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Sonoco posts softer-than-expected Q2 2021 financial results

Sonoco has reported its second-quarter 2021 results, citing base earnings for second quarter 2021 at $0.84 per diluted share, compared with $0.79 in 2020.

Second quarter 2021 net sales were $1.38 billion, compared with $1.25 billion in 2020.

The company also reported a second quarter 2021 GAAP net loss per diluted share of $(3.34), compared with earnings per diluted share of $0.55 in 2020.

“As anticipated, we reported a GAAP loss in the second quarter due to pension settlement charges associated with the purchase of group annuity contracts and the distribution of lump-sum payments, which resulted in our pension obligations being reduced by approximately $1.4 billion,” says Howard Coker, president and chief executive officer, in a statement.

“Also during the quarter, we further improved our strong balance sheet by reducing total debt by approximately $100 million, enhanced our financial flexibility by upsizing our committed credit facility with a new $750 million revolver, and returned value to shareholders by executing a $150 million accelerated share repurchase agreement.

“Sonoco’s balanced mix of consumer and industrial packaging businesses achieved second-quarter base earnings results which were well within our guidance range despite unprecedented raw material and non-material inflation and some continued impact of COVID-19 on certain of our served markets.

“Net sales grew 11 per cent in the quarter as volume/mix improved approximately eight per cent due to solid demand recovery in most of our industrial-related businesses. Base earnings benefited from volume/mix growth and productivity improvements, which more than offset a negative price/cost relationship and the impact from the divestiture of our former display and packaging businesses.

“While we expected demand in our consumer packaging segment to normalize from the pantry-stocking records set during the second quarter of last year, segment operating profit declined by 29 per cent due primarily to a negative price/cost relationship stemming from escalating resin, film, metals, packaging and freight costs.

“On the other hand, our industrial paper packaging segment benefited from strong global demand, which helped boost segment operating profit by 74 per cent compared to last year’s second quarter. Our ‘all other’ group of businesses, which consists of protective, healthcare, retail and industrial plastics units, also benefited from the economic recovery as operating profit improved 23 per cent.”

Second-quarter results

Net sales for the second quarter of 2021 were $1.38 billion, up 11 per cent from last year’s second quarter sales of $1.25 billion. This growth was driven by an improvement in volume/mix, higher selling prices mostly implemented to offset inflation and a favourable impact from foreign exchange.

These positive factors were somewhat offset by the disposition of the company’s European and U. S. display and packaging contract businesses in November 2020 and April 2021, respectively, net of sales added from the acquisition of Can Packaging in August 2020.

GAAP net loss attributable to Sonoco in the second quarter of 2021 was $(334.1) million, or $(3.34) per diluted share, a decrease of $389.3 million, compared with income of $55.2 million, or $0.55 per diluted share, in 2020.

Gross profit was $262.7 million in the second quarter of 2021 compared to $248.0 million in the same period in 2020. Quarterly gross profit as a percentage of sales declined 92 basis points year over year to 19 per cent. Second-quarter GAAP selling, general and administrative expenses increased $7.4 million from the prior year to $128.8 million. This increase was largely driven by a return to more normalized expenses for medical benefits and management incentives.

Consumer packaging segment

Sonoco’s consumer packaging segment primarily serves prepared and fresh food markets along with other packaging for direct consumer products and includes the following products and services: round and shaped rigid paper containers; metal and peelable membrane ends and closures; thermoformed plastic trays and containers; printed flexible packaging; and global brand artwork management.

Second quarter 2021 sales for the segment were $597.8 million, compared with $573.2 million in 2020. Segment operating profit was $59.8 million in the second quarter, compared with $84.4 million in the same quarter of 2020.

Segment sales increased 4.3 per cent compared to the prior year’s quarter as higher selling prices, mostly implemented to help offset inflation, acquisition sales from Can Packaging and a positive impact from foreign exchange more than offset an approximate two per cent decrease in volume/mix.

