Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Bemis (NYSE:BMS)

Q4 2012 Earnings Call

January 31, 2013 10:00 am ET

Executives

Melanie E. R. Miller - Vice President of Investor Relations and Treasurer

Scott B. Ullem - Chief Financial Officer and Vice President

Henry J. Theisen - Chief Executive Officer, President, Director and Member of Executive & Finance Committee

Analysts

Anthony Pettinari - Citigroup Inc, Research Division

Scott Gaffner - Barclays Capital, Research Division

Mehul M. Dalia - Robert W. Baird & Co. Incorporated, Research Division

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Chip A. Dillon - Vertical Research Partners, LLC

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Philip Ng - Jefferies & Company, Inc., Research Division

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division

George L. Staphos - BofA Merrill Lynch, Research Division

Mark Wilde - Deutsche Bank AG, Research Division

Stewart Scharf - S&P Equity Research

Operator

Good day, everyone. Welcome to the Bemis Fourth Quarter and Year End 2012 Earnings Call. This call is being recorded. For opening remarks and introductions, I will now turn the call over to the Vice President and Treasurer for Bemis Company, Ms. Melanie Miller. Ms. Miller, please go ahead.

Melanie E. R. Miller

Thank you. Welcome to our Fourth Quarter and Full Year 2012 Conference Call. Today is January 31, 2013. After today's call, a replay will be available on our website, www.bemis.com, under the Investor Relations section. Joining me for this call today are Bemis Company's President and Chief Executive Officer, Henry Theisen; and our Chief Financial Officer, Scott Ullem.

Today, Scott will begin with comments on the financial results, followed by Henry with comments on business performance and investments. After our comments we will answer any questions you have. [Operator Instructions] On today's call, we will also discuss non-GAAP financial information as we talk about Bemis' performance. Reconciliations of these non-GAAP measures to GAAP measures we consider most comparable can be found in the release and supplemental schedules on our corporate website under Investor Relations.

Before we begin, I'd like to remind everyone that statements regarding future performance of the company made in this teleconference are forward-looking and are subject to certain risks and uncertainties. Actual results may differ materially from historical, expected or projected results due to a variety of factors, including currency fluctuations, changes in raw material cost and availability, industry competition, unexpected costs associated with information systems, changes in customer order patterns, our ability to pass along increased costs in our selling prices, unexpected costs related to our facility consolidation program and plant closings, interest rate fluctuations and regional economic conditions. A more complete list of risk factors is included in our regular SEC filings, including the most recently filed Form 10-K for the year ended December 31, 2011.

Now I'll turn the call over to Scott Ullem.

Scott B. Ullem

Thanks, Melanie. Good morning. We had a strong finish to the year. But before I cover the 2012 financial results and 2013 guidance, I'd like to explain some changes we have made to increase disclosure of financial information. First, on January 10, we announced the separation of our Flexible Packaging business segment into 2 different reportable segments: U.S. Packaging and Global Packaging. Bemis now reports the results of 3 segments, including our Pressure Sensitive Materials business. Our comments today will provide color about the results and trends in each of these 3 segments.

To give you a summary view of the segments, in 2012, U.S. Packaging represented 59% of total company sales and 76% of total adjusted operating profit. Global Packaging generated 30% of total sales and 17% of operating profit. Pressure Sensitive Materials contributed 11% of total sales and 7% of profit from operations.

Our U.S. Packaging business contributes higher operating profit margins than our other 2 segments, each of which has a different strategy to generate value for Bemis. In short, our Global Packaging segment is positioned to capture attractive top line growth in emerging markets, and we expect to improve the profit margins over time as we introduce high barrier packaging that commands higher margins. Our Pressure Sensitive Materials business is more exposed to overall macroeconomic conditions and half of the business is in Europe, so it has been fighting strong headwinds in this lackluster economic environment. But over time, Pressure Sensitive can contribute strong cash flow and adhesive technology to Bemis.

The second action we have taken to enhance disclosure is to post on our website some supplemental schedules with information that provides more details on our financial results. We will add some additional metrics on our website going forward. We would appreciate your feedback on other information investors would find valuable.

Now, with regard to total year 2012, there's a lot to cover this quarter due to our new segment reporting structure and the adjustments we have booked in connection with our facility consolidation program. My report this morning is broken down into 4 sections: first, a quick overview; second, I'll discuss fourth quarter results for Bemis and for each of our 3 reportable segments; next, I'll cover the full year 2012 results; and finally, I'll present guidance for 2013.

We had a strong quarter, which contributed to solid results for the full year. This morning, we reported adjusted earnings per share of $2.15, an 8% improvement from 2011 and at the top of our guidance range of $2.10 to $2.15 per share. Improved gross margins delivered much of this improvement, increasing to 18.4% of net sales in 2012 compared to 17.1% in 2011. This improvement reflects some of the cost savings from our facilities consolidation efforts, efficiencies we have created through World Class Operations Management, as well as better sales mix in both the U.S. and Global Packaging segments. As we look towards 2013, we expect the sales mix improvements to be sustainable and our cost savings to grow.

