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Text: A news release reporting our financial results was issued before the market opened today and is available in the Investor Relations website at sonoco.com.
These statements are not guarantees of future performance and are subject to certain risks and uncertainties.
Therefore, actual results may differ materially.
Further information about the company's use of non-GAAP financial measures including definitions as well as reconciliations of those measures to the most closely related GAAP measure is also available in the Investor Relations section of our website.
At a high level, we experienced strong volume growth in many of our businesses, but our third quarter operational results continue to be impacted by significant cost inflation and supply chain challenges.
In terms of the $0.21 difference between base and GAAP earnings per share the largest item was the $0.30 per share benefit from the use of additional foreign tax credits on our recently amended 2017 U.S. income tax return.
Next, we recognized $0.03 per share in GAAP earnings related to net restructuring and asset impairment expenses.
And finally, there was a $0.06 impact from a variety of adjustments including approximately $11 million in discrete income tax expense items, partially offset by $5 million of after-tax net gain running through operating profit.
Now moving to our base income statement on Slide 4, and starting with the topline, you see that sales were $1.415 billion, up $130 million or almost 8% from the prior year period.
I'll review more details about our key sales drivers on the sales bridge in just a moment.
Gross profit was $258 million, a $1 million increase over the prior year's quarter.
This resulted in gross profit as a percent of sales of 18.2% compared to 19.6% last year.
SG&A expenses, net of other income were $135 million, an increase of $9 million year-over-year.
This increase was expected and key drivers were higher expenses for normalized management incentives, group medical activity as well as strategic IT projects.
So all of that resulting in third quarter 2021 operating profit of $122 million, and I'll discuss the key drivers on the operating profit bridge in a few minutes.
Net interest expense of $14 million was $5 million below last year due to reduced debt balances and a more favorable mix of fixed and floating rate debt.
Income tax expense of $20 million was $7 million below last year due to our lower effective tax rate of 18.1% compared to last year's 24.1%.
Much of this lower tax rate was anticipated, but we did recognize an increased benefit from project work related to R&D tax credit.
Moving down to net income, our third quarter 2021 base earnings were $91 million, an increase of almost 5% compared to the $87 million that we generated last year.
Now looking at the sales bridge on slide 5, you see that volume was higher by $43 million or almost 4% for the company after removing the display and packaging sales divested from 2020.
Overall, all segments experienced demand recovery or continued strong pandemic-driven volumes, although there was a diverse mix of volume trends within our various markets.
Consumer packaging volume mix was up $6 million or 1.1% as very strong growth in Flexibles was mostly offset by lower demand in both global rigid paper containers and plastic foods.
In our industrial Paper Packaging segment volume mix was up $25 million or just over 5% with a continued surge in post COVID economic recovery across most of these operations.
Our global tubes, cores and cones franchise volume rose by approximately 12%, and our global paper business increased by almost 3%.
Finally, our all other group volume mix growth of $12 million are almost 8% when excluding the impact of Display and Packaging from 2020 sales.
This was primarily driven by a very strong rebound in Industrial plastics at almost 45% and solid demand at ThermoSafe, which grew by 6%.
Moving to price, you see that.
Selling prices were higher year-over-year by $161 million as we continue to increase prices to battle inflation globally.
This was mostly driven by our industrial segment as we work to recover escalating OCC, freight, labor and energy costs.
In both our Consumer segment and all other group we have also been acting on price increases to recover the significant inflation in resins and other operating costs.
Moving to acquisitions and divestitures, you see a topline negative impact of $111 million, which is driven by the divestitures of our Display and Packaging Europe and the U.S. operations, partially offset by the can packaging acquisition completed in August of last year.
And finally, the sales impact from foreign exchange and other was positive by $9 million.
The primary driver is approximately $30 million of foreign exchange gain associated with a weaker U.S. dollar year-over-year.
Moving to the operating profit bridge on Slide 6 and starting with volume mix, our higher sales volume of $43 million combined with the impact of mix had a positive impact on operating profit of $13 million.
Shifting to price cost, I will remind you that this category includes the earnings benefit from higher selling prices as well as the impact of total inflation.
In the third quarter, we had a $14 million unfavorable price cost impact with most of this falling in our Consumer Packaging segment.
In our Industrial segment we faced continuing increases in OCC costs during the third quarter.
As usual, there is a slide in the appendix that shows recent OCC price trends and you'll see that 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.
This represents a $105 increase relative to the third quarter of last year and a $68 per ton sequential increase just over this year's second quarter.
Next is the impact of total productivity, which includes all results from our productivity actions, including manufacturing, procurement and fixed cost.
You see that our total productivity contributed $15 million year-over-year with the favorable impact being predominantly driven in our consumer segment.
Moving to acquisitions and divestitures, the $10 million decrease in operating profit is the net impact from the divestiture of our global Display and Packaging businesses and our Can Packaging acquisition.
And finally, the operating profit change and FX and other was unfavorable by $12 million with various moving pieces, but mostly within SG&A expenses.
