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Sonoco cites "operating issues" for troubled 2012

By Joe Whitworth , 14-Feb-2013
Last updated on 14-Feb-2013 at 14:15 GMT

Sonoco identified self-inflicted operating issues that increased costs and reduced productivity as being behind “worse than expected” full year results and pointed to “contingency plans to reduce costs” until the outlook becomes clearer.     

Chairman and chief executive officer, Harris E. DeLoach, said their performance in 2012 was not what was expected at the start of the year, as the firm reported its full year and Q4 results.

“We did not fully anticipate the negative impact that rising commodity costs would have on consumers' spending for packaged food, or the extent to which the European recession and slowing emerging market economies would reduce demand in our industrial-related businesses.

“That said, we generated record sales and gross profits in 2012 and significantly improved free cash flow. In addition, we made significant strides in integrating Tegrant and further expanding our new Protective Solutions segment.”

Uncertain outlook

He added that the global economic outlook for 2013 remains “cloudy”.

“However, we have addressed our recent operating missteps and are poised to take advantage of any improvement in market conditions.

“The repatriation of offshore cash, and the related pay down of outstanding debt, provides us with improved financial flexibility to invest in the business and/or return cash to our shareholders.”

Consumer Packaging Q4 2012 sales were $464m, compared with $485m in Q4 2011 and segment operating profit was $40.1m compared with $47.8m in the same quarter of 2011.

Sales declined due to lower overall volumes and negative changes in product mix and operating profit declined 16% as productivity improvements were unable to offset negative volume and product mix changes along with higher pension, labor and other expenses.

Jack Sanders, president and chief operating officer, said there was a weakness in packaging foods relative to consumer demand.

“We had a reasonable October. Volumes were down in November slightly but then they dropped off significantly in December, which was sort of the phenomenon we saw in 2011 on the industrial side and that creates a significant deleverage for us,” he told analysts in a conference call.

Paper pricing

The Paper and Industrial Converted Products segment Q4 sales were $448m, compared with $452m in Q4 2011. Segment operating profit was $36.3m in Q4, compared with $29.4m in Q4 last year.

Sales declined less than 1% in Q4 as lower recovered paper prices in the company's recycling operations were offset by improved volumes in trade paper sales and recycling.

Operating profits improved 23% year over year due to strong productivity improvement, volume gains and a positive change in the mix of business which were partially offset by a negative price/cost relationship and higher pension, labor, freight and other costs.

Tegrant boost

The Protective Solutions segment reported Q4 2012 sales of $133m, compared with $84m in the Q4 2011. Operating profit was $9.5m, compared with $5.2m in Q4 2011.

The year-over-year improvement in quarterly sales and operating profits was attributable to Tegrant and largely driven by the timing of the acquisition. However, higher volume and an improved mix of business also contributed.

Commenting on the outlook for Q1 and full year 2013, Jack Sanders, said: "We are projecting similar year-over-year results in the first quarter on expectations that global economic conditions will not significantly improve and consumer spending will remain sluggish.

“Until we have a clearer view of economic conditions, we will continue to develop and implement contingency plans to reduce costs in all of our businesses.”