Global rigid paper containers volume/mix declined almost six per cent in the second quarter as food packaging volumes normalized to pre-pandemic levels compared to last year’s pantry-packing demand when consumers were primarily eating at home. Flexible packaging volume modestly improved due to a rebound in confectionery and food service-related markets, which was partially offset by a negative mix of business. In this segment’s plastics business, volume/mix also improved on higher demand for fresh, prepared and specialty food trays.

Segment operating profit decreased 29.2 per cent compared to the prior year’s quarter as a negative price/cost relationship stemming from higher raw material and non-material inflation along with lower volume/mix more than offset productivity improvements and profits from the Can Packaging acquisition. As a result, segment operating margin declined to 10 per cent in the quarter from the record 14.7 per cent in the 2020 period.

Industrial paper packaging

The industrial paper packaging segment includes the following products: fibre-based tubes, cones, and cores; fibre-based construction tubes; fibre-based protective packaging and components; wooden, metal and composite wire and cable reels and spools; and recycled paperboard, corrugating medium, recovered paper and material recycling services.

Second quarter 2021 sales for the segment were $608.5 million, up from $455 million in 2020. Segment operating profit was $57.9 million in the second quarter of 2021, compared with $33.2 million in the same quarter of 2020.

Segment sales increased 33.7 per cent from the prior year’s quarter largely due to higher selling prices implemented to offset higher raw material and non-material inflation. In addition, almost half of the segment sales increase, approximately 14 per cent, was attributable to improved volume/mix. Global tube and core volume/mix increased sales approximately 13 per cent, driven by a global rebound in demand for our products. In addition, global paperboard demand improved approximately four per cent due to demand from both internal converting and trade markets.

Segment operating profit improved 74.2 per cent from the prior year’s quarter, driven by positive volume/mix and strong productivity improvements. Segment operating margin improved to 9.5 percent from the prior year quarter’s 7.3 percent.

Year-to-date results

For the first six months of 2021, net sales were $2.74 billion, up $187.3 million, compared with $2.55 billion in the first six months of 2020.

Sales improved 7.3 per cent in the first half of the year as an almost six per cent improvement in volume/mix, excluding the impact of the display and packaging divestiture, reflected demand recovery following prior-year COVID-19-driven reductions, along with higher selling prices implemented to offset inflation, and a positive impact from foreign exchange translation more than offset sales reduced by divestitures, net of acquisitions.

GAAP net loss attributable to Sonoco for the first half of 2021 was $(261.8) million or $(2.60) per diluted share, compared to income of $135.7 million, or $1.34 per diluted share in 2020. The net loss in the first half of 2021 included $438.1 million in after-tax charges, including $418.0 million after-tax related to non-operating pension costs driven by the previously mentioned pension settlement charge and $15.0 million after-tax related to the early extinguishment of debt.

Base earnings for the first six months of 2021 were $176.3 million or $1.74 per share, compared with $175.4 million or $1.73 per diluted share in the same period of 2020.

Current year-to-date gross profit was $540.6 million, compared with $514.6 million in 2020. Year-to-date gross profit as a percentage of sales in 2021 was 19.8 per cent, compared with 20.2 per cent in 2020.

“As we enter the second half of 2021, we remain confident that our business will continue to benefit from the post-pandemic economic recovery,” says Coker.

“In our consumer-related businesses, we expect volumes to remain above pre-pandemic levels despite more normalized demand for food packaging as consumers moderate at-home eating patterns, while certain COVID-impacted markets, such as confectionery, food service and construction products should continue to benefit. We also expect further recovery in our industrial-served markets as illustrated by the historically high backlogs for uncoated recycled paperboard in the U.S. and Canada and demand for global tubes, cores and cones strengthening to pre-pandemic levels.

“Our biggest challenge for the rest of 2021 is our continuing battle to manage escalating raw material and non-material inflation. While we currently are behind the price/cost curve in several of our businesses, we are aggressively taking actions to drive productivity, control costs and implement necessary price increases to fully recover all commodity and other cost increases.”

Read the full Sonoco Q2 2021 financial results here.