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Bemis Co. Inc. (NYSE:BMS)

Q4 2008 Earnings Call

January 27, 2009 10:00 am ET

Executives

Melanie Miller - VP and Treasurer

Henry Theisen - President and CEO

Gene Wulf - SVP and CFO

Analysts

George Staphos - Bank of America Securities

Ghansham Panjabi - Wachovia Capital Markets

Tim Thein - Citigroup

Claudia Hueston - JPMorgan

Reik Read - Robert W. Baird

Mark Wilde - Deutsche Bank

Joseph Naya - UBS

Chris Manuel - KeyBanc Capital Markets

Operator

Good day everyone. Welcome to the Bemis fourth quarter 2008 earnings release conference call. For opening remarks and introductions, I would now turn the call over to Vice President and Treasurer for Bemis Company, Ms. Melanie Miller. Please go ahead.

Melanie Miller

Thank you, operator. Today is January 27, 2009. A replay of this call 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 Senior Vice President and Chief Financial Officer, Gene Wulf.

Today, Gene will begin with comments on financial details followed by Henry who will provide additional details on operations and the market. After our comments, we'll answer any questions you have. However, in order to allow everyone an opportunity to participate, we ask that you limit yourself to one question at a time with a related follow up and then fall back into the queue for any additional questions.

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 costs and availability, industry competition, unexpected consumer buying trends and customer order patterns, our ability to pass along increased costs in our selling prices, interest rate fluctuations, the availability and cost of bank financing 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, 2007. Now, I'll turn the call over to Gene Wulf.

Gene Wulf

Good morning, everyone. And thank you for joining us this morning. This morning Bemis reported fourth quarter 2008 earnings per share of $0.33. This includes an impact from currency transaction and translation losses of approximately $0.07. This is a substantial impact from currency, and I want to explain to you what this includes. Normally we'll highlight for you the impact of currency translation on our sales and operating profit numbers.

Currency translation gains and losses occur where we maintain operations in international locations to keep their books and records in a functional currency other than US dollars. When we consolidate the results of our domestic and international operations, we do so at the average exchange rate for the period for each functional currency. To determine the currency impact on our operating results, we determine the difference between the average exchange rates for the current period and the same period in the prior year and apply that difference to the current period results in international currency, functional currency. This amount is highlighted as a currency translational impact.

In addition, we incur currency transaction gains or losses, when our operations record receivables or liabilities in currencies other then their own functional currency. Therefore, when one of our businesses transacts business in a currency other than their functional currency, they risk gains or losses due to changes in the respective exchange rates. Historically, transaction gains and losses have been small.

We have exposures to a variety of global currencies. As you know, currency exchange rates move up and down for a wide variety of fiscal and political reasons. Unfortunately in the fourth quarter, we experienced serious changes in major international currencies that had an unfavorable impact. Drops in the EU's euro, United Kingdom's pound sterling, Brazil's real, Canada's dollar and Mexico's peso unfavorably impacted Bemis this quarter.

During the fourth quarter, significant changes in currency exchange rates in a short-period of time created about $6.1 million of transaction action losses. Prior to this, cumulative transaction losses for the first nine months of 2008 totaled only $625,000. In the fourth quarter of 2007, we recorded a foreign exchange gain of $700,000.

With respect to diluted earnings per share for the fourth quarter, results of $0.33 were $0.07 below the low end of our original quarterly guidance and at the upper end of our revised guidance.

If you exclude the $0.07 related to the combination of currency translation and currency transaction losses, it gets us back to the low end of our original guidance.

Fourth quarter net sales were 4.9% below fourth quarter 2007. Excluding the negative impact of currency, net sales would have increased by 1.8%. Flexible Packaging net sales decreased by 3.1%, compared to the fourth quarter of 2007.

Currency effect reduced net sales by 6.9%. Volume was down in this segment by high single digits, while price mix was up low double digits. While net price mix increased in nearly every market category, we experienced lower sales volume in about 44% of our markets.

Specifically and excluding the impact of currency, we enjoyed net sales growth in markets for packaging of meat and cheese, dairy and liquids, dry foods, bakery products, health and hygiene, medical devices and industrial products.