The facility consolidation program effort is nearly complete, with the last production transfers to other Bemis plants expected to occur by the end of the first quarter. As shown in the supplemental schedule on our website, total expense charged in 2012 was $69 million, and cash paid was $35 million. In 2013, we expect to record an additional $34 million of expense. While most of this expense will occur during the first quarter, we expect certain costs related to dispositions or closures of facilities to be delayed until at least the second quarter. Cash payments in 2013 are expected to total $50 million, so we are on pace to come in under the original cash cost we budgeted for the facility consolidation program.

Annualized cost savings from the facility consolidation program are expected to achieve the full $50 million run rate during the second quarter of 2013. In total, given the activity yet to be completed during the first quarter, we expect about $45 million of cost savings to be realized in 2013. This represents an incremental $37 million of cost savings compared to the $8 million of total savings realized in 2012.

Turning to Part 2 of this report, I am pleased to report fourth quarter adjusted diluted earnings per share of $0.52 compared to $0.45 for the same period of 2011. This represents a 16% improvement from 2011 and the top of our guidance range for the quarter. Our guidance for the fourth quarter assumed that facility consolidation cost savings would be offset by lower performance and expenses due to the disruption caused by our production consolidation efforts. In fact, those inefficiencies were less than unexpected, and we estimate that about $3 million of net cost savings were realized during the fourth quarter. This followed net savings in the third quarter of about $5 million, which is how we get to the $8 million total for the year.

Bemis' net sales in the fourth quarter decreased by 1.4% compared to the fourth quarter of 2011, excluding the impact of currency and acquisitions. This decrease reflects generally lower volumes, partially offset by higher pricing. Lower volumes reflect the impact of a weaker demand environment and the actions we took to address some low margin business.

Before moving to fourth quarter results for our 3 segments, I will highlight 2 nonrecurring income statement items unique to 2012: our effective tax rates and the harmonization of internal accounting practices. Our full year effective income tax rate was 37.6%, which was higher than originally forecast. The higher rate was caused by adjustments of valuation allowances against deferred tax assets in certain foreign countries. These adjustments were necessary based on our current analysis of the future benefits related to these tax-deferred assets. Without these adjustments, our effective income tax rate for the year would have been approximately 36%, which is normal for Bemis. These adjustments were made in the fourth quarter, so the effective tax rate in Q4 was even more unusually high at 42.7% versus our normal 36%. In 2013, we expect our effective tax rate to return to its normal level of about 36%.

The second nonrecurring item I'm going to highlight refers to the harmonization of internal accounting practices in connection with the implementation of a new ERP system. Synchronizing these practices will provide consistency across our locations globally. This resulted in nonrecurring adjustments primarily impacting cost of goods sold in the fourth quarter. These adjustments substantially offset one another in total, but were significant to the fourth quarter operating results of our 2 new packaging segments. These adjustments increased fourth quarter operating profit for U.S. Packaging by $13.8 million, and decreased Global Packaging operating profit by $16.4 million. In 2013, operating margins will return to normal levels. These adjustments are also detailed in the footnote on Page 9 of today's earnings release.

For our fourth quarter results by segment, excluding the increase in sales generated from acquisitions, U.S. Packaging sales declined 3.5% as compared to the fourth quarter of 2011. Keep in mind that Food Packaging represents about 85% of U.S. Packaging net sales. During the fourth quarter of 2012, this segment benefited from increased unit sales volume of high barrier packaging, which was more than offset by lower unit volumes of certain other products, some of which are related to a reduction of capacity for low barrier packaging as part of the facility consolidation program.

Operating profit was up $34 million year-over-year in the fourth quarter as a result of the nonrecurring accounting benefit of $13.8 million, as well as cost savings related to the facility consolidation and a better price cost match in 2012.

In fourth quarter for Global Packaging, excluding the impact of currency and acquisitions, sales increased 2.8% compared to the fourth quarter of 2011. The Global Packaging business segment includes our packaging businesses outside of the U.S., as well as our global medical and pharmaceutical packaging business, which has operations in the U.S., Europe, South America and Asia. Food packaging represents about 60% of sales for this segment, and medical and pharmaceutical packaging represents about 20%. In total, unit volumes were lower in this segment and higher prices were the primary driver of increased organic sales in 2012.

Adjusted operating profit for the Global Packaging business segment included a nonrecurring charge of $16.4 million related to harmonization of accounting practices. Taking this into account, adjusted operating profit improved modestly compared to the fourth quarter of 2011, supported by price mix improvements. Cost savings from the facility consolidation program were not significant, since the Global Packaging segment facilities that were impacted were just closed during the fourth quarter.

In our third segment, Pressure Sensitive Materials, volume improvement in both label and technical product areas was partially offset by lower unit volumes and graphic product lines. Price and sales mix declined compared to last year, which more than offset the impact of higher unit volumes. Adjusted operating profit improved, reflecting our focus on prudent cost management in light of the challenging European economic environment. The European market represents about 50% of our Pressure Sensitive Materials sales, so improvement in that region would have a positive impact on our segment.

Now I'll cover the full year results followed by the outlook for 2013. In total, the 3.4% decrease in net sales from 2011 to 2012 includes a 1.3% decrease in organic sales, led by lower unit sales volumes. As I mentioned before, it is important to note that some of the volume decrease was planned due to facility consolidations in 2012.

