Bemis' CEO Discusses Q2 2011 Results - Earnings Call Transcript

Jul.27.11 | About: Bemis Company, (BMS)

Bemis (NYSE:BMS)

Q2 2011 Earnings Call

July 27, 2011 10:00 am ET

Executives

Melanie Miller - Vice President of Investor Relations and Treasurer

Scott Ullem - Chief Financial Officer and Vice President

Henry Theisen - Chief Executive Officer, President and Independent Director

Analysts

Ghansham Panjabi - Robert W. Baird & Co. Incorporated

Benjamin Wong

Stewart Scharf - S&P Equity Research

Philip Ng - Jefferies & Company, Inc.

James Armstrong - Henry Armstrong Associates

Timothy Thein - Citigroup Inc

Operator

Good day, everyone. Welcome to the Bemis Second Quarter 2011 Earnings Release Conference 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 Miller

Thank you, operator. Welcome to our second quarter 2011 conference call. Today is July 27, 2011. After today's call, a replay will be available on our website, www.bemis.com, under the Investor Relations section. Joining me for the call today are Bemis Company's President and Chief Executive Officer, Henry Theisen; and our Vice President and Chief Financial Officer, Scott Ullem. Today, Henry will begin with comments on the performance of the business, followed by Scott with comments on the detailed financial results. [Operator Instructions]

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 trend, changes in customer order patterns, our ability to pass along increased costs in our selling prices, changes in government regulatory requirements, 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, 2010.

Now I'll turn the call over to Henry Theisen.

Henry Theisen

Good morning, everyone, and thank you for joining us today. Before I get into the details of our business initiatives and expectations for the rest of the year, I'd first like to update you on the challenges that our industry is facing in 2011.

Since October of 2010, we have experienced steady increases in raw material cost, especially resin and film used for our packaging business, including steep increases in Specialty Materials in the months of February and, again, in May. At this point, it appears that the momentum of these broad raw material cost increases have subsided as costs have been fairly stable in June and July.

Our business model is designed to meet this type of challenge by responding in a scheduled way, with selling price adjustments that offset the dollar impact of the raw material cost increases. As we have explained in the past, there is a time lag for selling prices to be adjusted to incorporate cost increases, and we expect all of our adjustments to be in place on or before the start of the fourth quarter.

The second challenge that our industry is facing is a threat of lower consumer demand for products that use our packaging. This is not related to the increase in our raw material costs but more directly is related to inflation in the cost of food ingredients. Food ingredients compromise a much larger portion of the retail cost of our product than our packaging does. And with meaningful price increases facing retail consumers, our customers have publicly expressed concern about the potential impact on demand for their products.

At Bemis, our North American volumes were healthy in the first quarter and above average overall for the second quarter with some softening late in the second quarter. In light of the commentary from our customers, we are expecting volumes for the second half of 2011 to be a few percent lower than the comparable volume from 2010.

In Brazil, our rigid packaging operations have been dealing with substantial volatility in the cost of polypropylene, their main raw material, which is affecting our profit margins. In Mexico, we trimmed our volumes in 2010 to restore the region to profitability. As a result, while volumes are considerably lower this year compared to last year, the business is now profitable compared to last year when it was operating at a loss. We continue to be pleased with the progress and performance of our operations in Mexico and look forward to its continued growth in both sales and profit margins.

Our European operations continue to meet the challenges of their very competitive environment, with renewed focus on World Class Manufacturing initiatives and sales strategies that prioritize niche projects. In total, we expect raw material prices to stabilize while selling prices continue to rise as pricing agreements adjust in the third quarter. In this challenging environment, which we expect to continue through the rest of the year, we are aggressively managing costs and accelerating opportunities to improve. We continue to transition production to optimum facilities and take costs out of our processes to maintain momentum and continuous improvement efforts. We have accelerated our World Class Manufacturing efforts, and we are aggressively passing through raw material cost escalation to our customers.

Outside our current operations, we continue to look for opportunities to expand our reach around the globe and apply our technological expertise to products in other markets. We continue to see our largest growth opportunities in growing economies like Brazil and Asia and in growing markets like medical and pharmaceutical. This year's environment is a challenging one, but our diligent focus on process efficiency, customer service and cost control has prepared our business well for the future.

Now I'd like to turn it over to Scott.

Scott Ullem

Thanks, Henry. Today, I'll begin by focusing my comments on a review of the quarterly results, and then review the assumptions used in our guidance for the rest of the year. Second quarter earnings per share were $0.51, in line with our guidance for the quarter. This compares to last year's earnings, excluding special charges of $0.58. The decrease in EPS compared to last year reflects higher raw material costs that were not yet reflected in higher selling prices to customers.

Net sales increased about 8% from the second quarter of 2010. Currency provided an increase of about 3.4%, driven by strengthening of the real, euro and pound sterling versus the dollar. The remaining increase was generated by selling price increases on roughly flat volumes.