In the meat and cheese market, representing almost 30% of flexible packaging sales, unit volume growth in North American process meat and cheese packaging was boosted by further increases in price and mix. However globally, unit volume was flat with mid single-digit price mix increases.

In dairy and liquid markets, which represent about 8% of flexible packaging net sales, increased sales contributed to higher unit volumes in this market compared to last year. Globally a double-digit price mix increase was supplemented by mid single-digit unit volume growth.

Net sales of packaging products for dry foods and bakery markets also increased compared to last year's fourth quarter, as a result of increased sales volume and strong double-digit price mix increase. Dry food and bakery markets make up about 6% and 5% of flexible packaging net sales respectively.

Sales to medical device markets increased this quarter, driven by improved price mix in low double-digits. This market represents about 7% of flexible packaging sales in 2008.

In health and hygiene packaging, which represents about 11% of flexible packaging net sales; a net price mix double-digit increase more than offset low double-digit unit volume decreases.

In the industrial products market, which represents about 5% of flexible packaging net sales; a nominal sales growth reflected a double-digit pass through of raw material cost increases, partially offset by low double-digit unit volume decrease. Demand in this market has slowed in light of our exposure to the housing industry.

Compared to net sales levels for the fourth quarter of 2007; we experienced decreased net sales in markets for confectionary and snack products, pet foods and overwrap for multipacks like bottle water.

Confectionary and snack market sales, which totaled about 8% of flexible packaging sales, have been under pressure for several years, due to competitive pressures and consumer trends. This quarter unit volume was down in the upper single-digits.

Sales of multi-packaging used to overwrap products like bottled and canned goods, slowed markedly in 2008, after years of strong double-digit growth.

While the packaging itself continues to expand into new applications, the growth of the market for this application has slowed considerably this year in consumption with related consumer buying trends in products like bottled water.

Quarter-over-quarter, unit volume declines were in the 25% range. This market represents about 3% of our flexible packaging sales.

In our Pressure Sensitive Material business segment, net sales for the fourth quarter 2008 decreased 13.5%, compared to the fourth quarter of 2007. Excluding the impact of currency, net sales would have decreased 7.8%.

This business segment is considerably more sensitive to the economy, than our food focused flexible packaging segment.

Looking at the specific pressure sensitive product lines and excluding the impact of currency; net sales of our labeled products declined about 7% compared to last year's fourth quarter.

Volume globally was down low double-digits, while price mix partially offset the volume decline. Labeled products represent about 57% of our sales in this segment.

Our graphic product sales decreased by about 12% as double-digit volume declined, with higher input cost being passed through increased selling prices. These products were sold into advertising and promotional markets.

As this market feels the impact of weaker economies, we have seen the investment in this type of promotion decline. Graphic products represent about 30% of our pressure sensitive material sales.

In technical products which represent the remaining 13% of our total segment sales, total net sales improved by about 30% compared to fourth quarter of last year reflecting an improvement in price sales mix.

Unit volumes in this particular product line continue to be negatively impacted by our exposure to the housing and the automotive industry.

Moving on through the fourth quarter income statement, gross margin as a percent of net sales was 16.9% for the fourth quarter of 2008, a decrease from 17.6% in the fourth quarter of 2007, but in line with the 16.9% in the third quarter of 2008.

Gross margin has been under pressure this year with a substantial increase in input cost that we experienced at the end of the second quarter.

While we have increased our selling prices in response to these higher costs, there is a time lag built into our business model that negatively affects our margins during periods of increasing raw material costs.

At the beginning of the quarter, we experienced rapid decreases in raw material costs. As we have explained in the past, while decreasing raw material costs are generally good for our business and our customers, when cost changes occur too rapidly, it is more difficult to fully recover the impact before margins come under pressure again.

We are pleased that in this volatile cost environment, we have stabilized our gross margin. Spending for SG&A expenses during the fourth quarter was slightly below last year's level, as you know there has been significant emphasis on managing this cost.

