Sonoco Products Company (SON)

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Sonoco Products (NYSE: SON) makes packaging - the cardboard and plastic, often painted with a company's branding, that encases a toy or other consumer item. Sonoco operates in two broad end-use markets: consumer and industrial, which represent 52% and 48% of sales respectively ^[1]. Demand for the company’s product is mostly driven by consumer use of non-durable goods, things that don’t last a long time or need to be replenished on a regular basis, such as food or pharmaceuticals. 38% of the company's sales in 2007 came from outside the US.^[2].

In 2008, this demand is being threatened by a slowing U.S. economy. When spending on goods that use Sonoco's packaging goes down, Sonoco's revenues suffer. A decline in demand is an especially urgent issue in 2008 as increasing energy and commodities prices are hiking up the cost of obtaining raw materials - such as plastic, which is made from oil. Sonoco is dependant on several materials such as recovered paper, paperboard, steel, aluminum and plastic resins^[3], to make its products. Steel prices, for example, were up 50% in the first few months of 2008^[4] and paperboard prices were up $50/ton during the same period^[5]. The rising costs of these commodities are forcing Sonoco into a difficult choice - raise prices on its products and risk losing customers, or cut its operating margins and earn less profit (operating margins fell from 8.8% in 2006 to 7.6% in 2007^[6]).

[edit] Business Overview

[edit] Product Segments

Sonoco divides its sales into four different product segments:

[edit] Consumer Packing (36% of net sales, 30% of operating profits)

The Consumer Packing business makes the packaging for a variety of consumer goods, whether it be the cartons for juice, boxes for frozen pizza, or plastic containers for medicine. The segment generated 36% of net sales in 2007. This segment’s operations control 63 plants worldwide. Net sales from this segment have been stable as it generated 36% and 35% of total net sales in 2006 and 2005 respectively. The products and services in this segment are^[2]:

• Rigid Packaging: Paper – is the company’s second largest revenue-producing group as it represented 15% of consolidated net sales in 2007. This however is down from 19% of consolidated net sales in 2005^[2]. Its products include: Round and shaped composite paperboard cans, paperboard pails, single-wrap paperboard packages, and fiber cartridges. These products are used in a variety of markets ranging from snacks and beverages to chemical and automotive ^[2].

Sonoco Revenue By Region^[1]

• Rigid Packaging: Plastic – products in this group include: Bottles, jars, tubs, cups, trays, squeeze tubes, monolayer and multilayer containers, specialty injection molded components, and caps. These products are used in a wide range of markets including processed foods, industrial chemicals, and pharmaceuticals^[2].

• Ends and Closures – include steel and peelable membranes -- think about the foil that seals a can of peanuts. These products are used in markets such as processed foods in metal and plastic containers, pet foods, and other nonfood products^[2].

• Printed Flexible Packaging – include packaging bags -- think about a package of Oreos, pouches -- think about a package of Crasins, and fractional packs -- think about an individual packet of hot chocolate.

[edit] Tubes and Cores/Paper (42% of net sales, 42% of operating profit)

The Tubes and Cores/Paper segment is the company’s largest segment as it generated 42% of net sales in 2007. This segment operates in 122 plants on five continents. Sonoco’s fiber-based packaging uses raw material that is provided by the company’s own paper operations; 65% of the paper the company manufactures is used in packaging, while the rest is sold to third parties ^[7].The products and services in this segment are:

• Tubes and Cores – is the company’s largest revenue-producing group as it represented 31% of consolidated net sales in 2007^[7]. Products in this group include: Paperboard tubes, cores, roll packaging, molded plugs, pallet components, concrete forms, void forms, and rotary die boards. These products are used in markets such as construction, film, and textiles^[7].
  

  

  Sonoco Revenue By Segment^[8]

• Paper – products include: Recycled paperboard, chipboard, tubeboard, lightweight corestock, boxboard, linerboard, specialty grades, recovered paper, other recycled materials. Markets include spiral winders, beverage insulators, and gaming^[7].

[edit] Packaging Services (13% of net sales, 13% of operating profit)

The Packaging Services segment represented 13% of net sales in 2007. The products and services for this segment are^[7]:

• Service Centers – are responsible for packaging supply chain management, including custom packing, fulfillment, primary package filling, scalable service centers, and global brand artwork management. The markets include personal care, baby care, and healthcare^[7].

• Point-of-Purchase (P-O-P) – services include: designing, manufacturing, assembling, packing and distributing temporary, semipermanent and permanent P-O-P displays, as well as contract packaging, co-packing and fulfillment services^[7].

[edit] All Other Sonoco (9% of net sales, 15% of operating profit)

The All Other Sonoco segment accounted for 9% of the company’s net sales in 2007. The prodcuts for this segment are ^[9]:

• Wire and Cable Reels – include steel, nailed wooden, plywood, recycled and poly-fiber reels for wire and cable manufacturers^[9].

• Molded and Extruded Plastics – has complete offering of product design, tool design and fabrication; manufacturing in both injection molding and extrusion technologies^[9].

