Sonoco Products Co. (SON Quick QuoteSON - Free Report) reported second-quarter 2016 adjusted earnings of 73 cents per share, ahead of the Zacks Consensus Estimate of 68 cents as well as management’s guidance range of 65–70 cents. On a year-over-year basis, earnings increased 7% from the year-ago level of 63 cents. Sonoco shares went up 0.86% on the earnings announcement.

Growth in Consumer Packaging and Protective Solutions segments, improvement in Display and Packaging, gains from a positive price/cost relationship, productivity improvements, lower pension and post-retirement benefit costs, and gains from volume/mix helped offset higher labor, maintenance and other operating costs. They also countered the negative impact of foreign currency translation.

On a reported basis, including one-time items, earnings per share were 55 cents, down 13% from 63 cents in the year-ago quarter.

Operational Update

Net sales of $1,206 million were down 3% year over year, falling short of the Zacks Consensus Estimate of $1,265 million.

Cost of sales was $964 million, down 4% year over year. Gross profit during the quarter was $242 million, up 1%. Gross margin improved 82 basis points to 20.1% - the highest margin level in 13 years. This was mainly driven by positive overall price/cost relationship and lower pension expense, which were partially offset by higher labor expenses and increased operating costs.

Selling, general and administrative expenses were $127 million, down 3% year over year. The decrease was primarily due to lower pension and post-retirement benefit costs, fixed cost reductions and the impact of foreign currency translation, partially countered by wage inflation and higher management incentive costs. Sonoco’s adjusted operating income was $115 million in the quarter, up 5% from $109 million in the prior-year quarter. Operating margin expanded 100 basis points to 10% in the quarter.
 

SONOCO PRODUCTS Price, Consensus and EPS Surprise

SONOCO PRODUCTS Price, Consensus and EPS Surprise | SONOCO PRODUCTS Quote

Segment Performance

The Consumer Packaging segment reported net sales of $511 million, down 4% from the year-ago quarter due to lower selling prices, primarily related to lower raw material costs, lower volume and the negative influence of foreign currency translation. Operating profit was a record $59.5 million, a 3% increase from the prior-year quarter. A positive price/cost mix and lower pension costs were partially offset by higher labor, maintenance and other operating costs, lower volume and the negative foreign currency translation.

Net sales at the Paper and Industrial Converted Products segment were $433 million, down 3% year over year. Improvement in global tube and core and North-America paperboard volume and a positive mix of business were offset by unfavorable foreign currency translation, lower corrugating medium prices and the impact of the divestiture of a paperboard mill in France. Operating profit was $37.5 million, a 4% decline due to the effect of weakening conditions for paper produced on the single corrugating medium machine.

The Display and Packaging segment’s net sales were $131 million, down 8% from $142 million in the year-ago quarter. Operating profit was $5 million, a substantial improvement from $1 million in the prior-year quarter, thanks to a positive price/cost relationship and productivity improvements.
The Protective Solution segment’s net sales were $130 million, up 3% year over year. Operating profit at the segment was $14.2 million, up 5% from $13.6 million in the year-ago quarter as strong volume growth, particularly in temperature-assured packaging, and a positive price/cost relationship helped offset higher labor, maintenance and other operating costs and a negative mix of business.

Financial Performance

As of Jul 3, 2016, cash and cash equivalents were $108 million, down from $182 million as of Dec 31, 2015. In the quarter, Sonoco’s cash flow from operations was $120 million, up from $112 million in the prior-year quarter. Free cash flow for the quarter was $31.8 million, compared with $32 million in the prior-year quarter. At second-quarter end, total debt was approximately $1.08 billion, down from $1.13 billion as of 2015 end. Debt-to-total capital ratio was 41% compared with 42% as of Dec 31, 2015.

So far in this fiscal, Sonoco repurchased 825,000 shares for $37.9 million at an average cost of $45.70 per share. These purchases were made under the company’s previously announced plan to utilize up to $100 million to repurchase shares during 2016.

2016 Guidance

For 2016, Sonoco raised its earnings per share guidance in the range of $2.68– $2.74 from the previous $2.64–$2.74. Free cash flow is projected to be approximately $140 million, reflecting expected operating cash flow of $490 million.

For the third quarter, the company expects earnings per share in the range of 65–70 cents. Compared to the year-ago quarter’s earnings of 65 cents per share, this reflects flat to year-over-year growth of 8%.

Peer Performance

Crown Holdings (CCK Quick QuoteCCK - Free Report) reported second-quarter 2016 adjusted earnings per share of $1.19, which surpassed the Zacks Consensus Estimate of $1.10 and increased 16% year over year.

Packaging Corporation of America (PKG Quick QuotePKG - Free Report) reported second-quarter 2016 earnings of $1.25 per share, up 6% year over year, ahead of the Zacks Consensus Estimate of $1.18.

At present, Sonoco carries a Zacks Rank #4 (Sell).

A better-ranked stock worth considering in the same industry is Greif, Inc. (GEF Quick QuoteGEF - Free Report) , carrying a Zacks Rank #2 (Buy).

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