However, some of this year-over-year decrease is result of lower incentive and profit sharing obligations. Other cost in income included $7.9 million of fiscal income, about 40% of which represents interest income from cash balances held in international subsidiaries.

In order to reduce the cash balances on our balance sheet and make this cash available for debt reduction in the United States, we paid dividends from several of those international subsidiaries during the fourth quarter of 2008. This will reduce interest income going forward until cash builds up again in those subsidiaries. The remaining 60% of the financial income reflects fiscal incentives at international locations.

As we have explained in the past, while it is classified as other income, the fiscal incentives relate to specific flexible packaging operations, and are included in our calculation of segment operating profit.

Also recorded in other income and costs is the foreign exchange transaction loss of $6.1 million that I discussed earlier. The comparable amount for the fourth quarter of 2007 included in other costs and income was a $700,000 gain. Although included in other cost and income, it is allocated to the business segment for segment reporting.

In the fourth quarter, year-over-year interest expense was down $3 million. This decrease is the reflection of both lower debt levels, and lower average interest rates. With regard to segment performance, operating profit as a percent of sales was lower than the last year's fourth quarter level due primarily to the impact of weaker sales volume, final flow through of higher raw material input costs from earlier this year, and currency losses.

In our Flexible Packaging segment, we reported $66.2 million of operating profit for the fourth quarter of 2008. This represents 9.1% of net sales. Currency translation and transaction impacts reduced operating profit by about $8.7 million. Without the adverse impact of currency, this quarter's operating profit would have been 10.2% of net sales.

In the fourth quarter of 2007, we recorded $83.3 million of operating profit or 11% of net sales. Operating profit for the fourth quarter of 2007 also included a restructuring gain of $1.2 million. Operating profit in our Pressure Sensitive Materials segment was $4.4 million or 3.2% of net sales compared to $6.7 million or 4.3% of net sales for the fourth quarter of 2007.

Currency translation and transaction impacts reduced operating profit for the fourth quarter of 2008 by $1.2 million. Without the adverse impact of currency, this quarter's operating profit would have been 4.1% of net sales. As I mentioned previously, lower sales volume in this segment have pressured operating profit levels.

With regard to cash flow and liquidity, we reduced debt by $140 million this quarter. Debt to total capitalization calculated as total debt plus deferred taxes and equity, as of December 31st, was 32.1%. This compares to 32.9% at December 31st, 2007.

At the end of December, we had $331 million of commercial paper outstanding with maturity spread throughout the first quarter of 2009. We plan to continue to participate in the commercial paper market since it presents good liquidity and the lowest cost of borrowing. Our commercial paper program is supported by $625 million in backup credit facilities. If the commercial paper market were no longer available to Bemis, we would draw upon them as our source of liquidity.

Of these backup credit facilities, $200 million matures on April 29th, 2009. While these amounts are in excess of our expected commercial paper needs for 2009, we would prefer to maintain a comfortable cushion of backup liquidity. As such, we are studying our future financing needs, and will make this determination closer to the maturity date.

Cash flow from operations for the fourth quarter of 2008 was $92 million. The highest quarterly cash flow level of 2008, but less than the strong cash flow level of $107 million achieved during the fourth quarter of 2007. Our cash flow from operations for the total year of 2008 was $298 million, $108 million below the record levels of 2007. Lower cash flow in 2008 primarily reflects lower net income, increased levels of working capital this year, as both higher input costs and selling prices caused higher levels of accounts receivable in inventory.

We maintain defined benefit pension plans in North America and Europe, for which we recorded $10.5 million of pension expense during 2008. In light of a reduction in funded status as of December 31, 2008 that reflects the impact of lower asset balances and increased liabilities at year-end; we plan to contribute $30 million to our US pension plans during 2009. Pension expense in 2009 is also expected to increase by $9 million.

Capital expenditures for 2008 were $120.5 million, substantially below the $179 million spending level of 2007. This reduction from 2007 reflects the completion of several large capital projects, directed at building technology capabilities for certain key markets.

We have also invested substantial time and effort in improving the productivity and efficiency of our existing equipment, which improves capacity and delays the need for new equipment.