Unit volume was lower in both U.S. and Global Packaging business segments, partially offset by improved sales mix. Pressure Sensitive Materials enjoyed a modest increase in unit volumes in 2012, which was offset by sales mix.

Regarding our consolidated gross profit, our margins increased in 2012 to 18.4% from 17.1% in 2011. Sales mix improved in 2011 -- in 2012, and 2011 was negatively impacted by dramatic raw material price increases. In 2012, we faced a more stable raw material environment.

Selling, general and administrative expenses in 2012 were $23.3 million higher than in 2011, reflecting higher pension- and benefits-related expenses.

During 2012, adjusted operating profit as a percentage of net sales for our U.S. Packaging segment improved to 13.4% from 11% in 2011. Excluding the impact of nonrecurring harmonization adjustment, 2012 adjusted operating profit for the Global Packaging segment would have been lower than 2011 levels, due primarily to the impact of currency translation, specifically with respect to the Brazilian real.

Currency translation remains a headwind for the first half of 2013 in Global Packaging since the real has depreciated versus the dollar. But facility consolidation cost savings and sales mix improvement are expected to continue to have a positive impact on our return on sales in Global Packaging going forward.

Adjusted operating profit in the Pressure Sensitive Materials segment faced headwinds in 2012 from European currency exposure, but careful cost management and direct response to production needs achieved improved performance in a challenging year.

Moving on to the statement of cash flows for 2012. Cash provided by operating activities totaled $131 million for the fourth quarter, bringing total cash flow provided by operating activities to $421 million. Net debt to adjusted EBITDA at the end of the year was 2.1x, right around our long-term target of 2.0x.

Finally, regarding guidance for 2013, we expect total consolidated Bemis volumes to be about the same as in 2012. We are expecting to continue to benefit from the commercialization of new business, but it will take the full year to anniversary the recent plant closures. We do expect this activity to promote modest sales mix improvements throughout 2013.

We are laser-focused on cash flow and disciplined use of our cash. Even after payments for facility consolidation expenses in 2013, our goal is to increase cash generated from operations to over $430 million, and we have plans to increase cash provided by operations to over $500 million in 2014.

For 2013, we expect capital expenditures to be approximately $175 million, and we expect interest expense to be just slightly less than in 2012 because interest expense in the first quarter of 2012 included interest on bonds that we have since refinanced with lower rate commercial paper. As a percent of sales, SG&A in 2013 should be in the range of 9.5% to 10%, consistent with 2012. As I mentioned, we expect our effective tax rate to be about 36% for the year.

Our adjusted earnings per share guidance for the first quarter of 2013 is $0.50 to $0.56. Modest seasonality in our U.S. Packaging segment has historically resulted in lower EPS levels in the first and fourth quarters of the year, while the second and third quarters tend to be stronger.

For the full year 2013, considering the improvement in packaging sales mix and the incremental cost savings from the facility consolidation program, partially offset by the anticipated impact of currency headwinds and stable volume levels, we expect adjusted earnings per share to be $2.30 to $2.45 per share, an increase of between 7% and 14% compared to 2012.

Now after that long lead-in, I'll turn the call over to Henry for his comments on operations and business strategy.

Henry J. Theisen

Thank you, Scott, and good morning, everyone. I would like to start by congratulating our business teams on a job well done in 2012. As we started this year 12 months ago, we faced a number of challenges. We had to seamlessly transfer production and close 9 plant locations in 4 countries, integrate our newly-acquired packaging business in China and aggressively manage cost in an environment of weak customer demand. In the face of all these challenges, our teams successfully transitioned business to new facilities and will cease production at the last 2 plants this quarter. We have upgraded our sales mix in this weak volume environment. At the same time, our business teams are implementing best practices in every Bemis facility around the world using a global Bemis framework called World Class Operations Management.

In China, we are expanding our converted capacity to accommodate growth as we leverage our global customer relationships. While we expect overall volume weakness to continue into 2013, our customers are looking to packaging as a vehicle to increase their market share with consumers.

I would like to mention a few examples of the new products that we launched during 2012 that really showcase our technology and the value that our products bring to our customers. Our recyclable rigid film solution for liquid packaging removes the environmentally unfriendly PVdC materials from packaging. It is being commercialized for applications such as pudding, yogurt and baby food products. Our Peel Reseal technology provides a cost beneficial solution that uses a combination of our easy peel and pressure-sensitive adhesive technologies to provide easy open and reclosable features. Our odor scavenging films for the poultry market are solving an issue that our lead customers have struggled with for decades. Our microwavable films allow frozen sandwiches to be warmed in the microwave, while maintaining the crispness of the bread. And our polyester medical device packaging eliminates the need for extra packaging for knee replacements by using a polyurethane coating to protect the product from damage during distribution.

Our sales mix improvements reflect the increased percentage of sales of these and other high-performance packaging products. As a result of these initiatives and some sales mix improvements, in 2012, we increased our return on sales, our return on invested capital and our cash flow from operations. And we expect these metrics to continue to improve in 2013.

Following dramatic raw material cost increases in 2011, raw material costs were relatively tame in 2012. As we enter 2013, we expect cost to increase modestly during the first quarter and remain steady for the remainder of the year. Our guidance for the year incorporates these expectations, as well as some currency headwinds during the first half of the year.