• Paperboard Specialties – makes custom-printed Stancap® glass covers, Rixie™ coasters, and other paper amenities. Markets include hotels, airlines, restaurants, and casinos^[9].

• Protective Packaging – include proprietary Sonopost® technology, Sonobase® carrier system and, the Sonopop® display system used in household appliances, heating/ air conditioning, and fitness equipment^[9].

[edit] Sonoco's Five-Year Plan

At the end of 2007, the company introduced a new five-year plan to increase revenue, improve margins, and more effectively use assets. The company plans to do this by shifting its focus onto consumer-related business rather then industrial-related business. The company hopes to generate 60% of sales in the consumer market and 40% of sales in the industrial market by 2012 ^[10]. Other objectives include increasing organic sales, expanding geographically, developing new products and services, and making acquisitions.

[edit] Financial Metrics

In 2007, Sonoco saw record sales and net income, despite increasing raw materials costs. Net sales rose 10.5% from $3.66 billion to $4.04 billion and net income rose 9.8% from $195 million to $214 million ^[11]. The Tubes and Cores/Paper segment provided 49% of the increase in revenue, the Consumer Packaging segment 35%, and the Packaging Services 16%. The All Other Sonoco segment remained relatively flat. But despite record numbers, the company did face decreasing margins due to higher raw materials and commodities costs. Profit margins declined .6% from 19.3% in 2006 to 18.7% in 2007 ^[1].

Sonoco Total Revenue & Net Income^{[12] [11]}

[edit] Trends and Forces

[edit] Rising Commodities and Energy Prices are Forcing Sonoco to Make Difficult Choices

Rising cost of raw materials and commodities has forced the company to implement several price increases on its products. For example, in January 2008, the company announced an 8% price increase on its paper tubes and cores in the U.S. and Canada ^[13]. The ability to obtain raw materials, which include metals such as steel and aluminum and other commodities such as recovered paper, paperboard, and plastic resins ^[3], at favorable prices is an essential part of the company’s success. Higher commodities prices translate into high production costs for the company, which forces the company to either raise the prices of its products by placing the burden on the consumer or to take the burden itself by absorbing the higher costs and decreasing profit margins. Steel prices for example soared 50% in just the few months of 2008 ^[4] as the industry faces increasing demand from developing countries like China and India as well as rising costs for iron ore and scrap metal, essential components for making steel. Steel is an essential commodity for Sonoco as it is used in several of the company’s packaging products, especially in the construction and appliances market. Most importantly though, the company faces higher recovered paper and paperboard costs; most of the company's packaging products are paper based. Paperboard prices rose $50/ton in summer 2008 and recovered paper costs are setting records ^[5][14].

Higher energy costs have already forced the company to implement energy surcharges to its customers on its North American tubes and core shipments as well as its recycled paperboard products^{[15] [16]}. Higher energy costs also forced the company to shut down one of its smaller specialty machines as according to the company, “energy and other costs… made it impossible to profitably operate the unit”^[17]. The problem with the increasing price of energy is that it adds to production costs. Production plants and its machines are powered by oil and natural gas^[18], both of which are seeing record prices. Higher energy costs translates into higher production costs and once again the company is forced to either pass the burden to consumers by raising prices or take the burden itself and suffer decreasing profit margins.

[edit] Environmental Regulations and Liabilities

Sonoco is forced to adhere to many federal, state, provincial, foreign, and local environmental regulations. To make sure that these regulations aren’t violated, the company must implement policies and invest in more efficient technology to ensure they are emitting below pollution emission standards; this process can be very costly to the company. In addition, if the company fails to meet all environmental regulations, they face hefty fines. For example, in 2002, a Sonoco plant in Washington was fined $17,500 for discharging more than the allotted amount of waste into the White River ^[19]. As the world becomes increasingly eager to fight global warming, more and stricter environmental regulations will be placed on the company. The costs of adhering to new regulations and fines of breaking regulations can substantially decrease the company’s operating results.

The company however has taken precaution to any future environmental liabilities. At the start of 2008, the company had $31.1 million reserved for environmental liabilities^[20]. The company has also taken initiative to decrease environmental pollution on their own. In September 2007, the company launched Sonoco Sustainability Solutions (S3), a service that has aims to identify ways to reduce waste materials going into land fills and to turn waste into revenue by finding alternative uses for them ^[21].

[edit] A Slowing Economy Means Less Demand for Sonoco’s Products

In July of 2008, the company announced that it would be closing one of its recycled paperboard mills in Montreal, Canada due to a “decline in demand for cores and subsequently in coreboard” ^[22]. Sonoco is dependant on the average consumer buying typical goods and a slowing economy spells trouble for Sonoco. As consumers cut back on spending ^[23], it leads to a decrease in the demand of goods. Sonoco is dependant on a high demand of durable goods (goods that are replenished or replaced often) to make money. As the demand for these goods drops, so do Sonoco’s net sales as there are few and fewer items that need packaging. For example, American consumers are spending less money and are less willing to get car repairs due to the slumping economy ^[24]. Fewer repairs means fewer automotive parts needed and leads to a decrease in demand for Sonoco's packaging.