Moving to the segment analysis on slide 7, you see that Consumer Packaging sales were up by 9.7% driven by higher selling prices, which were mostly implemented to offset cost inflation.
Consumer segment operating profits fell by 5,4% driven by unfavorable price cost, but with a positive impact from their strong productivity results.
Our Consumer segment margin declined to 10.2% versus the third quarter of last year when the margin was 11.8%.
Our Industrial segment sales grew by almost 30% due to year-over-year price increases as well as recovering demand from pandemic lows last year.
Our Industrial segment's operating profit surged by 30% driven by the global turnaround in demand as well as procurement productivity.
Our Industrial segment's margin profile was unchanged compared to last year at 8.4%.
All other sales declined by just over 34% driven by the sale of the Display and Packaging businesses, but this was partially offset by volume mix growth as well as price increases.
Operating profit in all other decreased by almost 68% due to the Display and Packaging divestiture and price cost headwinds.
Margins declined to 4.5% from the prior year's 9.1%.
So for the total company sales were up almost 8% and operating profit declined by 6% resulting in a companywide operating margin of 8.6%.
Moving to cash flow, in the middle of slide 8, you see that our year-to-date third quarter operating cash flow was $220 million compared with $490 million last year.
But back to the top of this slide, I'll note that we had a year-to-date GAAP net loss of $150 million compared to a profit of $290 million in the prior year period.
Most of this decrease relates to the $404 million after tax and non-cash settlement charge related to our pension termination process that was substantially completed in the second quarter.
This leaves us with several primary drivers to our lower operating cash flow.
One is the $133 million pension contribution related to the pension termination process.
Next is the $59 million increased use of cash by working capital driven both by inflation and by a greater increase in business activity year-over-year.
And finally, we had a $35 million negative impact related to last year's COVID-related FICA deferrals that were partially paid in this year's third quarter.
Moving down to our year-to-date capex spend, our net spend was $146 million this year compared to $108 million for the same period last year.
This $38 million increase is mostly due to the spending on Project Horizon.
This takes us to free cash flow of $74 million compared with $381 million for the same period last year.
This $307 million decrease again is mostly driven by the pension termination process, increased working capital and higher capex spend.
I'll note that we paid cash dividends of $35 million year-to-date this year compared to $129 million for the same period of 2020.
On slide 9, you see that our balance sheet and our liquidity position remains very strong and reflects several strategic actions implemented through the first 9 months of this year.
Our third quarter ending 2021 consolidated cash balance was $160 million, a $405 million decrease from year-end 2020.
This decrease was driven by significant deployments of cash this year which have included the accelerated share repurchase of $150 million, almost $500 million of long-term debt repayments and the already mentioned $133 million of pension contributions.
These cash uses uses were somewhat offset by the Display and Packaging U.S. divestiture gross proceeds of around $80 million, operating cash flow generation, as well as commercial paper borrowings.
Our consolidated debt was approximately $1.5 billion at the end of the third quarter, a decrease of $231 million from year-end and reflecting the debt portfolio actions that I just mentioned.
So finally, on slide 10 for your reference, we've included our quarterly earnings history for 2020 and for this year.
I'll note that the now divested Display and Packaging businesses contributed $0.29 of earnings per share in full-year 2020 with $0.21 coming in the first 9 months of last year.
This compares with this year when we earned $0.03 of earnings per share in the first quarter before the divestiture of these U.S. operations.
But focusing on this year and our fourth quarter guidance, you see that our range for Q4 base earnings per share is $0.84 to $0.90 per share.
This guidance includes several key assumptions.
Starting with volumes we expect that demand will remain solid, but this is more than offset by 6 fewer days than in last year's fourth quarter.
For price cost, our outlook is to have a positive overall result in the fourth quarter as various inflation driven price increases continue to be implemented.
Also, while the Display and Packaging divestiture is an $0.08 headwind, this is more than offset by lower SG&A expenses, lower interest expense and reduced shares outstanding.
I'll add that our expected effective tax rate in this year's fourth quarter is approximately 25%, slightly higher than last year's 23, 5%.
So, based on our year-to-date actual base earnings plus our updated fourth quarter outlook we are updating our full-year guidance to be $3.49 to $3.55 per share.
Related to our cash flow guidance on a full year basis, we are not changing our full year free cash flow guidance of $270 million to $300 million, but we are reducing our outlook for operating cash flow by $50 million to be between #520 million and $550 million.
This reduction is driven by our updated expectations for slightly higher year-end 2021 net working capital balances due to a combination of inflation as well as increased fourth quarter business activity in addition to our updated forecast for the timing and amount of certain tax payments.
These operating cash flow headwinds are offset by our expectation for lower capital spending, which is now approximately $250 million instead of our original $300 million target.
And as a reminder, our cash flow guidance excludes the $133 million of one-time pension contributions that we made in the second quarter.
This concludes my review of our third quarter results and our outlook for the 4th quarter and full year 2021 yeah.
Let me share thoughts on our third quarter performance.