With the completion of our facility consolidation program and the closure of 9 packaging plants worldwide, our manufacturing footprint better matches our long-term growth strategy around value-added packaging for food safety and sterility. As Scott mentioned, we have separated our businesses into 3 segments, and I'd like to provide some additional color on each one.

Our U.S. Packaging business is tied closely to the food industry in the United States, and we expect it to reflect the same general trends. The improvement and return on sales during 2012 is evidence of our prioritization of returns over unit volume. Our facility consolidation program reduced our capacity for low barrier products, providing us with the opportunity to weed out products that did not meet our return requirements.

Our Global Packaging business will reflect both food industry trends in emerging markets, as well as the packaging needs of the global health care industry. Our 2005 investment in Brazil and our 2011 investment in China have positioned us to supply the emerging consumer markets in these regions of the world. Not only will these consumer markets grow on volume as the middle-class expands, but we expect demands from consumers to be more complex, increasing the need for packaging that delivers convenience, food safety and sterility. We will use our patented and proprietary technologies to respond to these emerging consumer demands, upgrading our sales mix and profit margins in the process. The emerging market exposure by Global Packaging business offers further margin improvement as our medical and pharmaceutical packaging product lines reach new consumers.

Our Pressure Sensitive Materials business is more closely tied to general economic conditions, and at this point, we expect performance in 2013 to be similar to 2012. Improvement in the economic environment would benefit this segment by driving increased sales in higher margin graphic and technical products.

Our long-term strategy prioritizes expansion in the Asia Pacific region, as well as the global growth of high-performance packaging technologies. Our 2013 capital investments will support this strategy, with additional printing and converting lines to expand our operations in Dongguan, China, and 3 9-layer blown film lines to support payment in North America, Mexico and Brazil. These blown film lines will expand capacity for high barrier products, polyester sealants, Peel Reseal technologies and our unique liquid packaging products. We are confident that the performance improvements we attained in 2012 are sustainable, and we have the assets, the technologies and the resources that we need to continue these positive trends well into the future.

Now I'll open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from Anthony Pettinari from Citi.

Anthony Pettinari - Citigroup Inc, Research Division

You referenced 3.5% organic decline in U.S. Packaging with stronger growth in high barrier. And I was wondering if you could quantify that with high barrier and then maybe the commodity businesses that you've shed in the quarter.

Melanie E. R. Miller

If you look at -- for the fourth quarter, if you look at the refrigerated foods type of products in high barrier, including meat and cheese, dairy and liquids, some of the dry food type items, we had, say, added them all up, maybe an increase of a couple of percent in those areas, maybe roughly 2%. I don't have them all combined. Meat and cheese was up the most. But then, on the other side, we had high single-digit or close to double-digit declines in volume in other areas like confectionery and snack, some of the beverage products that we make, some of the nonfood health and hygiene products as well.

Anthony Pettinari - Citigroup Inc, Research Division

Okay, that's helpful. And when you think about the full year, when you think about North American demand for packaged foods and especially meat and cheese, what's your kind of outlook and how should we think about the comps as we go through the year? Does the second half of the year become a little bit easier? Or how are you thinking about sort of packaged food demand in North America and meat and cheese specifically?

Scott B. Ullem

North America, generally, we're expecting relatively flat volumes across all categories. But our customers are optimistic that in the second half of 2013, volumes may start to show some support. I think we feel relatively optimistic about meat and cheese, and that optimism is tempered by the impact of the drought on the herd last year and the expected price increases in some of the protein categories. But generally, the high barrier product applications that we have been selling and new ones that we're introducing are continuing to drive growth and improvement in our sales and mix.

Operator

And we'll take our next question from Scott Gaffner with Barclays.

Scott Gaffner - Barclays Capital, Research Division

A quick question on -- Henry, you mentioned higher return on sales, higher ROIC in 2012, and then you also mentioned quite a few new products that were launched in 2012. I was just wondering if you could sort of parse for us a little bit, how much of the -- even if it's in big buckets, how much of the improvement year-over-year return on sales was really driven by some of these new product introductions versus the exit of some of the low barrier packaging in North America?

Henry J. Theisen

I believe that our return on sales improvement, our return on invested capital not only comes just from some of these new products being launched, but it also comes from taking market share and growing our market share with our core product lines where technology is important. So I don't know if I can really split it out accurately, but a substantial amount of our growth and return on sales and return on invested capital is just market share improvement in the products and the markets that we want to participate in.

Scott Gaffner - Barclays Capital, Research Division

Great. I guess what I was trying to get at, I just want to make sure you're getting paid for the innovation that you're bringing to the market and getting a higher price for the newer products versus the older products that are being replaced. Is that typically the case?

Henry J. Theisen

Oh, I think that's typically the case. That's kind of the standard curve. When you introduce a new product, you generally get a higher price. And as more people copy it or it goes on with time, it slowly decreases in margin. But that's just the general curve.

Scott Gaffner - Barclays Capital, Research Division

Okay. And then just second on the Alcan contracts, I think you were out in the market trying to renegotiate some of those resin pass-through price, resin clauses, especially with resin prices running up here in the first quarter. Can you just give us a general update on that? Where you stand on renegotiating those contracts?

