Sonoco records strong Q3 sales

Sonoco, a diversified global packaging company based in Hartsville, South Carolina, achieved record net sales of $1.42 billion for the third quarter of its fiscal year compared with $1.31 billion in the same period of 2020.

The company reports that cash flow from operations was $220.1 million for the first nine months of the year compared with $489.5 million in the same period of 2020. Free cash flow was $74 million for the first nine months of the year compared with $381.1 million in the same period of 2020. Sonoco says free cash flow during the period included pension contributions totaling $133 million made as part of the final settlement of the company’s inactive plan’s liabilities.

Sonoco says full-year 2021 cash provided from operations has been updated to a range of $520 million to $550 million, while free cash flow guidance remains unchanged at $270 million to $300 million.

According to the company’s latest earnings report, Sonoco expects fourth-quarter base earnings per diluted share to be in a range of 84 cents to 90 cents and full-year base earnings per diluted share to be in a range of $3.49 to $3.55. Fourth-quarter and full-year base earnings per diluted share in 2020 were 82 cents and $3.41, respectively.

“We were pleased with the improved top-line and bottom-line results delivered in the third quarter as our Sonoco team skillfully navigated through supply chain disruptions, raw material shortages and unrelenting inflation to meet the critical needs of our customers,” says Howard Coker, president and CEO of Sonoco.

Coker says net sales grew almost 8 percent over the prior-year quarter, and volume and mix improved by about 4 percent in light of growing customer demand in each of Sonoco’s business segments. He adds that earnings benefited from volume and mix growth and productivity improvements, which offset the negative price and cost relationship and the impact from Sonoco’s divestiture of its former display and packaging business. Coker says the company’s base earnings for the quarter also benefited from certain tax items that were above its expectations.

“Operating profit in our Consumer Packaging segment declined 5.4 percent in the quarter as strong productivity improvements were more than offset by a negative price/cost relationship stemming from rising resin, film, metals, packaging, freight and labor costs,” Coker says. “Our Industrial Paper Packaging segment experienced a 30 percent improvement in operating profit due to strong demand and the associated positive leveraging impact on operations. Finally, our All Other group of businesses, which consists of industrial plastics, protective, health care and retail security packaging units, experienced a 67.5 percent decline in operating profit due mostly to the divestiture of the display and packaging business but also a negative price/cost relationship stemming primarily from higher resin prices.”

Industrial Paper Packaging segment performance

Sonoco reports that sales rose for its Industrial Paper Packaging segment in the third quarter. Sales for that segment were $635.2 million in the third quarter, up from $490.4 million for the same quarter in 2020. Segment operating profit was $53.3 million in the third quarter compared with $41 million in the same period in 2020.

According to Sonoco, sales increased in this segment by 29.5 percent from the prior-year quarter largely because of higher selling prices implemented to offset raw material and nonmaterial inflation, while volume and mix improved by about 5 percent. The company says global tube and core volume and mix increased by about 7 percent as demand returned to prepandemic levels. Additionally, global paper volume and mix improved about 3 percent as internal converting and trade markets reported increased demand in the third quarter compared with the same period in 2020.

During the company’s third-quarter earnings call Oct. 21, Julie Albrecht, vice president and chief financial officer at Sonoco, said this segment faced continuing increases in old corrugated container (OCC) cost this quarter.

“Southeast OCC official board market pricing was $125 per ton in June and increased to $195 per ton in September, resulting in an average of $175 per ton in the third quarter,” Albrecht said. “This represents a $105 increase relative to the third quarter of last year and a $68 per ton sequential increase over this year’s second quarter.”

This segment’s operating profit improved 30 percent from the prior-year quarter, primarily driven by positive volume and mix and related productivity gains. Segment operating margin was unchanged from the prior-year quarter at 8.4 percent.

Future outlook

Sonoco projects fourth-quarter base earnings to be in the range of 84 cents to 90 cents, which compares with 82 cents per diluted share reported in the fourth quarter of 2020. Full-year 2021 base earnings are expected to be between $3.49 to $3.55 per diluted share, which compares with 2020 base earnings of $3.41 per diluted share.

During the earnings call, Coker provided an update on Project Horizon, which is the company’s investment to transform its corrugated medium machine in Hartsville to an uncoated recycled paperboard operation with 180,000 tons of annual production capacity. In the past quarter, Coker said the company accomplished much work on that new stock prep system. The system will enable it to use a larger percentage of mixed paper at that operation. Coker said he expects it could be operational by the end of the year. “We will experience downtime during the quarter but expect this will have only a minor impact on profitability in 2022 while providing, of course, significant savings going forward,” he said.

Looking ahead to the final three months of the year, in the news release announcing the company's earnings, Coker adds that Sonoco is “upbeat” despite some challenges."

He says, “We remain upbeat as demand for our products across most of our businesses remains strong despite supply chain challenges. That said, our cost inflation expectations have grown and we project certain raw materials, energy, freight, packaging and other costs pressures will continue well into 2022. As a result, we must continue executing inflation-justified pricing actions across each of our businesses and will remain focused on controlling costs as we work to steer successfully through a difficult operating environment."

He continues, “Demand for our global Industrial Paper Packaging products has recovered to prepandemic levels in most of our global markets and we have opportunities for new product growth such as our fiber protective post business, which is expanding into Poland, Turkey and Mexico. … Sonoco is coming out of the pandemic well-positioned with strong businesses, a strong balance sheet and solid cash flow. We’ll continue investing in the long-term potential of our core consumer and industrial businesses while remaining committed to returning value to our shareholders through dividends and share repurchases.”