In 2009, we are benefitting from those efforts and further reducing our capital spending plan to a range of $100 million to $110 million.

Market conditions continue to be difficult to predict, given the current economic environment. Even in markets for which demand is more resilient in times like this, our customers are reluctant to build inventory levels in anticipation of future sales.

Bemis remains focused on managing its cost structure, to match anticipated production volume levels and strengthening its competitive position.

Management believes diluted earnings per share for the first quarter of 2009 will be in the range of $0.30 to $0.38, reflecting a general slowdown in orders and continued weakness in product lines serving markets for discretionary products such as protective display films, industrial housing, and many consumer good applications, and promotional display products.

For the full year 2009, management believes diluted earnings per share to be in the $1.50 to $1.70 range. These two ranges reflect the uncertainty associated with the general global economic environment.

We believe that the range will narrow during the year, as more clarity in to the global economic situation is more available.

Our quarterly and annual guidance today and going forward, excludes the impact of any possible acquisition related costs associated with adoption of the new Business Combination Accounting Principle 141R.

Now I'd like to turn the call over to Henry for his comments.

Henry Theisen

Thank you, Gene. As Gene mentioned, 2008 was a challenging environment in which to do business. During the first nine months of 2008, we faced substantial increases in almost all of our input cost including resins, films, chemicals, energy, and transportation.

In this environment, we have focused on cost control, accelerated cost take-outs and proactively managed our selling prices. We implemented contract-price escalator as permitted by contract, we aggressively implemented non-contract price increases multiple times during the year.

In the fourth quarter, we observed the inverse of the first three quarters. The global energy and commodity prices plummeted. Global demand for some of our products sensitive to industrial, housing, consumer goods, and advertising markets have dropped.

Food markets generally remain stable, but demand in certain markets such as multipacks for bottled water has been very soft. Although the financial results are disappointing, I am proud of how our teams around the world responded to last year's challenges.

The fourth quarter was affected by two key items. First, the substantial changes we saw in the global currencies and secondly, reduced demand for our pressure sensitive products and our display shrink films. These products are sold into markets that have been some of the hardest hits in the current economic downturn.

Our pressure sensitive label products are used in a broad range of applications, from consumer staples like shampoo bottles and food jars to discretionary items like electronics and toys.

Our pressure sensitive graphic products are also sold to printers for advertising and promotional applications; another market where spending has declined in the face of a slowing global economy.

Our protective display films represent only about 3% of Bemis sales. But the slowdown in volume for that market was also more dramatic than we had expected in the fourth quarter.

During the quarter, we shut down our North American display film plant for two weeks to adjust inventory levels. Again, this is a reflection of a depressed consumer discretionary spending market.

The multipack product line used to overwrap bottles and cans have been growing at a double-digit pace for the past few years. In 2008, and particularly in the fourth quarter, we saw volumes drop substantially, reflecting a sharp decline in consumer demand for bottled water.

We believe this reflects a combination of change in consumer attitude, and economic pressure on the family food budget.

On the other hand, our meat and cheese packaging products did well. We have all read about the challenges being experienced by our fresh meat customers, with high raw material costs and inventory supply levels. Their challenges have impacted our fresh meat programs.

However, we continue to enjoy growth in processed meat packaging, which represents the majority of our meat packaging product market.

Our food customers are focusing their efforts on mid-priced take-home meals and meal kits. Frozen foods, pizza and bakery products have also been good markets for us in this environment.

In these challenging economic times, we believe that consumers will spend more of their family food budget on home meals and less on restaurant meals. We believe that this will be good for Bemis in 2009.

We are happy with the performance of our medical device packaging business. Over the past few years, we have invested in this business with new plants and equipment in North America, Europe, and China.

In 2009, the continuing efforts of our world class manufacturing initiatives and cost-management focus will be vital to our ability to react properly to changes in demand.

World class manufacturing is not a one-time exercise, nor a restructuring program. It is a plant-by-plant program in which all plant personnel are involved in improvement to the manufacturing process and the business.

In 2008 and 2009, the benefits of this world class manufacturing effort are most evident in our decreased need for capital expenditures.