Scott B. Ullem

We renegotiated a lot of contracts during 2012, some of the legacy Alcan contracts, some of the legacy Bemis contracts. In general, we feel like we're on pretty stable footing right now and feel good about the price adjustment formulas that we've reached with our contract customers in the U.S. And so we go into 2013 feeling like we're as well-positioned as we can be to be able to be insulated from the sharp, short-term spikes in volatility that really hurt us back in early 2011.

Operator

And we'll take our next question from Ghansham Panjabi with Robert...

Mehul M. Dalia - Robert W. Baird & Co. Incorporated, Research Division

It's actually Mehul Dalia sitting in for Ghansham. What drove the volume growth in Global Flexible Packaging during the quarter? And how did those volumes trend throughout 2012?

Melanie E. R. Miller

I'm looking at -- in Global Packaging, actually, volume was modestly down for the quarter, but price mix was up nicely. And that's what drove the organic growth. For the total year, the trends were a little better. We had a modest increase in volume and also in price mix.

Mehul M. Dalia - Robert W. Baird & Co. Incorporated, Research Division

Okay. And how is North American Flexible Packaging trended in 1Q so far? Has there been any change in customer promotional activity in 2013?

Melanie E. R. Miller

In 2013, I think it's early yet. The first quarter's usually a slower quarter for us like the end of the fourth quarter, and customers are usually ramping up their promotional activity in late February and March time frame to hit the spring buying season. So it's kind of early in the first quarter to see any trends.

Operator

And we'll take our ask question from Phil Gresh with JPMorgan.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

A couple of questions around cash flow. The CapEx here, $175 million this year, I know that's kind of where you started with your number last year and then it ended up coming down throughout the year. Now this level is basically the highest level since 2007. And I'm curious, is this the new higher level, or are there some kind of onetime projects here? And to the extent that there are some projects here, and you've laid them on, but I don't know if it's ongoing or just this year, but what gives you the confidence that this year is the right year to be stepping up those investments versus the past 2 years?

Scott B. Ullem

Sure. For the last couple of years, as you know, we've come in below our original forecast for CapEx, and really, it's been for a couple of reasons. One is that as our World Class Operations Management initiatives have borne fruit, it's effectively created the capacity we need to continue to grow our new product productions. And so we've been very disciplined and throttled back on CapEx whenever we can, especially given the weakness in our end markets over these last couple of years. The 2013 forecast, we feel good about, and there are a couple of specific investments that we're making around our high barrier film platforms in Latin America and growth in China, as well as high barrier film in the U.S. And so there's always a risk that we don't get all that money invested as fast as we'd like. But I think at this point, we feel like that's a better new normal range to expect. Keep in mind, our depreciation and amortization is around $200 million a year, so we're still underspending D&A, which longer-term, we think will be more in line.

Phil M. Gresh - JP Morgan Chase & Co, Research Division

Got it, okay. And then you talked about more return of cash to shareholders in the press release. Obviously, the dividend as a percent of your projected free cash flow is less than 50%. So how do you think about the dividend today, and what additional cash you might return to shareholders as we progress through this year? Should we -- might we start to see a ramp-up in buybacks in the back half of the year as the cash flow starts to come in?

Scott B. Ullem

You should expect that we'll continue to increase the dividend every year as we've done for the last 30, and you should expect that we're going to be making share repurchase again in 2013. We were out of the share repurchase market in 2012 as we were trying to pay down some debt repair leverage ratios. But we are going to be continuing to manage that debt equity balance to make sure that we're doing everything we can to drive total shareholder return.

Operator

And we'll take our next question from Chip Dillon with Vertical Research.

Chip A. Dillon - Vertical Research Partners, LLC

If we take a step back, just to help us understand because I know the parts you're moving there and certainly you guys are moving into more faster growing markets. But I was just looking at the volumes, the organic volumes, say, going back to '07, and it looks like that, at least when we look at the non-Pressure Sensitive segment that used to exist, that the volumes really never recaptured where we were even in '06. And I wonder how -- first of all, do you agree with that? It's slightly lower '12 than it was back then, excluding the Alcan Americas business and a few of the other acquisitions. And I was just wondering, is it due to changes in how people -- in diets, or could it be changes more in either your direct competitors or how maybe meats and cheeses and other foods are packaged?

Melanie E. R. Miller

This is Melanie. I think the -- you're right, 2006 was a strong volume year. 2009 was also a very strong volume year, as was part of 2008. So I don't have the numbers in front of me to see what you're seeing with the change over those years. But one of the things that impacts the way that we measure volume in square inches is the sales mix, and the fact that over the last 6 years, we have focused and invested more and more in high barrier packaging. High-barrier packaging may sell for more dollars. But if you're looking at volume and square inches, these tend to be heavier, larger items that have -- that are sold in fewer square inches than a monolayer polyethylene film that's more of a commodity item. So over the last 6 years, I think perhaps part of what you're seeing is the strategy of focusing more on the higher-margin, high barrier products and lesser so on the growth of those commodity film areas.

Chip A. Dillon - Vertical Research Partners, LLC

Got you. And then hopefully, you're getting paid for those improved lighter-weight substrates. And then, I guess the second question is, as you do move overseas, I know a couple of years ago, you talked about moving out of some of the lower-end business that you were involved with in Europe, I believe, or more overseas that -- and as you move back into, say, China and expand in the overseas marketplace, are you finding that with the emerging middle class, that you're finding some of the stuff you get paid -- the products you get paid well for here translate into these other regions?

