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Sonoco Products Co. (SON - Analyst Report) has announced a $40 per ton price hike on all grades of uncoated recycled paperboard (URB) to combat increasing recovered paper and other raw materials costs.

Sonoco is a leading producer of uncoated recycled paperboard in the U.S. and Canada, with over 1 million tons of annual production from 13 mills. Sonoco maintains collection centers for old corrugated containers (OCC) that is used to produce paperboard, which is then converted into tubes and cores, as well as composite cans and protective packaging.

Since Sep 2012, price for OCC have reportedly increased 60% and currently stands at $120 per ton. The current price hike will be effective with shipments beginning Jul 8, 2013 in the U.S. and Canada.

Adjusted earnings per share for Sonoco Products declined 4% in the first quarter to 50 cents, while net sales dipped 3% to $1.179 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 by volume improvement and sales price gains in the Display and Packaging and Protective Solutions segments.

The company expects second quarter earnings per share between 56 and 60 cents, and guided full year earnings in the range of $2.26 to $2.32 per share. The company expects to increase sales to $5.5 billion to $6 billion over the next three to four years, increase base earnings per share annually by approximately 10% and increase return on net assets employed to 12.5%. Growth drivers continue to be organic sales growth, new product sales, geographic expansion and strategic acquisitions.

Sonoco had earlier announced price increases in its Industrial, Consumer Packaging and Protective Solutions businesses and expects it to offset higher operating and raw material costs. Sonoco has recently been awarded a contract from Energizer for the primary packaging, retail display assembly and fulfillment of a segment of battery products for Energizer brands. This should help packaging by roughly $20 million. The first shipment was delivered in March, with complete ramp up of operations expected to occur through the second quarter of 2013.

On the flipside, uncertainty among its customers, given the slow recovery in the U.S. and ongoing European weakness, remain a headwind for the company. Europe contributes 17% of Sonoco’s sales and given the scenario in Europe, we believe volume growth in the region will remain muted for some time. Pension expense is expected to be higher in 2013 compared with 2012.

Historically, Sonoco has recovered OCC costs through price increases for its paperboard-based converted products. In the wake of weak consumer demand and competition, we remain skeptical regarding Sonoco’s ability to continue to hike prices to counter increasing raw material costs.

Sonoco currently retains a Zacks Rank #3 (Hold). Other companies in the paper and related products industry with favorable Zacks Ranks are KapStone Paper and Packaging Corporation (KS - Snapshot Report) and Resolute Forest Products Inc. (RFP - Snapshot Report), with Zacks Rank #1 (Strong Buy), and PH Glatfelter Co. (GLT - Snapshot Report) with a Zacks Rank #2 (Buy).

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