Although we have no doubt heard that resin prices have dropped in the fourth quarter, the price decreases have been limited primarily to the commodity resins. The grades of polyester, nylon and EVA resins used by Bemis, do not see fourth quarter price reduction and prices remain high coming into the first quarter. Therefore, we are expecting resin to offer a small benefit in the first quarter, when volumes are at their lowest.

As we look to 2009, we are pleased to be a leading supplier packaging for staple food products that have maintained solid demand levels in these times, where consumers are more focused by cooking at home. Many of our food customers are optimistic about their 2009 prospects which should also be good for Bemis.

Now, we'll take your questions.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically and we have several questions. Our first question comes from George Staphos from Bank of America.

George Staphos - Bank of America Securities

Hi, everyone. Good morning. I guess looking at 2009 we appreciate all of the details that you provided for the businesses. But, if we distill it down to, maybe two or three trends, with resin prices being down significantly and your selling prices in flexible packaging -- some of the details that Gene shared, being up fairly sharply into the fourth quarter of 2008, and therefore entering 2009. What are the primary reasons why you expect earnings are more likely to be down than up in your guidance range? Thanks, and I had a follow-on question.

Gene Wulf

Good morning, George.

George Staphos - Bank of America Securities

Good morning.

Gene Wulf

As you look at our food business, it is doing very well. And as you say, we've been able to get our price increases through. The real areas that we are concerned about are the pressure sensitive business and our display films business, which we pointed out in our remarks before. Those are very sensitive to the economy, and even though they represent smaller portions of it, they probably will be a drag on our business in the first quarter.

George Staphos - Bank of America Securities

Okay. I guess the other question I then had, Henry. I haven't had this one up in a few quarters, but I will bring it back again to me. The company has over the year spent a lot of money on developing new applications, and higher value-added films and structures, within food, packaging in particular, and while we can't always see with the granularity that we'd like the benefits of that in your P&L, it sounds like you are pleased with the margin improvement that you are getting out of those businesses, yet for various reasons, not necessarily the company's fault, some portion of business always seems to be dragging the good performance in food packaging down.

Is it a time to maybe take another look at the overall portfolio within Bemis and determine whether being in pressure sensitive materials or some of these more commodity overwrap businesses is in fact the right strategy, or maybe should be perhaps look to be disassociated with the company? Thanks.

Gene Wulf

George, every year as we go through our annual planning sessions, we do review that, and we do sit down with the management team and talk about how certain pieces of business fit into our company, whether we should look at changing those things, how much we should put in to the capital planning. We do all the things that you are talking about on a continuing basis.

OPERATOR

Our next question comes from Ghansham Panjabi from Wachovia.

Ghansham Panjabi - Wachovia Capital Markets

Hey guys, good morning.

Gene Wulf

Good morning, Ghansham.

Ghansham Panjabi - Wachovia Capital Markets

Good Morning. Gene, I think you mentioned in your prepared comments or at least you implied that when resin prices dropped substantially, that you don't see the benefit, you don't get to keep the benefit for very long, but when resin prices increased substantially, you took a hit on your P&L from a margin perspective. And it just basically implies that you're not getting compensated for taking that risk on your P&L. So can you comment on why this is and how the business model maybe needs to change going forward?

Gene Wulf

Well, what's happening Ghansham is, when prices go up, there is a lag between the price time period of the increase in the raw material, and that point in time when we can pass that price increase onto our customers. When we have rational markets, where costs are going up at nominal amounts, or coming down at nominal amounts, our model works pretty well.

Where we end up having conflicts is when you get rapid increases, where you'll have a large increase, like we saw earlier this year, where we got a rapid increase early in the year, and we had to wait to about 90 days to be able to get our contracted customers prices changed, and now we'll see as prices decrease in the fourth quarter, they will trigger new opportunities on price decreases come January, and so when you have those rapid changes, we don't get that chance to really recover on the downside.

Ghansham Panjabi - Wachovia Capital Markets

Okay. So we should see some benefit in the first quarter, then, right?

Gene Wulf

We still have some benefit, but we lose it more rapidly than when you have a more rational change in the market place.