[edit] Improving Technology Increases Threat of Substitution

The packaging industry is a highly competitive market that has few barriers to entry. R&D is an essential part of any company in the industry as firms look for new, cheaper, and stronger types of packaging for their products. Sonoco uses a lot of paper/paperboard for packaging, which is relatively cheap, but not as strong as plastic. Sonoco will risk losing some of its customers if other companies are able to develop stronger and cheaper types of packaging. The company’s biggest customer Procter & Gamble, which represents 12% of the company’s net sales ^[3], has thousands of different products that each require its own unique packaging. Sonoco must be able to keep developing improved packaging for all the products in order to keep P & G as its top customer. In 2007, the company spent $15.6 million on R&D, up $2.9 million from the previous year ^[25]. Most of the focus was spent designing new products for the construction and film industries. The company was also able to invest in cost-reduction projects, high-value flexible packaging enhancements, rigid plastic containers technology, and next-generation composite packaging.

[edit] Competitors

Because Sonoco makes hundreds of different packaging products using different kinds of materials, the company faces competition from both big companies with a diversified line of products and smaller narrowly-focused companies.

The company’s paper-based packaging competitors are:

Bemis Company (BMS) - This consumer packaging company focuses on the prodcution of flexible packaging prodcuts which are primarly sold to companies in the food industry^[26]. This puts the company in close compitition with Sonoco as many of Sonoco's rigid and flexible packaging prodcuts are for the food industry. Bemis also has a small portion of its business focused on the production of pressure sensitive materials.

Caraustar Industries (CSAR) - Caraustar makes paperboard products, including tubes and cores. The tubes and core segment is the company's largest segment and represented 34% of net sales in 2007^[27]. The tubes and core/paper business is Sonoco's largest segment.

Smurfit-Stone Container (SSCC) - Smurfit-Stone makes paper based packaging prodcuts with a focus on containerboard and corrugated containers^[28]. Although this company doesn't have a tubes and core segment, many of the company's items can be used in the packaging for various other items such as food, which is in direct compitition with Sonoco's consumer packaging segment.

[edit] References

1. ↑ ^{1.0 1.1 1.2} SON 2007 Annual Report pg. 14
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5} SON 2007 Annual Report pg. 4
3. ↑ ^{3.0 3.1 3.2} SON 2007 Annual Report pg. 6
4. ↑ ^{4.0 4.1} International Herald Tribune “Lofty Steel Prices Could Keep Climbing” 19 May 2008
5. ↑ ^{5.0 5.1} MSN Money "Caraustar raises coated recycled paperboard prices" 9 July 2008
6. ↑ Google Finance: SON Financial Statements
7. ↑ ^{7.0 7.1 7.2 7.3 7.4 7.5 7.6} SON 2007 Annual Report pg. 5
8. ↑ SON 2007 Annual Report pg. 17
9. ↑ ^{9.0 9.1 9.2 9.3 9.4} SON 2007 Annual Report pg. 5 and 6
10. ↑ AllBusiness “Sonoco Outlines New Five-Year Growth Strategy“ 7 Dec 2007
11. ↑ ^{11.0 11.1 11.2} SON 2007 Annual Report pg. F-3
12. ↑ SON 2004 Annual Report pg. F-4
13. ↑ Reuters “Sonoco Announces North American Tube and Core Price Increase” 15 Jan 2008
14. ↑ International Business Times "Recovered Paper Prices Expected to Hit Record High" 18 June 2008
15. ↑ Forbes “Sonoco to Add Energy Surcharge for Tube, Core Products Shipments in U.S., Canada” 30 June 2008
16. ↑ Press Release “Sonoco to Add Energy Surcharges to Uncoated Recycled Paperboard Products” 27 June 2008
17. ↑ Press Release “Sonoco to Shutdown Small Holyoke, Mass., Specialty Paper Machine” 11 April 2008
18. ↑ Yahoo! Finance “Sector Snap: Paper Product Makers Set for Rally?” 18 July 2008
19. ↑ Department of Ecology “Southwest Washington Industries Fined for Causing Water Pollution 14 Feb 2002
20. ↑ SON 2007 Annual Report pg. 8
21. ↑ Press Release “Sonoco Launches New Waste Reduction Consulting Service” 27 Sept 2007
22. ↑ Press Release “Sonoco to Close Montreal, Quebec, Canada, Paperboard Mill” 3 July 2008
23. ↑ New York Times “Americans Cut Back Sharply on Spending” 14 Jan 2008
24. ↑ Morningstar "Auto Parts, Service Industry Hit As Americans Drive Less" 24 July 2008
25. ↑ SON 2007 Annual Report pg. 7
26. ↑ BMS 2007 Annual Report pg. 3
27. ↑ CSAR 2007 Annual Report pg. 3
28. ↑ SSCC 2007 Annual Report pg. 2
29. ↑ BMS 2007 Annual Report pg. 9
30. ↑ SSCC 2007 Annual Report pg. 37
31. ↑ CSAR 2007 Annual Report pg. 14