Net sales for the first quarter were $1.17 billion, down $54.0 million, or 4.4%, from last year’s quarter. The decline in sales was a result of the previously mentioned divested businesses, net of acquisitions; the discontinuation of the Company’s contract packaging business in Mexico; and the negative impact of foreign exchange, partially offset by higher selling prices, primarily attributed to rising recovered paper costs.
Gross profits were $220.2 million in the first quarter, down $25.1 million, compared with $245.3 million in the same period in 2016. Gross profit as a percentage of sales declined to 18.8%, compared with 20.0% in the same period in 2016.
Cash generated from operations in the first quarter was $67.4 million, compared with $66.4 million in the same period in 2016. As previously guided, 2017 operating cash flow and free cash flow are expected to be approximately $470 million and $125 million, respectively.
“Despite an unprecedented and unexpected sharp increase in recovered paper prices, which is the primary raw material used in our Paper and Industrial Converted Products segment, Sonoco was still able to achieve the midpoint of our first- quarter guidance,” Jack Sanders, Sonoco president and CEO, said. “Overall, compared to the prior-year quarter, the company’s earnings were negatively impacted by lower volume/mix; divestitures, net of acquisitions; a negative price/cost relationship; and higher labor, maintenance, pension and other operating expenses. Partially offsetting the quarter’s headwinds were procurement savings, fixed-cost productivity, lower management incentive expense, and a lower effective tax rate.”
“Operating profit in our Consumer Packaging segment declined 8% from the prior-year quarter; however, operating margin remained at a solid 12%,” Sanders reported. “The decline in segment operating profit was due primarily to the November 2016 sale of the company’s blowmolding operations and lower composite can volume in Europe and North America. Segment sales declined by 9%, due to the divestiture of the company’s blowmolding operations, net of acquisitions, lower volume and the negative impact of foreign exchange, partially offset by higher selling prices implemented to recover rising raw material costs and other inflation.
“Our Display and Packaging segment’s operating profit was essentially flat with last year’s quarter,” he added. “Segment sales declined 21% primarily due to discontinuance of the company’s contract packaging center in Mexico, which had little effect on operating profits.
“Operating profit in our Paper and Industrial Converted Products segment declined approximately 26% as the average price for recovered paper in the company’s U.S. and Canada operations increased nearly 90% from the prior year’s quarter, resulting in a significant negative price-cost relationship as the company was unable to immediately pass on the higher costs to our paper, tube and core customers,” Sanders noted. “Current-quarter segment sales grew by 5% due primarily to higher recovered paper prices, partially offset by the divestiture of a paperboard mill in France, lower volume and the negative impact of foreign exchange. Operating profit in our Protective Solutions segment declined 10% from the prior-year quarter, as negative volume/mix, a negative price/cost relationship, and higher labor, maintenance and other operating costs were only partially offset by fixed-cost productivity improvements. Sales improved slightly in the quarter due primarily to acquisitions.”
Free cash flow for the first quarter was a negative $18.4 million, compared with a negative $22.1 million in the same quarter last year. At April 2, 2017, total debt was approximately $1.25 billion, compared with $1.05 billion as of December 31, 2016. At the end of the first quarter, the Company had a total debt-to-total-capital ratio of 43.8%, compared with 40.4% at December 31, 2016. Cash and cash equivalents were $212.8 million as of April 2, 2017, compared with $257.2 million at December 31, 2016. The increase in the debt ratio as well as the reduction in cash was due to the $230 million acquisition of Peninsula Packaging, which was partially financed by a new $150 million three-year term loan.
Commenting on the company’s outlook, Sanders said, “While we are starting the second quarter somewhat behind the price/cost curve, we have announced necessary price increases, along with contractual resets in nearly all of our businesses that should allow us to recover as the year progresses from the significant raw material inflation we experienced in the first quarter. Overall, we remain optimistic for the rest of 2017.”