Operator

Our next question comes from Tim Thein from Citi.

Tim Thein - Citigroup

Yes. Hi, good morning.

Gene Wulf

Good morning, Tim.

Tim Thein - Citigroup

Question is on, if you can just make a comment, I don't know if you gave a description, or explanation for it. And if you did, I missed it. The health and hygiene you said was down double-digits in the fourth quarter. I thought, maybe I'm mistaken, but I thought you had put up some new capacity in Ireland and that would have helped that. And even if you didn't, I'm just surprised that it would be down to that magnitude.

And the second part of the question is the dividend. You obviously have a nice long record of raising that. But if you look here at the payout ratio, at least in the past you said, call it a 30% or 35% range is where you want to be in or north of 50. So just curious what you had to say on that. Thank you.

Henry Theisen

Well, let me take the first question and then I'll turn the second question over to Gene. We did put a substantial investment in to Ireland as you're recalling, and that is really for our medical device business.

The health and hygiene would be more in the area of personal care, tissue overwraps, wipes and those types of items.

Melanie Miller

Diapers.

Henry Theisen

Diapers. So those investments we made were in the medical device packaging area, not in the health and hygiene.

Gene Wulf

As far as dividends, that's something that we review with our Board every year, and it will be on our agenda to review again later this week in our Board meeting.

Melanie Miller

The payout ratio that we have targeted in the past or the Board has targeted in the past has been 35% to 45%.

Operator

Our next question comes from Claudia Hueston with JPMorgan.

Claudia Hueston - JPMorgan

Thanks, very much. Good morning.

Henry Theisen

Good morning, Claudia.

Claudia Hueston - JPMorgan

How are you? I was hoping you could just clarify one thing you said on the pension expense. You said, $10.5 million and I just wondered if that was a pretax or a post-tax number. And then also if you could just, maybe give some guidance on the tax rate for 2009?

Melanie Miller

The pension number, the $10.5 million for 2008 expense is pretax, not post tax. And Gene, do you have a good estimate for - the tax rate doesn't change substantially --

Gene Wulf

No, the tax rate won't be materially different than it was this year.

Claudia Hueston - JPMorgan

Okay, thank you. And then I just wondered if you could maybe talk a little bit about what you are seeing in terms of the M&A environment right now? Thanks.

Henry Theisen

Well, when we talk about M&A, unfortunately there is not a lot of M&A activity out there right now with what's going on in the banking industry. So we really haven't been seeing a great deal of new offerings coming across our desk lately. So, I think when the markets open up for credit, we'll see more opportunities for M&A.

Operator

Our next question comes from Reik Read from Robert W. Baird.

Reik Read - Robert W. Baird

Hey, good morning.

Gene Wulf

Good morning, Reik.

Reik Read - Robert W. Baird

Could you guys just talk a little bit about the de-stocking? You talked about that for a couple of periods. Where you are seeing that, what you think the levels of inventory are, and maybe if you could give a comment on it by region as well?

Henry Theisen

Firstly on our core food business: I don't know if we really get a good glimpse into what the inventory levels are through the whole system. That part of our business has held up very well and I don't really think we had a big de-stocking or what I would call our core technology platforms for the meat, dairy, or liquid those areas that are up in our medical business.

We see some of that de-stocking more in the areas that are not the primary package, like our display films, our pressure sensitive businesses, those things that are more directly related to shipping and labeling. And our core technology, food and medical business, I don't think we had that substantially de-stocking.

Gene Wulf

When we talked about de-stocking a year ago, it was really more at the consumer level; we talked about the de-stocking of the pantry, not the de-stocking at our customer level.

Reik Read - Robert W. Baird

And I take it from what you guys are saying is that, that you think inventory levels that are out there today are pretty reasonable given all things?

Gene Wulf

Well, I would say that our customers have been managing their inventories very closely, but I don't think that they have taken their inventories, way, way down.

Operator

And we now have a question from Mark Wilde from Deutsche Bank

Mark Wilde - Deutsche Bank

Good morning.

Henry Theisen

Good morning, Mark.