In flexible packaging, overall volumes were also roughly flat. Volumes weakened in Latin America quarter-over-quarter, driven by several factors. Volatility in the price of polypropylene resin used for our rigid packaging operations in Latin America has increased competitive pressures and reduced operating margins in this category. While this volume may be restored in the future, as these factors change, we do not expect them to turn around during the second half of 2011.

Separately, we purposely trimmed low-margin business in Mexico during the second half of 2010 in order to improve profitability which was successful. So year-over-year second quarter volumes were lower. In addition, the strengthening real puts pressure on our customers' exports from Brazil. Finally, the inflationary economic conditions in Argentina have not been favorable for our business in that region.

Continuing through the income statement, consolidated gross profit as a percentage of net sales was 17.1 in the second quarter. We expect this to be the low-point in 2011 as selling price increases boost gross margins during the second half of the year.

Looking at flexible packaging operating profit, we reported $116 million or 9.5% of sales in the current quarter of 2011 compared to $130 million or 11.5% of sales in the same quarter of last year after add-backs of special charges. The decrease in 2011 primarily reflects the impact of increased raw material costs in advance of selling price adjustments. As we head into the second half of 2011, we expect operating margins to improve as selling prices are adjusted higher to reflect the raw material cost increases we experienced during the first half. We have implemented selling price increases in our flexible packaging and pressure sensitive businesses to reflect these higher raw material costs.

We reported cash flow from operations of $91 million for the second quarter. This was a substantial improvement from the $8 million use of cash we reported during the first quarter. Working capital contributed slightly to cash flow during the second quarter in spite of the continuing raw material cost increases. The largest use of cash for operating activities was a pension contribution made in April totaling $15 million. No other contributions are planned for 2011.

Based on capital expenditures we have completed to date this year and our CapEx schedule for the second half of the year, capital expenditures will likely total approximately $125 million in 2011. This is lower than our original guidance for the year of approximately $150 million.

During the first 6 months of 2011, we repurchased a total of 3.8 million shares of our common stock for $123 million. Future share repurchases will be evaluated among other priorities for cash flow, including dividends and acquisitions.

Subsequent to the end of the quarter, on July 8, we completed the tender offer for the outstanding preferred shares of our South American subsidiary, which were publicly traded. On July 22, the preferred shares of Dixie Toga were de-listed from the Brazilian Stock Exchange. The total purchase price was approximately $90 million, and there will no longer be a reduction in our income associated with non-controlling interests.

Now looking at our guidance for the remainder of the year, resin prices stabilized in June and our guidance assumes that they remain generally flat on average for the rest of 2011. Our selling prices are increasing to reflect this year's earlier raw material inflation, and the net effect will be improving income margins in the second half of this year. Our earnings per share guidance of $0.56 to $0.61 for the third quarter and $2.08 to $2.18 for the full year, reflects this combination of stable costs and increasing selling prices.

Now operator, we will be pleased to answer questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Ghansham Panjabi with Robert Baird.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated

Henry, the last time your customers pushed through retail price increases was in the '07, '08 time period. I think your volumes at that time were also impacted as consumers adjusted their purchasing, and obviously, it was a weak consumer spending environment as well. Is what you're seeing now comparable to back then?

Henry Theisen

What you're saying is what happened in 2007 is exactly right, and that's what we saw. We saw our volumes pretty much across the board fall 2%, 3%, something in that magnitude. What we're seeing now is warnings from our customers and concern from our customers. We were relatively flat in the second quarter with last year, and what our customers are telling us is to expect slight decreases and their concerns over how the retail environment will react to these price increases. So it's really kind of a little bit unknown at this point.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated

Okay, and just as a follow-up, on your revised guidance for 3Q, it sounds like you're still expecting EPS to be nicely up on a sequential basis. Just based on your comments, volumes are expected to be down a few percent, I think is what you said. Is it the resin catch-up the offset on the positive side along with the lower share count?

Henry Theisen

The real part of that is the resin catch-up as our ability we pass through a lot of these increases, a lot of our contracts or pricing agreements that fired in the third quarter. And with stable resin prices, we should start to catch up where we should be.

Operator

We'll go next to James Armstrong with Vertical Research Partners.

James Armstrong - Henry Armstrong Associates

My first question is on the range of the guidance. Can you help us understand what differentiates the low end of the range with the high end, and what factors we should be looking for?

Scott Ullem

Sure, James. It's really going to be tied to how quickly we realize the higher selling prices and that better spread versus the raw material prices that we've paid in the first half. And so that really explains the $0.05 range, $0.56 to $0.61.

James Armstrong - Henry Armstrong Associates

Okay, and then as a follow-up on a slightly different topic, have you already worked through all the synergies of the Alcan acquisition? And should we see year-over-year increases in 2012 from 2011?

Scott Ullem

James, we did achieve the cost savings that we expected in 2010, and really, the operations are being run together in 2011. So it's really not possible to break out the difference between cost savings from the integration and cost savings from the World Class Manufacturing initiatives that we have accelerated during the course of this year. But we expect there's going to continue to be benefits from World Class Manufacturing in the process efficiency programs that we have in place.

