global production capability in composite cans, flexible packaging and rigid plastic containers. These projects include:

• Investment of $13 million to $15 million to further grow composite can production capacity in Poland.
• $20 million in investment in a new composite can facility in Kuala Lumpur, Malaysia, which opened in September 2015 and will ramp up production through the first half of 2016.
• Investment in a new composite can line at its new plant in Shanghai, China, and possible development of a second new plant in South China in 2016 or 2017.
• Development of a new rigid paper product technology engineered by its European rigid packaging operations for commercial development at its West Chicago, Ill., can plant.
• $22 million invested to purchase a new rotogravure press and triplex laminator in its flexible packaging facilities in Waco, Tex., and Franklin, Ohio.
• New extrusion and increased thermoformed portion control capacity at its Franklin Park, Ill., plant.
• New polypropylene tray production capacity for microwavable food trays.
• New blowmolding capacity at its New Albany, Ohio, plant in 2016.

ConclusionSanders concluded the Company’s outlook and strategy review by saying, “Two years ago, we began talking about our intention to Re-envision Sonoco. Since that time we have been busy putting all the pieces in place to grow through new products, new markets, new services and new ways of thinking. At the same time, we have been working diligently to harness the power of our portfolio and our people to optimize business performance. It is my belief Sonoco is on the cusp of transforming into a more innovative, faster growing company that should provide more consistent results and better returns for our shareholders.”

Telephonic ReplayA telephonic replay of the investor conference will be available starting at 11:20 a.m. Eastern today, to U.S. callers at 855-859-2056 and international callers at +404-537-3406. The replay passcode for both U.S. and international calls is 62454034. The archived call will be available through December 14, 2015. The webcast will be archived for 90 days on Sonoco’s Investor Relations website along with today’s presentation.

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