Mark Wilde - Deutsche Bank

Wondering if you could just talk about the activity in the offshore markets that you are in? And I'm particularly curious as to whether Brazil in particular in lagging the US a bit.

Some other countries are suggesting that they are starting to see more signs of slowing down there. So I wondered just incrementally as we move from the fourth quarter to the first quarter, what you might be expecting?

Henry Theisen

Through 2008 our Brazilian operations did very well. We saw growth in the key markets that they serve. We continue to plan for growth in their local currency throughout 2009, so we feel very good about that business.

Our Brazilians report that they do some see slowdown in some areas like automotive or some of the more consumer product areas like that. They start to feel a little bit of a touch, but we're not seeing it in our core food business in Brazil. So we're looking for a good year in the local Real currency. Unfortunately the Real to the dollar exchange rate is a little bit different than it was a year ago.

I would like to comment on our European operations. European operations had some good growth for us, both in volumes and margins in 2008.

Based on the technology products that we brought over there with our polyester technologies, our easy-open, our salability issues, and we look forward to some good growth with those key value-added markets in Europe 2009.

Gene Wulf

But in Europe with our pressure sensitive business, we certainly did feel a slowdown in the economy over there, and we're strongest in our European business in the promotional items for advertising and graphics, and that has, really felt an impact in the fourth quarter, and we expect to get continue in the first quarter.

Mark Wilde - Deutsche Bank

Okay. And then any thoughts on the business down in Mexico, and how well your turn around of that business is progressing?

Henry Theisen

That business is so small; it really doesn't affect what we're doing. We make slow, slow progress ever year. So the economy in Mexico follows the US economy, so it is somewhat weak now.

Operator

And Joseph Naya from UBS has our next question.

Joseph Naya - UBS

I was just wondering, looking at your guidance for 2009, what type of currency exchange rates are baked into those numbers?

Melanie Miller

The currency included in our guidance would be the average rate thus far in the month of January. That's really what we've based on. We did want to include any currency speculation at all, and not plan any significant FX transaction gains or losses either.

Joseph Naya - UBS

Okay. And I was just also wondering if you might be able to comment kind of on what you're seeing so far in the month of January in the terms of demand front? If you have seen any sort of a change from what you saw in the fourth quarter? Obviously it's a real uncertain environment.

Henry Theisen

You know, it's very hard to predict what the volumes are at this stage in the first quarter. We generally have some good shipments at the end of December, and always the first half of January is a very, very slow time, and you really don't get a good look at what's going on during the first half of January.

Operator

Our next question comes from Chris Manuel from KeyBanc Capital Markets.

Chris Manuel - KeyBanc Capital Markets

Good morning.

Henry Theisen

Good morning, Chris.

Chris Manuel - KeyBanc Capital Markets

Couple of questions for you; first let's start with the guidance that you gave here for 2009. You know, exiting 2008, I think you mentioned and obviously you saw some volume declines in pressure sensitive, and I think you indicated volume down high single-digit in flexible as well, but some portions that were up. Can you help us with, both on a volume side and on a price mix side, what you've embedded or what you think your assumption is, when you gave us that 2009 guidance?

Gene Wulf

Well, Chris, as we look into the crystal ball in to the New Year, the pressure sensitive business, our display business, the protective display films.

We're anticipating that they are going to have a struggle in the first half of the year at least, until the economy comes around, because their products are so sensitive to other markets. And so that's going to be a very heavy drag on us in 2008.

There is a lot of uncertainty in terms of what's going to happen in the marketplace. I think in our product lines that our staple food product lines were confident that those will stay in the same area, but we're not expecting great growth in those areas in these uncertain periods.

I think markets that are more associated with discretionary buy, whether it's bottled water, overwraps, those kind of things, I think those are going to be a much more difficult market for us in the coming year.

Chris Manuel - KeyBanc Capital Markets

All right. Let me pin you down a little, I guess. I do not quite understand that within your $1.50 to $1.70, the pressure sensitive side sounds like we see volumes continue to be down as we have seen on the flexible side, were predominantly your food. Are you anticipating up low single-digit, flat, down low single-digit, down low double-digit? What are we anticipating there?