I would also like to provide a brief update on some important capital projects and what we see as we finish out the year.
Firstly, we were very pleased with the improved top and bottom line results delivered in the quarter as our team navigated through supply chain disruptions, raw material shortages and frankly unrelenting inflation to meet the needs of our customers.
Sales reached a record level driven by an almost 4% improvement in volume mix despite the impact of the divestiture of the Display and Packaging business.
We experienced solid demand in each of our business segments while facing numerous supply chain challenges.
For example, we had a sizable consumer customer shut down for more than a week due to logistic problems.
All other customers were impacted by labor and material shortages.
Our team did a remarkable job in keeping our plants running despite similar challenges.
Base earnings per diluted share improved 6% and above the midpoint of our guidance.
Operating profits in our Consumer Packaging segment declined 5% in the quarter, a strong productivity improvements were more than offset by a negative price cost relationship as we continue to chase inflation of critical raw materials and other inputs.
Our Industrial segment experienced a 30% improvement in operating profit due to strong demand and the associated leverage through our operations.
Finally, we were disappointed in results from our all other segment, which consist of our Industrial Plastics, Protective Health Care and Retail Security Packaging units.
While the 58% decline in operating profit primarily reflects the divestiture of Display and Packaging, several of the business has struggled due to price costs as well as a high degree of COVID related volume impacts such as chip shortages.
A key element of our strategy is investing to drive growth and margin improvement.
So let me provide you a brief update on some of our large capital projects starting with Project Horizon.
We've made a tremendous amount of progress over the summer.
We've completed much of the work on the new stock prep system, which will allow us to use a larger percentage of lower cost mixed paper.
This should be operational by the end of this year and we expect the machine to be fully converted around the end of the third quarter.
We will experience downtime during the conversion, but expect this will have only a minor impact on profitability in 2022 while providing of course significant savings going forward.
Also in our industrial businesses, we are completing work on a new 100,000 square foot plant in Tulsa, Oklahoma, where we will be combining our current tube and core operation with two new fiber Sonoco's lines to serve growing appliance and HVAC customers in the Southwest.
In the fall we are opening a new Sonoco's operation in Poland and are working on growth opportunities in Turkey as well as Mexico.
Our fiber protective business is attracting a lot of new orders as the market is looking for a more sustainable and durable protective alternatives.
And our can business we recently approved approximately $15 million of new capital to develop additional capabilities to produce cans with new options including paper bottoms and paper overcast.
As I mentioned previously we continue to receive interest particularly in Europe to convert products into a more sustainable type of can option.
These new capital products, projects will go into our existing facilities in Belgium, Poland and the U.K. In addition we're making investments in renewable energy projects to help meet our target of reducing greenhouse gas emissions by 25% by 2030.
Here in Hartsville we plan to spend $2.5 million to convert waste methane generated from our mill affluent system into to a fuel quality biogas, which will be traded compressed and injected in the pipeline to be used in industrial applications.
We're also investing $1.5 million have to install solar panels on an East Coast can plan and expect to add further solar power projects in the near future.
Combined, these projects will reduce approximately 5,300 metric tons of carbon dioxide annually while generating returns greater than our cost of capital.
Entering the final three months of 2021 we do remain upbeat as demand for our products globally remains strong despite those supply chain challenges we are facing.
That said inflation continues to be a concern.
We expect certain raw materials, energy and freight packaging and other pressures will continue well into 2022.
We now project inflation excluding labor will rise an additional 1.2% of our previous estimate from last quarter.
This means our costs globally this year will have an increase by more than $250 million or about 9%.
As a result we will continue executing price actions and we will remain focused on controlling costs as we work to see successfully through this continued difficult operating environment.
As for volume we expect our Consumer Packaging segment to continue to benefit from elevated at-home eating trends driven by remote working and consumers particularly younger consumers adopting new cooking habits.
In most markets demand for our global Industrial products has recovered to pre-pandemic levels and several of our businesses in the all other segment, which have been negatively impacted by supply chain interruptions are starting to see external conditions improve, and we've taken actions to improve the overall performance of several of these businesses.
Finally, we're pleased that our ThermoSafe cold chain packaging business has picked up significant new orders to provide temperature assured shippers for transporting COVID-19 vaccines.
Sonoco is coming out of the pandemic well positioned, we have a strong balance sheet, we have strong businesses and we have a solid cash flow.
We'll will 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, and as always acquisitions that fit our portfolio and expand our capabilities.
Let me close by inviting you to participate in our live virtual investor beginning at 8:00 AM Eastern on Friday, December 10th.
While we will miss meeting with you face to face, we will do our best to facilitate an open discussion in this virtual manner.
You can expect us to talk in more detail about our value creation strategy and we'll provide you a first look at our earnings expectations for 2022.
So, please consider joining us again on December 10th.
Now with that, operator, would you please review the question and answer procedures.

user
sonoco products- expects q4 base earnings per diluted share to be in a range of $0.84 to $0.90.
expects full-year base earnings per diluted share to be in a range of $3.49 to $3.55.

assistant