Henry J. Theisen

Yes, yes. I think that since we acquired all of Dixie Toga in 2005, every year, we see more and more technology products, and that's why we're putting in the investment in additional 9-layer blown film lines into Brazil. And in our acquisition that we were able to find in Mayor Packaging, there's a lot of technology with our own stand-up pouches and around retort that we're going to be building out in that end of the world. So we're starting to see the tick up, and our investments are going into those areas to support that tick up in the technology products.

Operator

And we'll take our next question from Alex Ovshey with Goldman Sachs.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

I think in the past, you've talked about shortening the lag in the pass-through of the resin costs to the customers, specifically I think you mentioned that on the Alcan contracts, there was an opportunity to do that. Can you update us on where you stand with that initiative?

Scott B. Ullem

Alex, as I mentioned before, we feel good about entering 2013 with the right mix of price adjustment formulas in our contract portfolio with our customers in the U.S., where we have customers. Keep in mind, about 2/3 of our customers in the U.S. are on multiyear contracts with the price adjustment formula; 1/3 are just spot price agreements. And outside of the U.S., we don't have any contract exposure. So we did a lot of work in 2012 trying to synchronize our price adjustment formulas with the current industry standards and the raw material volatility that we just can't burden. And so we feel good about where we are at this point.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Okay. And then second question, I may have missed this if you mentioned this. Is there any update on how the FreshCase product is doing, or has that been released into the marketplace?

Henry J. Theisen

There is no major sales going on of our FreshCase products. We are working with a number of customers. We have some small applications that are out there and I don't think we're going to see much effect due to FreshCase in 2013. But hopefully, in 2014, we'll start to see the uptick as people get more accustomed to this packaging design.

Operator

And we'll take our next question from Philip Ng with Jefferies & Company.

Philip Ng - Jefferies & Company, Inc., Research Division

Just want to get your take on what you're baking in for resin in your guidance. The polyethylene is up about $0.05 in January. Implicit in your guidance, are you baking in the February increase that's been announced? I just want some color on the specialty grade as well.

Henry J. Theisen

What we baked into our guidance is the initial $0.05. That's what's in our guidance.

Philip Ng - Jefferies & Company, Inc., Research Division

And does that flow through in Q1 because you guys do have some FIFO inventory accounting adjustment?

Henry J. Theisen

It's depending upon the division that we have. Some of it will flow through late in the first quarter, majority of it will flow through into the second quarter.

Philip Ng - Jefferies & Company, Inc., Research Division

Okay. And just switching gears a little bit. Can you talk a little bit more about your expansion strategy? I mean, you're obviously adding capacity in China and Brazil. How did margins and returns stack up? And do you have contracts in place that support volumes and just the returns on these projects?

Henry J. Theisen

Most of our international sales or our global sales are not in some kind of a contract. They're generally order by order on a spot basis.

Operator

And we'll take our next question from Adam Josephson with KeyBanc.

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

Forgive me if I missed this, how much of an earnings drag is embedded in your 2013 guidance from the recent increase in polyethylene prices?

Scott B. Ullem

We haven't really quantified it in terms of EPS. But as Henry just said, we have baked into 2013 the $0.05 increase in PE that we're going to see here in the first part of the year. That will largely show up in Q2. And our guidance for 2013 assumes that beyond that the raw material environment is stable.

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

Right. And Scott, along those lines, do you think that further increases in polyethylene are the biggest risk to meeting your guidance, or do you still think that volume is the biggest risk?

Scott B. Ullem

I think they both are. But certainly, we worry about raw material prices. We feel better about our ability to pass those along to customers now than we did, say, 18 months ago. But volume has been the big headwind for us over the last 12 months. Our customers tell us that they're feeling more optimistic about volumes in the second half of 2013. But we've really rightsized the company to be able to deliver these kinds of earnings, the guidance that we've given today, even if we don't get improvements in volumes in the second half.

Henry J. Theisen

I want to make a comment on the raw material increases. It isn't that the raw materials are going to increase because we have pass-through applications. And our presidents and our people are paid on earnings, so they know they have to pass those through. Where we get into problems, this goes back into late 2010 and 2011, where every month you saw a drastic increase. And it wasn't the ability to pass those increases on, it was as soon as you pass those increases on, you had another handful of them. So it's not the ability to pass them through, it's how they occur.

Operator

And we'll take our next question from Chris Manuel with Wells Fargo.

Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division

A couple. First, just a general housekeeping question, if we can. As we think about the new segments now, the U.S. Packaging and the Global. Could you give us a sense within each one of those, what the mix is between -- what you're selling in there? Is it between food? Between, I guess, you gave medical piece for other. What the other components are there? A. And then b, within there, what would you deem to be the mix of high barrier versus lower barrier within those? And potentially where that goes or what you think that would look like through time?

Scott B. Ullem

Let me take a crack at that, Chris. I think for U.S. Packaging, which is our biggest segment, about 85% of that business is packaging for food. The -- there's a whole spectrum of high barrier to lower barrier, and it's not possible just to break it into 2 and say, "This is high and this is low." There's whole spectrum, but there's a lot of technology and a lot of refrigerated food packaging in that 85% of U.S. Packaging sales. And that's where food safety is really a critical consideration of our customers and where we get paid for our technology. In Global Packaging, about 60% of our packaging is for food, 20% is for medical and the other 20% is just other consumer products and applications.

Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division

Okay. So to be clear with respect to that, I mean, so when you're talking about the mix getting better with high barrier to monolayer, et cetera, type of stuff, are we talking about -- obviously, there's a pretty good margin disparity between the 2 pieces. Is the U.S. piece more like 80/20 as you look across the segment that's high barrier to low barrier? And the Global, maybe the flip or something like that, because obviously, that's where you've talked about one piece gaining share -- or not gaining share, but one piece growing and one piece shrinking. I'm just trying to get a sense as to how big each of those pieces are within those as to what could continue to a trip through time, and which side you're continuing to grow, if that makes sense.

Melanie E. R. Miller

Chris, if you look at U.S. Packaging, and Scott's right, it's very hard to draw a bright line between high barrier and low barrier because there's all this graduation in between them. But if you look at U.S. Packaging, it's fair to say that about half of that 85% focused on food is refrigerated products. Clearly refrigerated products, clearly high barrier, complex, involves a lot of technology. And then there's a graduation up to that 15% that is not food is low barrier, no barrier type of products. In the Global Packaging part of the business, we would consider -- we would pretty much consider the whole medical device packaging business to be -- and pharmaceutical to be a high barrier technology, sterility protection type of package, so we would put that in the high barrier category. And the other 60% that's food products, it's not as -- it's a lower portion that would be high barrier. A smaller exposure to meat and cheese, smaller to a dairy and liquids type of thing. So of that 60%, well less than half would be the barrier refrigerated foods. We do some refrigerated foods, but they might not all be barrier.

Operator

And we'll take our next question from George Staphos of Bank of America Merrill Lynch.

George L. Staphos - BofA Merrill Lynch, Research Division

I appreciate all the details in the presentation. I guess I had a question, maybe around the same topics that everyone else has been digging around in terms of margin, how you get paid for your performance or your technology and the like. If we look at the high barrier versus low barrier mix, what are the reasons as you think about them to even be in the lower-barrier businesses since it's difficult to get paid, or at least more difficult to get paid for them than, say, your high barrier. I'm guessing some of it is around scale and purchasing, but wanted to get a reaffirmation or update on that front.

Henry J. Theisen

I think, George, you hit on the 2 key things. One is, a lot of our consumer product companies package a broad spectrum, and we really want to be seen with our key customers as being able to support their entire needs. So some of it, we just want to be in the game. The other part is, it helps us when we talk with our suppliers because of the overall volumes that we purchase. So it's scale and purchasing power, and support of our customers because we want to be seen as a total supplier to them.

George L. Staphos - BofA Merrill Lynch, Research Division

And I know it's a difficult conversation to have. And again, we're not minimizing the progress that you've made in 2012. You should be congratulated for the year. But if your technology is as important as you say it is, and it seems to be on the high barrier side, doesn't that give you more leverage over time to go to your customers who value that and say "Listen folks, we also need to get paid on our lower barrier if you need our higher barrier." How do you answer that questions?

Henry J. Theisen

Well, I think that's somewhat true. As you get into the lowest part of our business, the more competitive and the more competitors we have. I think what's really the thing that we have to do is take our technology and drive new applications and new products that can compete with the people who don't have the technology base that we have, so we bring something that differentiates us in these markets to our customers.

Operator

And we'll take our next question from Mark Wilde with Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

Just 2 questions. First, some of the packagers, some of the other packaging companies are reporting what sounds like a sharper than normal drop-off in volumes in the late fourth quarter. Did you see that? Because it sounds like you saw a normal seasonal one, but was there anything on top of that?

Henry J. Theisen

No, we didn't see any drastic change. In fact, we saw some pickups in what we would call our higher barrier. Our meat, cheese, liquid markets, coffee, some of those areas that require the barrier products and the extended shelf life, we saw a slight uptick. As either what Scott or Melanie pointed out, some of the other areas we saw some decreases, but I don't have anything drastic to say.

Mark Wilde - Deutsche Bank AG, Research Division

Okay, all right. The second question I have is just a question about sort of margins in the Global business. It sounds like what you're suggesting is kind of almost like a Trojan horse strategy, where you're going to go into those markets initially with a lower margin product, and then you're going to try to migrate upmarket as those economies expand and the demand for more sophisticated products goes up. Is there anything that gives you confidence that, that strategy will work? Because I think in some of these markets like China, people see, across the whole product range, across the whole economic spectrum, that margins have just tended to be depressed in that market.

Henry J. Theisen

That's a good question. In our acquisition, we moved in and acquired Mayor Packaging. We didn't come in at the lowest level. We didn't come in on a monolayer polyethylene where all it does is provide a dust cover for a shipment. We came in at kind of a mid-level. So we've got a good base. We have technologies in there around retort, we have technologies around in fitments and stand-up pouches. So we come in kind of at the mid-level. And then we can add longer-term our technologies to make the base films that -- and not just be a converter. But we're coming in both with Dixie Toga and in China at a mid-level that protects us from some of the very low end just transportation or dust cover type materials.