Gene Wulf

Well, we'd probably be in the flat range this year.

Melanie Miller

If you add it all up: remember it's very difficult to add up all these various markets, and when we build our plan, we really build it bottoms up. But yes, for the total.

Gene Wulf

And a lot of it is dependent on what happens to the economy, and what people are going to eat, are people going to change eating habits during the year? I think that's some of the uncertainty we're dealing with in the markets. We package whether it is one pound baloney or other kinds of packages, but those all have impacts on us.

Operator

We'll now take a follow-up question from George Staphos from Bank of America.

George Staphos - Bank of America

Hi, guys, two quick ones. First in terms of financing, Gene, can you tell us what types of options you are currently considering, or Melanie, in terms of getting some additional, I guess, liquidity and flexibility? Have you incorporated any potential increase in cost into your guidance?

Gene Wulf

Well, at this point, George, you know, we have lots of flexibility with the commercial paper market, and it's the lowest amount of financing cost at this point.

George Staphos - Bank of America

Yep.

Gene Wulf

And so as we look forward at this point, you know, we like the commercial paper market, and the flexible rate that it has, and unless we see a need for any long-term capital needs, we'll probably try to stay in the commercial paper market for the short-term at least. It's a question of how much we want to have in our backup.

George Staphos - Bank of America

Okay. So aside from that, what were you alluding to in saying that you might want to consider some additional financing options depending on what happens to the commercial paper market?

Gene Wulf

Well, whether you want to consider, you want to go out and term out some of your commercial paper or not. At this point we don't have a strong interest in trimming out our commercial paper rates because the interest rates are so much higher than the commercial paper rates.

Melanie Miller

If you look at our total credit facilities, we have $625 million of total credit facilities, and the amount we are using is shrinking as we generate more and more cash flow.

And so part of the $625 million is a long-term backup facility that goes out through 2013. The rest that matures is only a 364 day that matures in April.

We just need to decide how much and to what extent we want to renew that when April comes around, depending on how much we're borrowing in the commercial paper market at that time.

George Staphos - Bank of America

Okay. On cash flow, we were pleased to see the guidance on CAPEX being where it is. How long do you think you can hold or let me say it differently, how long do you think you can keep the CAPEX at that level, Henry?

Henry Theisen

This year we're still benefiting from some of the spending we did for CAPEX in the past few years, and we're also really benefiting from the improvements we made in our world class manufacturing and being able to improve our capacity and our outlook.

I think this year's $100 million to $110 million is probably the lowest you're going to see. I would expect that to get back up between where it is now and depreciation halfway in between there.

Operator

And we have another question from Chris Manuel from KeyBanc Capital Markets.

Chris Manuel - KeyBanc Capital Markets

Good morning, again. A couple of follow-up questions. First is, can you give us an update on the new meat product? I think previously you had indicated it, you were anticipating FDA approval towards the end of the fourth quarter. Can you give us an update on where you are there?

Henry Theisen

Our really struggles are with the USDA. The FDA has said they don't have any problems with our new products. It's really with the USDA, and we had to do additional testing and submit additional data, which turned out very well for us.

We are now in discussions with the USDA on exactly what the label should say. And we are hopeful that in the first half of this year, we will finally get this through the USDA, and they will agree to the language on the label. That's what we're down to now.

There is no trouble with the science going forward. It's just what the label will read exactly.

Chris Manuel - KeyBanc Capital Markets

Okay. So first half '09, and then we could see it on shelves, is that what you are saying?

Henry Theisen

Yeah, first half '09 and then start to see it on shelves late '09, and really be a 2010 product.

Operator

And there appears to be no further questions. However, I would like to give everyone one final reminder.

And there are no further questions. I would like to turn the conference back over to our presenters for any additional or closing remarks.

Melanie Miller

Thank you, operator, and thank you everyone for joining us today. Have a nice day.

Operator

This concludes today's presentation. Thank you for your participation and have a wonderful day.

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Source: Bemis Co. Inc.Q4 2008 Earnings Call Transcript
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