Operator

We'll go next to Phillip Ng with Jefferies.

Philip Ng - Jefferies & Company, Inc.

Yes, it looks like your pricing, at least from run rate standpoint, 2Q decelerate little bit. I would imagine it would have ticked up. Was that more of a mix issue or...

Melanie Miller

From a pricing standpoint, no, prices definitely increased year-over-year.

Philip Ng - Jefferies & Company, Inc.

Okay, and then...

Melanie Miller

There was not -- as Henry had said, some of the pricing doesn't go until third quarter. So but yes, we did have positive in all geographies, positive price second quarter 2011 over second quarter 2010 [indiscernible].

Philip Ng - Jefferies & Company, Inc.

Okay. And if you assume resin prices do stay stable, do you expect to reach the price cost parity by 3Q or more so in 4Q?

Henry Theisen

We would expect to meet price equilibrium with the raw materials at the start of the fourth quarter.

Operator

We'll go next to George Staphos with Bank of America.

Benjamin Wong

This is Benjamin Wong filling in for George. First question is on the cash flow statement, specifically cash from operations. What was behind the big increase for deferred charges and credits?

Melanie Miller

That's mostly where -- the biggest thing there is that pension contribution.

Benjamin Wong

Got it. Okay. And as a follow-up, Henry, what kind of volume trajectory have you seen at the end of 2Q and entering third quarter?

Henry Theisen

We saw in the first quarter healthy volumes, which at the end of the first quarter, we talked about going to second quarter, we saw that same pattern. We saw that very late in the second quarter just slightly start to decrease and stay flat.

Operator

[Operator Instructions] We'll go next to Tim Thein with Citigroup.

Timothy Thein - Citigroup Inc

Just to clarify on the guidance. So going into the quarter, you hadn't assumed completion of the buyout of Dixie Toga, but now you are. Is that -- am I correct on that? So if you did, it adds, call it, $0.05 or $0.06 a share on a full-year basis, if our numbers are correct. So can you just clarify that in terms of what -- if you look at the change in guidance from last quarter to today, did the buyout of Dixie Toga come into play?

Henry Theisen

The buyout of Dixie Toga did not come into play, and given the timing, we expect the impact will be nominal in 2011. But our full year guidance does assume the buyout being completed in the month of July -- or the delisting in the month of July, and there's a little bit of a squeeze-out still that’ll come in early August. But our $2.08 to $2.18 includes the repurchase of the preferred shares in Dixie.

Timothy Thein - Citigroup Inc

Okay. And then just coming back on the, Henry, I guess for you, the food price inflation that you mentioned in the release is a potential drag on volumes. But then, you also commented on some new product launches as a positive factor in the second half of the year. I would think those 2 would be somewhat at odds. In other words, the food and HPC companies potentially throttle back on new products and innovation as they try and focus more on getting price passed through at the retail level. But can you comment or add any color on that in terms of what you're seeing in the pipeline in light of this inflationary backdrop?

Henry Theisen

When we enter these times of inflationary backdrop, what our consumer product companies, our customers, recognize is that packaging is a differentiator on the market shelf. And it's a way to differentiate themselves from other products. So we really don't see a real slowdown or a big change in direction from trying to launch new products, trying to get new packaging concepts into the marketplace. It is really a differentiator, and I think that a lot of our launches will help offset some of these volume concerns that we have.

Operator

We'll go next to Stewart Scharf with Standard & Poor's.

Stewart Scharf - S&P Equity Research

My question was basically regarding the new products. Would you be able to expand on that a little bit, what products? And going into '12, how much impact that would have on the mix? And I assume they're higher-margin products, and how you will be able to sell that considering the weak consumer demand?

Henry Theisen

A good example of some new products that we have coming out are related to the packaging of ketchup, for instance, in the Dip & Squeeze. It's a new packaging concept for condiments where can you not just give them away free at a fast food restaurant, but they also will be sold in a retail store. And they're easy-open. You can squeeze and get your ketchup out or you can dip the ketchup. It's a whole new packaging concept for condiments that we've launched. And we've been able to -- and what really allows us to go through and do this is we've been able to put in oxygen scavengers that double the shelf life. So it's quite a unique technological development to be able to put in that oxygen scavenger. And it's one of the things that really came out of the acquisition. When we put the 2 R&D groups together, we were able to add technology to their understanding of that product line. Another one would be FreshCase. Our launch, finally, after getting approval from the FDA and going through testing of a packaging concept that preserves the red color of meat in a vacuum package. And a vacuum package offers a lot of conveniences, a lot of extended shelf life. It offers a new way to go to market. It offers better economics for our customers. It fits the shelves better than the rigid tray, and we had our first minor sales where we have some sales now in the U.S. And it's kind of interesting, we also have expanding sales in Latin America, specifically in Chile. So those are 2 good examples of where material science drives new products and new concepts.

Operator

And at this time, we have no further questions.

Melanie Miller

All right. Thank you for joining us today, and we look forward to seeing you at conferences in September.

Operator

This does conclude today's conference call. We thank you for your participation.

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