Operator

And we'll take our next question from Stewart Scharf with S&P Capital.

Stewart Scharf - S&P Equity Research

I'd like to know what percentage of your sales growth is coming from new products. And do you have any target range going forward?

Scott B. Ullem

We really don't report on sales of new products. But what I can tell you is that our product portfolio is changing all the time. And we are working with our customers both proactively and reactively, as our customers keep a pretty continuous velocity of new product introductions. And so it's an important part of our business, but we don't really quantify it.

Stewart Scharf - S&P Equity Research

Okay. And then what's your capital capacity utilization rate right now? About 85%?

Scott B. Ullem

That's a good guess.

Henry J. Theisen

That's a good assumption. It's going to vary depending by which division or which market, but 85% is a reasonable point.

Operator

[Operator Instructions] And at this time, we will take a follow-up question from George Staphos with Bank of America Merrill Lynch.

George L. Staphos - BofA Merrill Lynch, Research Division

Two last follow-ons. Henry and Scott, when you look at your key markets and customers and what's been very slow to declining volume environment the last couple of years, what do you think has happened? What are your customers telling you has happened in terms of ultimate consumer takeaway? Are you feeling perhaps that some of the growth there is that Flexible Packaging used to have or may be being blunted by other packaging substrates? Is it just purely an economic factor? I ask the question because 1 year ago, again, you had good performance overall for 2012. You had been expecting a pickup in volume in the second half of the year, and it didn't materialize, and just the consumer didn't take away. So what are your updated views on that? And then I had a follow-on.

Henry J. Theisen

I think that, overall, our customers, and you've heard a lot of them talk, have been down 3%, 4% in their volumes, and that people are just being more cautious in the economic climate. What I don't agree is the opportunities for Flexible Packaging to grow. If you want to just take a look -- just walk down the baby aisle once, and everything used to be in jars and cans, and now it's in flexible pouches. There's new products being introduced. I got a grandson who goes buys all these things, and you squeeze them and they're berry mixes. You can see the conversion going on in cans and jars to flexible packaging. You see people wanting more extended shelf life. I think what you see is really I could identify with the mix we have. We're growing those areas where we provide extended shelf life, food safety and sterility, and the fall out that we're having is partially I think because our customers, and the economic and a little bit that we've made some tough decisions here over the course of 2012, and how much of that business we want to take on in our factories and how much capital we want to put towards it.

George L. Staphos - BofA Merrill Lynch, Research Division

So from your vantage point, it's the fact that consumers are being a bit more cautious and then you've made the decided walk-away decision, and that's affected your volume? It's not so much the market as you see it?

Henry J. Theisen

I agree with that, what you just said.

Stewart Scharf - S&P Equity Research

Okay. The other question I had is around Terre Haute. If we go back a long time ago, when you had the old reporting format and polyethylene was a big focus of the company, Terre Haute was a massive facility, probably still is. How has Terre Haute been affected by what's been perhaps a tougher performance, tougher margin environment over the last several years? Is it fully loaded? Is it loaded like you'd like?

Melanie E. R. Miller

George, I'll let Henry or Scott add in after I give you a couple of facts with regard to Terre Haute. The Terre Haute facility is a very large facility, you're right, and it focuses on the lower-barrier areas of the business. But they are very good at managing manufacturing costs. They've implemented World Class Operations Managements, which Henry and Scott talks about extensively, and benefited in 2012 from the transition of production from some of these other plants that we closed, where we had substantial amounts of volume moving in there. So the plant is a valuable asset, and it's running very well.

Henry J. Theisen

The only other thing I'd add to that, George, is we continue to see growth in multipacks and the shrink bundling film. So that growth helps to support and grow the Terre Haute facility.

Operator

And we'll take our next follow-up question from Mark Wilde with Deutsche Bank.

Mark Wilde - Deutsche Bank AG, Research Division

Henry, just one that you probably will have to answer carefully, but just I'd like to get your general thoughts. There's a Pressure Sensitive transaction announced this morning. Will that have any effect on your business that you can think of?

Scott B. Ullem

Mark, it's Scott. That will not have any real effect on our business. The Avery divestiture was a product area that -- where we don't compete. And so that's really not going to affect our business.

Mark Wilde - Deutsche Bank AG, Research Division

Okay. It looked like it was more kind of converted office products, which is not a market that you're in. I didn't know whether the label side of the business had any impact.

Henry J. Theisen

No, no, it should have no impact on us.

Operator

And we'll take a follow-up question from Adam Josephson with KeyBanc.

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division

Just one question, how would you characterize the nature of the competition in your high barrier packaging areas in North America? And have you noticed any recent changes in that regard? What I'm trying to get at is, how you managed to gain share in some of these higher value businesses that you're in?

Henry J. Theisen

I think we have some very good competitors in our high barrier area. They have their products, we have our products, and I think it's just an overall congratulations to our R&D and our development teams, that they're able to solve problems and provide solutions that our customers are looking for faster than our competition.

Operator

[Operator Instructions] It appears there are no further questions in the queue.

Melanie E. R. Miller

Thank you, operator. That ends our conference call for today. And we will be out visiting lots of investors over the next several months on the road and a number of conferences and meetings, so we look forward to seeing most of you then.

Operator

This concludes today's presentation. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Bemis Management Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts