Bemis Co., Inc. (BMS) CEO William Austen on Q2 2016 Results - Earnings Call Transcript

| About: Bemis Company, (BMS)

Bemis Co., Inc. (NYSE:BMS)

Q2 2016 Earnings Conference Call

July 28, 2016 12:00 PM ET

Executives

Erin Winters - Director of Investor Relations

William Austen - President and Chief Executive Officer

Michael Clauer - Vice President and Chief Financial Officer

Jerry Krempa - Vice President and Controller

Analysts

George Staphos - Bank of America

Anthony Pettinari - Citi

Ghansham Panjabi - Baird

Scott Gaffner - Barclays

Brian Maguire - Goldman Sachs

Adam Josephson - KeyBanc

Mark Wilde - BMO Capital Markets

Arun Viswanathan - RBC Capital

Chris Manuel - Wells Fargo

Jason Freuchtel - SunTrust

Philip Ng - Jefferies

Chip Dillon - Vertical

George Staphos - Bank of America

Debbie Jones - Deutsche Bank

Operator

Good day and welcome to the Bemis Company Hosted Second Quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Erin Winters. Please go ahead, ma'am.

Erin Winters

Thank you. Good morning, everyone, and welcome to our second quarter 2016 conference call. Today is July 28, 2016. After today's call, a replay will be available on our website, bemis.com, under the Investor Relations section. Joining me for this call today are Bemis Company's President and Chief Executive Officer, Bill Austen; our Vice President and Chief Financial Officer, Mike Clauer; and our Vice President and Controller, Jerry Krempa.

Following Bill and Mike's comments on our business and outlook, we will answer any questions you have. However, in order to allow everyone the opportunity to participate, we do ask that you limit yourselves to one question at a time with a related follow-up, and then fall back into the queue for any additional questions.

At this time, I'll direct you to our website, bemis.com under the Investor Relations tab, where you'll find our press release and supplemental schedule. In Mike's discussion of the financials, he'll specifically be referring to pages three and four of the supplemental.

On today's call, we'll also discuss non-GAAP financial measures as we talk about our performance. Reconciliations of these non-GAAP measures to GAAP measures that we consider most comparable can be found in the press release and supplemental schedules on our website.

And finally, a reminder that statements regarding future performance of the company made during this call are forward-looking and, therefore, subject to certain risks and uncertainties. Actual results may differ materially from historical, expected or projected results due to a variety of factors. Please refer to Bemis company's regular SEC filings, including the most recently filed Form 10-K to review these risk factors.

Now, I'll turn the call over to Bill Austen.

William Austen

Thank you, Erin, and good morning, everyone. As I reflect over the last few years of leading Bemis, I am proud of the progress we've made. Every day has been a critical step toward reshaping this company's culture toward high performance. A culture that's first passion for meeting our long-term objectives, while holding ourselves accountable. Ice-T and feel the change, and we've been seeing the results in our financial performance.

We've increased operating margins and ROIC. We've been still disciplined in product development and performance management, and in our capital spending process, just to name a few. We've wisely invested capital to support growth and efficiency. We've acquired two businesses with great strategic fit, and most importantly, we are not finished.

Specific to our second quarter, I view the financial results as just okay. Quarters have ups and downs, but our focus and drive at Bemis is to create long-term sustainable shareholder value. In our U.S. business this quarter, sales volumes were up approximately 1%, with a higher portion of sales from less differentiated products, a clear indication that our asset recapitalization program is helping us to be competitive in areas, where we hadn't been in years.

As we move ahead, we will continue to recapitalize converting assets that'll allow us to improve margins in our less differentiated business, while also delivering innovation. In our global business this quarter, sales volumes were also up approximately 1%, with particular strength in healthcare packaging.

Operationally, we made progress and improved sequentially from the first quarter, specifically at our expanded healthcare facility in Oshkosh, Wisconsin. As you recall during the first quarter, earnings lagged by $0.02, due to the learning curve associated with doubling the workforce. During the second quarter, we made operational progress in training new hires, but the expense of duplicative workforce required for training and waste from the learning curve continued, reducing earnings another $0.02. My view is that this full rate of expense will continue through the third quarter and we will come out of it during the fourth quarter.

Our team at the Oshkosh Healthcare facility is focused on creating quality products to meet customer demands and that will remain our priority in the short-term and long-term. Related to the operational issues in Latin America from the first quarter, as you recall, we didn't react to short-term order patterns in our rigid plastic Rigid Plastic business by properly reducing costs.

During the second quarter order patterns recovered, our cost structure was properly utilized, and there was minimal adverse impact to profit. Stepping back for a minute, over the last year our profits in local currency have been relatively untouched by the struggling Latin American economies. Our customers continued innovating high technology packages, and we've done a great job passing through inflation to our customers.

Now as consumers' disposable income continues to be stretched due to the impact of the prolonged economic environment in Latin America, our business is beginning to feel the effects. While our product portfolio serves basic needs for consumers, we've started to see a mix shift from higher price point products to those with lower price points. Yogurt is a prime example. While total demand for yogurt packaging in the quarter was strong, we are starting to see some customer shift to simpler style packages, instead of the high end pre-made cups for drinkable yogurt, we saw more demand for films using simpler, traditional packages for yogurt.

With the potential impact of this shift in mind, we took a hard look at the capacity in the region. The Emplal acquisition came with modern and efficient facilities that provide us the opportunity to consolidate production. Beyond the original Emplal synergy plan to close one legacy facility, we initiated a larger effort in which we'll close a total of four legacy plants in the region. We are taking action in order to maintain our leadership in the region and to ensure that we will meet our original target of 10% plus operating margins in our global packaging segment.

Latin America is and will continue to be an important part of our portfolio as the local economy recovers, our business will continue to be well-positioned with the right products, management team and asset base. A quick update on our most recent acquisitions SteriPack. Our teams have started working together to familiarize our businesses and learn from each other. We are finding the SteriPack business to be very strong from both an operational and leadership perspective.

Our teams will continue to work over the next year to qualify Bemis Films with our SteriPack customer base. In the interim I'm pleased that the acquired business contributed to second quarter earnings, so we're off to a great start. We will continue to build a combined Bemis Healthcare packaging business that is stronger, more customers centric and more profitable as we move forward.

Turning to the topic of guidance. We confirm our EPS range of $2.68 to $2.78. This considers today's currency exchange rates, the continued expense in global packaging related to the Oshkosh Healthcare facility, and our views of the balance of the year in Latin America. In relation to volumes in the business, my view hasn't meaningfully changed. In the U.S., I feel good about 1% plus for the full year. And in our global business, my view is that Latin America will be slightly up and the balance of the globe will average in the 4% range.

In summary, I remain very confident in our long-term health of our business, in our ability to adapt, and in our drive to create long-term shareholder value.

With that, I'll turn the call over to Mike for his comments on the financials.

Michael Clauer

Thanks, Bill, and good morning. BMS' adjusted diluted earnings per share for the second quarter were $0.67 per share, flat with last year. Currency translation decreased EPS by approximately $0.02 versus one year ago, primarily driven by currencies in Latin America that devalued against the dollar. From a total company perspective, gross margins was down during the quarter at 21.2%. About 30 basis points of this decline resulted from continued inefficiencies at our Oshkosh healthcare facility.

On a year-over-year basis, sales mix in the U.S. trended toward our less differentiated business, which is a natural outcome of the asset recapitalization program. Nonetheless, we continue to expect gross profit to improve over long-term.

Looking at slide three, some detail on U.S. Packaging. Sales dollars in our U.S. segment declined by 3.4% over the prior year. Unit volumes increased about 1% during the second quarter versus the prior year. The decline in sales dollars was driven by contractual price reductions to pass through lower raw material costs, which is neutral to profit, along with a lower sales mix from less differentiated products.

U.S. Packaging operating profit return on sales was 15.4% compared to 14.8% last year. About half of this margin improvement was mass related to resin pasture. As I've said before, we do not consider this mass improvement when judging ourselves against our long-term targets of 15% to 18% in this segment.

We will continue our strategic efforts to drive margins in the long-term regardless of what happens to raw material prices. The remainder of the improvement in margins this quarter was driven by manufacturing efficiencies from our asset recapitalization program. Our margin performance in the U.S. was a bit lower than expected, however, we continue to expect the full year 2016 to provide approximately 70 basis points of real improvement over the prior year, which is on pace toward our long-term targets.

Turning to slide four, and our Global Packaging segment. Sales dollars were up 4.4% over the prior year. Currency translation reduced sales by 12.6% driven by currencies in Latin America that devalued against the U.S. dollar versus the prior second quarter. The acquisitions of Emplal and SteriPack contributed about 7.7% increase in sales over the prior year. Excluding the impact of currencies and acquisitions, our global segment delivered organic sales growth of 9.3% this quarter versus the prior year, which reflects a unit volume increase of 1% along with overall selling price and mix increases.

Before turning to adjusted operating profits in Global Packaging, I will discuss the restructuring program we initiated this quarter. As bill mentioned, we looked extensively at our manufacturing footprint in Latin America and determined that we could close four facilities, which is more than the original synergy plan associated with our Emplal acquisition. The total program will cost between $28 million and $30 million through 2017. Approximately two-thirds of the total program costs are employee related and our primarily severance costs for the elimination of 1,100 jobs that will take place at the four facilities we are closing. When the program is over the net reduction in employees will be approximately 700 as we hire additional direct labor to support the transferred volume. The remaining one-third of the total program cost consists of a variety of other items including asset related costs, reinstallation costs and legal costs. From a cash flow perspective, approximately $10 million of the total program cost will impact 2016, less than $1 million flow through Q2 and the remainder will flow equally through the remaining quarters.

Beyond the program cost, we will also invest $10 million to $12 million of capital to effect these integrations which will be absorbed in our normal annual CapEx spend. Cost reductions from this program will be approximately $16 million, that total includes our original estimate of $7 million to $8 million related to the Emplal synergies. Adjusted Global Packaging operating profit return on sales was 8% compared to 8.1% last year. Currency translation negatively impacted operating profits by $2.6 million or about $0.02 of the total company earnings per share, compared to the prior year.

As Bill mentioned our Oshkosh healthcare facility pulled down earnings, another $0.02 during the second quarter due to continued operational inefficiencies that we had anticipated. Without that drag, Global Packaging operating profits would have been up nicely as a result of strong sales mix during the quarter.

Moving to Bemis consolidated results. Total company SG&A expense in the second quarter was $100.4 million as compared to hundred and $103.9 million last year. While recognize, inflation and currency can impact this line, over the long-term I continue to expect SG&A dollars to be flat. Specific to this year, I anticipate SG&A dollars be down on a year-over-year basis in the second half of the year. The income tax rate for the second quarter was 32.7% in line with our expectations of full year tax rate of approximately 33%.

Looking next at return on invested capital. In the second quarter, ROIC increased to 10.4% compared 10% last year in Q2. Current year ROIC would be slightly higher, if not for the expected near term impact related to Emplal acquisitions.

Simply put, investment capital has [indiscernible] calculation while a full year earnings and synergies have not. We continue to expect this metric to improve year-over-year toward our long-term goal of being in the upper quartile of our peer group. Operating cash flow for the second quarter totaled $100 million less than my expectation by $50 million due to the timing of collecting accounts receivable related to financing programs we have implement with our customers on contract renewals that will be recovered in Q3.

We are reducing full year cash flow from ops guidance to $425 million to $465 million due impart to the $10 million of restructuring. Our original expectation was that payables were delivered $50 million to $75 million of working capital improvement this year. I will reduce that expectation by $25 million for the current year. However, we will continue to push on this initiative and expect the difference to be recovered in 2017.

Turning to EPS guidance, we continue to expect adjusted EPS for 2016 in the range of $2.68 to $2.78, where we perform within this range will depend on currency movement in rest of the year, the speed of operational improvements at our Oshkosh Healthcare facility, volume and mix across our businesses, and the pace of implementing our restructuring program.

With that, I'll turn the call over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go ahead and take our first questions from George Staphos with Bank of America. Your line is open.

George Staphos

Hi, everyone. Good afternoon or good morning, depending on where you are. A couple of questions. First of all, Mike or Bill, can you talk a bit about why U.S. performance is maybe a little bit below your expectations if you had mentioned, I had missed it.

And then, second question, as far as Oshkosh, I seem to remember that you had assumed the inefficiencies would last the second quarter, and you'd be on a more normal plane, maybe not all the way back, but more normal in the third quarter. It sounds to some degree like that's been pushed back a bit. If that's true, why is that the case? Thanks.

William Austen

George, this is Bill. I'll take – I'll start with the Oshkosh healthcare piece first. We look at five pieces as being critical to that facility forward, manufacturing output, staffing quality of the product we produced waste and service levels. All of those metrics sequentially have improved from Q1 to Q2. Manufacturing output is up, we're staffed, quality continues to improve and we've implemented procedures that people sign off on the quality of the product before they move it to the next station. Waste continues to trend at a higher level than we had anticipated moving out of Q1 to Q2. And, our service levels are continuing to improve.

We were overly aggressive when we thought we could move the needle faster coming out Q1 to Q2. We were not able to achieve those rates. So it's being pushed through to Q4. However, all of those five key metrics that we look at are continuing to improve and get better as we go forward.

The first question you had was – was there anything in U.S. packaging that really caused us concern in Q1 – Q2 rather. The answer is no. We don't look at quarter-to-quarter basis. If we look at our operating profit – if we look at our margin improvements on a full year basis year-to-date, we've improved operating margins there 80 basis points to 90 basis points for the first half of the year. We don't look at things on a quarter-to -quarter basis that way. The business is moving in the direction that we have anticipated. So, we don't see any unusuals there happening in Q2.

Operator

And we'll go ahead and take our next question from Anthony Pettinari with Citi. Your line is open.

Anthony Pettinari

Good morning. Just following up on U.S. packaging. I think you had two customer losses that you lapped in the quarter or maybe early 3Q. Can you just remind us the timing of that? Does your outlook still expect kind of 2% volume growth in the U.S. in the second half and if you've seen any kind of inflection point early in the quarter.

William Austen

Hi, Anthony, this is Bill. Yes, we lapped those two losses in the quarter and as I said in my remarks, we see U.S. packaging 1% plus growth in the back half of the year. What we've talked about at the start of the year was the second half would always be better than the first half and that view has not changed. We will see a better second half in volumes than we saw in the first half. And the first half volumes were plus the half in U.S. packaging.

Operator

And we'll go ahead and take our next question from Ghansham Panjabi with Baird. Your line is open.

Ghansham Panjabi

Hey, guys. Good morning.

William Austen

Morning.

Michael Clauer

Morning.

Ghansham Panjabi

Hey, I guess, switching to Latin America and the announced restructuring, does that lower your production footprint in the region, or you just consolidating towards more efficient facilities? I guess what should we take away from your long-term view on the region with this announcement. And also are you shedding any customers as part of that?

William Austen

Sure. George, this is Bill. We step back for a minute, and we looked at the – the overall situation in the region. Unemployment 11% a year ago it was 8.5%, inflation 9.5% versus about 9.5% a year ago. GDP at negative 3.5%, the prolonged economic environment caused us to step back and take a look at what was going on in the region.

What we're doing is we're taking out less efficient, smaller, older legacy facilities that we had within the Bemis portfolio now that we've acquired Emplal, which has got newer, bigger more modern facilities along with more modern equipment. So all we're doing is, taking out older legacy Bemis plans, consolidating and moving that volume to the newer more efficient facilities at Emplal that we acquired. We're also putting a little bit of a footprint onto one of the newer Emplal plants to absorb some of the equipment that we will move. So, no losses of customers, no loss of volume, much more efficient operation when this is all over, and we're doing this to continue to be the leader in the region and to be stronger as we move forward.

Operator

And we'll go ahead and take our next question from Scott Gaffner with Barclays. Please go ahead.

Scott Gaffner

Thanks. Good morning.

William Austen

Hello, Scott.

Scott Gaffner

Mike, just wanted to talk about the increase or the decrease in working capital improvements for 2016. Can you give us a little bit more details what's going on with the payables there and what gives you comfort that you get it back in 2017?

Michael Clauer

What we have done, Scott, is we have implemented basically supplier financing for our kind of Tier 2 and Tier 3 suppliers. And I just believe the traction of getting that implemented is not at the pace that we originally anticipated. I do not at all believe the pace, the targets were unachievable or unrealistic, is just the pace of getting the implementations made.

Operator

And we'll go ahead and take our next question from Brian Maguire with Goldman Sachs. Your line is open.

Brian Maguire

Hey, good morning, guys, thanks for taking question. Just a question on the negative mix in U.S. Packaging, you alluded to – and I take it to me that was related to the asset recapitalization program you've been doing. So it sounds like the volumes have been growing a little bit faster in some of the less differentiated markets, how does that impact margins overall and as you think about the capital investments, does that lead to a drag on return on capital down the road as – you have to try and sell more or the less differentiated products that are a little bit lower margin than the overall business? Thanks.

William Austen

Now we take a longer term view on that, so if we look at our – if we look at our margin as I said on a year-to-date basis this year, it's 80 basis points to 90 basis point improvement in U.S. Packaging. It's tough to look at it at a 19 day window, you have to take a longer view of where those margins are headed and the visibility we have with our innovation pipeline, projects that we have in place that we're recapitalizing on today, all of our projects that go into the recap program have to have a minimum 15% return on invested capital over a five-year average. So, nothing has changed in our view, nothing has changed in our process, we continue on the same track that we've been on.

Operator

And we'll go ahead and take our next question from Adam Josephson with KeyBanc. Your line is open.

Adam Josephson

Thanks very much. Good morning, everyone. Bill, just one on the margin expansion. So, you've obviously generated substantial margin expansion over the past year and a half, but over that period, your EBITDA is flat. So what do you focus more on margin expansion or growing EBITDA and why?

Michael Clauer

This is Mike. I'll take that question. Clearly, our primary focus is EBITDA. We want to grow EBITDA dollars, in fact from an internal metric perspective, we have added that, so in addition to ROIC and return on sales, we now measure and compensate based on EBITDA. So, it dollars so that's the future and I hope that kind of answers your question. You want both, but from an overall perspective, we would much rather see EBITDA dollars increasing.

William Austen

Adam, I'll just add on to that, why didn't we make the shift. We had ROS as a metric in our incentive plan a year ago, because we wanted to improve the quality of our business, which is get it back to the margin rates we were at several years ago. We are succeeding to do that, now we've put EBITDA dollars as part of our incentive plan.

Operator

And we'll go ahead and take next question from Mark Wilde with BMO Capital Markets. Your line is open.

Mark Wilde

Good morning Bill, Mike, and Arun.

William Austen

Good morning.

Michael Clauer

Hey, Mark.

Mark Wilde

Just a couple of things on Brazil. One, can you talk about the business impact of customers going to these lower cost kind of simpler forms of packaging. Because it seems like one of the things you've been doing down there is trying to move people in the other direction to kind of higher value-added and then if you could also just talk about sort of any lags in terms of really implementing restructuring down in Brazil. I don't know what the rules are in terms of severance and things like that?

William Austen

Sure. It's a good question, Mark. On the rigid side of things, we are – we're the leader in rigid packaging, whether it's the less differentiated type of material or the higher value-add, the drinkable yogurt cups for instance. We added that to the portfolio. We've always been there in the less differentiated product as well. So, it's really just shifting the mix of higher value-added came down because consumers valuing down. We just made more of the less differentiated type of materials. We still had a very good quarter from yogurt perspective. So we don't see that as being a problem.

Mark Wilde

Any lags of implementing the restructure...

William Austen

Oh, I'm sorry, the lags of implementing.

Michael Clauer

No, regulations are pretty [indiscernible].

William Austen

They are very, very open and clear and there should be no lag.. It's already phased out and scheduled to go.

Operator

And we'll go ahead and take our next question from Arun Viswanathan, your line is open, with RBC Capital.

Arun Viswanathan

Hey, thanks. Good morning. I guess, wanted to understand you are making some changes to your Outlook. So, what gives you the confidence, maybe you can just differentiate between those things under your control, both in U.S. and Global Packaging versus your innovation pipeline. If you were to look at U.S. packaging, if that accelerates from the 1%. If you get into the mid-single-digit range, how much of that is under your control and how much of it is market dependent and similarly on the Global Packaging side, how would you parse that out?

William Austen

Arun, you're questioning the volume, going forward?

Arun Viswanathan

Correct. Mainly volume.

William Austen

Okay. Yeah. We have a very robust pipeline at this point of projects that are customer driven on innovation. And we have a pipeline of recapitalization projects that's very robust and already in play. So we're confident in our second half volumes being better than first half as we've said and as we go forward those recap projects just continue to allow us to be more competitive in the non-differentiated product. So, we have visibility to volume growth there as well.

Operator

And we'll go ahead and take our next question from Chris Manuel with Wells Fargo. Your line is open.

Chris Manuel

Good morning or good afternoon, folks. Thank you for taking the question. I kind of wanted to follow-up on the kind of business recapitalization process and where you are in that process, but kind of as a transition into that I mean your volumes got better here at least in North America got better 1Q – 2Q versus 1Q, so it looks like you are seeing some modest acceleration. And I guess, the way I'm coming at this is how are you doing some of the business recap stuff is it mainly as products come up for renewal, and it's a new contract or you in fact kind of going back looking at some of the business you have today saying, hey, let's go out and extend some contracts and maybe try to take some cost out of manufacturing and up to your things in the process, how are you doing that and then how far in the process are you with respect to you addressed how would I think about it, how much of the portfolio you've addressed with that?

William Austen

Right. Hey, Chris this is Bill. The recap program is completely driven by ourselves of the assets we have in place today. We know what the age of the equipment is, how it runs, the waste it creates, the length, the time it takes to change over. That's all within our preview, we have that and that's how we recap. We have volume running across those machines today if we can put in an asset that takes one to take out two that's what drives the asset recap program. It's not contract driven, it's not contract specific, it's asset specific.

Michael Clauer

And then, he asked how far we're along in the process [indiscernible].

William Austen

Well, we're phasing in, in overtime, Chris. We have 27 plants in the network in North America. And there is a lot of assets in those plants that – a lot of opportunity for us to continue to push forward on.

Chris Manuel

That's helpful. Thank you.

Operator

And we'll go ahead and take our next question from Jason Freuchtel with SunTrust. Your line is open.

Jason Freuchtel

Hey, good afternoon. Can you quantify any benefits from innovation you saw in the quarter, and how much of your volume growth expectations are driven by innovation in the back half of the year in the U.S. Packaging segment? And then lastly, do you still expect to generate higher profitability in 2017 from implementing pricing analytics?

William Austen

Sure. Jason, for the first part of your question, when we look at our two segments, we would see Global Packaging as where the innovation would have come from in the quarter, we had some good mix there. In our U.S. business, that was really more so a function of asset recap that help to bump up margins a little bit. Second piece of your question was? Sorry, can you give us a second piece of your question again, Jason?

Jason Freuchtel

Sure. Do you still expect to generate higher profitability in 2017 from implementing pricing analytics?

William Austen

Jason, this is Bill. Pricing analytics is a long-term – a long-term view. It will – we will start to see the benefits of that in 2017.

Jason Freuchtel

Okay. Great. Thanks.

Operator

And we'll go ahead and take our next question from Philip Ng with Jefferies. Your line is open.

Philip Ng

Hey, guys. I guess, packaged food volumes for the U.S. has generally been pretty muted for some time now. With growth coming more from the fresh and organic side of things, particularly from some of the smaller private label guys or co-packers, are you doing anything different to target this market and with some of the investments that you've made, what allow you better service customer base? Thanks.

William Austen

Yes, Phil, we're, part of the asset – not part of, but asset recapitalization allows us to attack that pieces of the market, the afresh trend if you will, because it's usually shorter runs, quicker changeovers are required, better service to customers and these newer assets, clearly help us do that, which the older legacy facilities just couldn't handle.

Operator

And we'll go ahead and take our next question from Chip Dillon with Vertical. Your line is open.

Chip Dillon

Yes, hi. Good morning, good afternoon. First question is really dealing with the reduced working capital sourcing this year, and wanted to know how – I think you mentioned it was mostly inventory related, but maybe part of it was receivables. But could you talk about how that has gone from being down $50 million to $70 million to just down $25 million this year?

Michael Clauer

Yes. I can answer that. As I mentioned it, the target was to reduce improved days payable outstanding, which would add $50 million to $75 million of working capital benefit in the current year. We are absolutely doing that, however not at the pace that we had expected. And so I think we'll get $25 million to $50 million of it not $50 million to $75 million, but we still are going to target getting the entire $50 million to $75 million range. It will just spill into $70 million.

Chip Dillon

Okay. Got you. And also just a quick follow-up if I could. Could you -you mentioned, I know in the first half of the year, there were sort of a $10 million per quarter headwind from the issues with Brazil and also in the new plant. Did you say that those headwinds would continue into the third quarter? I think you did, but could you just reiterate how much of an impact you think you'll get in the third quarter? And does that, it should have been done by then?

William Austen

Yes, Chip. This is Bill. You were correct on the first quarter. However, we don't see the headwind from the Latin American piece of that. We only see the headwind from the Oshkosh healthcare facility piece going through Q3 and minimizing it in Q4.

Operator

And we'll go ahead and take our next question from George Staphos with Bank of America. Go ahead.

George Staphos

Hi, everyone. And apologies, before I took two questions. That was in two question from the last conference call. I guess, my next question and Bill, I wasn't trying to say or ask whether you are concerned at all, about U.S. packaging in the quarter, but I did think, I heard you say, that performance was less than what you had anticipated. So, if I was correct in that and that's the right premise. What was trending a little bit, below your expectations, recognizing again 90 days isn't an eternity?

William Austen

Yeah. George. It's just might being built, where I think, these guys can perform better, they did a nice job, but hey, nice doesn't cut it, they have to do better and I expected them to do better. We don't – as you said already, we don't measure things in 90 day increments, we look over the long-term, but I thought those guys could have performed at a little bit higher pace.

George Staphos

Fair enough.

Operator

And we'll go ahead and take our next question from Adam Josephson with KeyBanc. Please go ahead.

Adam Josephson

Thanks. Bill, just one more on emerging or merger market strategy broadly. I mean, are you concerned at all that you could have something similar happened in another of your emerging markets, in other words the economic conditions in another market were to deteriorate and need to have to do another restructuring. I mean, what gives you confidence that you have the right strategy in emerging markets in light of this development?

William Austen

Right. Adam, if you look at our Brazilian footprint or Latin American footprint, it's pretty big, right. If you go to the other emerging markets, we have the small footprint, where we're much more contained, much smaller, more focused on some end markets in the other emerging markets. So, Brazil was just a big exposure, we had a lot of older legacy facilities in and around Brazil.

In our other emerging markets, we have much more newer, more modern facilities, and they're much more efficient. So, this was our opportunity to continue to be the leader in that region of the world. We're continuing to do well, we're continuing to do all the things we should be doing down there, now is the time to restructure as we looked at what the longer-term picture is going to look like for that economy.

Operator

And we'll go ahead and take our next question from Debbie Jones with Deutsche Bank. Your line is open.

Debbie Jones

Hi. Thank you for getting me in the queue here. My first question is, Mike, what gives you the confidence that you can get that payable benefits in 2017, and then can you just talk about the potential for some benefits from inventory as well in 2017, I think that you've been talking about the SAP program driving that?

Michael Clauer

Yeah. What gives me the confidence is the discipline we're instilling in this company. This is ours to get. There is absolutely no reason to get it. We have other packaging companies that we can look at their metrics and they have them, so we're not any different than anybody else. So that's what gives me the confidence and the fact that we're going to stay focused on it relentlessly.

As far as 2017, what we've talked about in the past is, as we get more and more of our facilities on our common ERP platform. We are also introducing demand forecasting and scheduling that is starting to get introduced right now, and the intention of those systems processes are really to if you think through it's really to reduce with. So, it's really to get better at forecasting and scheduling your plants that allows you to kind of move your lead times down, which lead to a reduction of work-in-process.

Operator

And we'll go ahead and take our next question from George Staphos with Bank of America. Please go ahead.

George Staphos

Thanks. Hi, guys. As we think about the three broader categories that are driving, we expect improvement and return for you. So, we have the recap program, we have innovation and we know we have pricing analytics. Is there way to recognizing that, you don't have discrete stoppages and beginnings with these programs per se. So, way to maybe tell us where you're on the timeline for each of them. So, the recap program is a making this up now?

A third done and you have another two thirds to go and similar type of discussion on the other programs related to your longer-term goal. And then relation back to – I think maybe it was Adam's question on the volume with innovation kicking in why aren't you seeing closer to the 2% goal I think you had had for the second half and looking out? Thank you.

William Austen

Yeah, George. We've always had a history of innovating, right. And we've always innovated at what we would call the high-end the high barrier end of things. What's occurring now is the company continues to change and move forward and drive toward high performances, the whole process or recapitalization and innovation all start to blend together. The recapitalization projects allow us to bring innovation to customer that we hadn't dealt with before. Innovation is now being driven across the big middle of the packaging space for us because we're dealing with customers that we hadn't served for the last three years four years, because we walked away from business because the margins were too low. Well now, we're back in there, bringing innovation to bakery customers. We're in there bringing innovation to health and hygiene customers that we had not served for the past few years. So, we're going to start to see a big blending of these three buckets or the two buckets of innovation and recap.

And pricing analytics we're just starting on that journey, we're just getting into that now. We're going to start to see those impacts helping us in 2017. But as far as innovation and recap, they are all co-mingled as we're going forward here, because one feeds the other.

Michael Clauer

George, the second part of your question, I think may have been about volumes and just to reconfirm in the U.S. our view is still that the full year for 2016 would be at that one plus range, which to your point means heavier in the back half of the year. So, hopefully that helps clarify.

Operator

And we'll go ahead and take our next question from Mark Wilde with BMO Capital Markets. Your line is open.

Mark Wilde

Yeah. Bill I want to just come back to comment you made about the global volumes were you said Brazil was going to be weak, but you get 4% in the other pieces of the global business, but I just wonder with Brazil being such a large part of the global business. Can you really hit the kind of 4% global overall target that you've set out there, kind of now I think the 2019 if Brazil remains weak?

William Austen

We think we can Mark, because of obviously organic growth in some of the other areas is going to be higher than that 4%. We've got some really nice, very significant growth in our healthcare business and we're going to continue to push on that and that's on the organic side of things in the double-digit range. So, we think we can offset that – some of that weakness in Latin America with much higher growth rates in some of the other segments.

Mark Wilde

Okay. And if I could there is a follow on. Could you just talk, maybe Mike, about sort of where you are at with acquisitions right now? I think in the past you have talked about sort of BNDN regions and you've talked about Central and Eastern Europe and you've been growing I think over in China. So, if you could just maybe update us on where you stand in that process?

William Austen

Yeah. We still have sort of better term of good pipeline. We've got some interesting things we are working on directly, we are aware of some kind of interesting type investments that could be coming to the market later this year. It's same old markets. It's still in Eastern Europe. In the U.S., looking at things that could have a lot of synergies with them. Not a lot going on right now down in Latin America. I mean I think the way we look at it, we're not going to tax a management team and I think the people or groups down in Latin America have the hands full with restructuring and the integration of Emplal also it would not be an [indiscernible] best interest or those to probably add anything there for the next year or so. So, again I think things continue to move forward. I'm excited about some of things that they are in – that we're looking at but nothing imminent at this point in time.

Operator

And we will take your next question from Arun Viswanathan with RBC Capital Markets. Please go ahead.

Arun Viswanathan

So I just wanted to understand make sure I got this right. So in the second quarter, there was a negative price mix from the contractual pass through of lower raw materials in U.S. packaging, has that kind of fully flowed through? I know resin costs were actually up in Q2 on an index basis, I guess, what you expect in Q3, Q4 if resin is flat or what you would be modeling?

William Austen

We don't forecast the resin pass through numbers on a go forward basis, Arun. So it'll shake out to be what happens during each of those quarters as it's comp versus the prior year. So to answer your question on second quarter, in the U.S., the resin pass through was a couple of points on that top line revenue just passing through contractual differences versus the prior year.

Arun Viswanathan

But it didn't have any effect on income then.

William Austen

Correct, you're correct.

Michael Clauer

And that's how we would look forward as if you're modeling, as you can assume whatever you want with resin. Our assumption and our experience has been that we don't get hurt or helped with that pass through.

Arun Viswanathan

Great. And then on the global side, similarly it was just the sales of the lower sophisticated products, I guess, that affected to the sales, the top line and...

Michael Clauer

In global...

Arun Viswanathan

...impact

Michael Clauer

Yeah, in global, there is a few things going on there. So if you pull out the currency effect, which decreases your top line, you have a positive effect from acquisition and you're left with organic growth, price volume mix positive 9%. And that's really a couple of things, you've got unit volumes up 1%, you've got some inflation that passes through, and then we're left with positive price mix in the global business during the second quarter, and you can think of that a good chunk of that is going to be your Healthcare business that was quite strong in the quarter.

Operator

And we'll go ahead and take our next question from Adam Josephson with KeyBanc. Please go ahead.

Adam Josephson

Thanks a lot for taking my follow ups. Mike just one on free cash flow, it's been – it's fluctuated a fair bit over the past three years or four years, obviously and have a conversion ratio as well as has fluctuated quite a bit, net income to free cash flow, what you think to the normalized -normalized free cash or to the normalized conversion ratio is and why?

Michael Clauer

Well, I mean, we've got a very specific target at working capital and that is what we're trying to get to it. I look at this year $425 million, $450 million based on current year kind of guidance and EBITDA, would be where, I would expect it to be in the group, but we still feel we've got some improvement opportunities, but I'd like to get to the point, I mean, first of all I love it when we start growing, and there will be a little bit of working capital load, but I'd like to start assuming the way we should think about it is, EBITDA minus kind of and a cash taxes and cash interest is what you should expect from us. I hope that helps answer your question.

Adam Josephson

Sure. Thanks, Mike. And just one last one on resin appreciating that fluctuations and resins don't have a meaningful impact on your EBITDA, do you have a view as to what impact the additional polyethylene capacity that's being added in North America will have on domestic polyethylene prices overt thee next year or two years?

William Austen

Adam, this is Bill. This is just my view. I don't think there is going to be any impact downward on polyethylene prices in United States from the added capacity. Just my view, these guys do a great job of managing that capacity around the world, taking out older assets that are less efficient, running a more efficient assets and maintaining that balance between demand and supply.

Adam Josephson

Thanks a lot, Bill. Appreciate it.

William Austen

Yeah. You're welcome.

Operator

And we'll go ahead and take our next question from George Staphos with Bank of America. Please go ahead.

George Staphos

Hi, everyone. Last one from me. Just as we think about the impact of the new ERP system, Mike, is any of that showing up in your working capital performance this year? How would that phase in? And recognizing that there is a risk of double accounting here, what kind of benefits do you expect to get from the ERP system in terms of working capital when the systems all implemented in the next couple of years. Thank you and good luck in the quarter.

William Austen

First of all, we're getting no benefit. Right now from the implementation of the ERP platform, I think last year, we got some inventory improvement. I think that was just get rid of some bad behaviors and I really haven't given a number yet going forward, but what the people are doing the work, the people that we brought in new employees that have done it in other places, truly believe that they can get 20% to 25% of the work in process out over a period of time. And so it's probably $50 million, $75 million, $100 million that would start coming in latter part of 2017, into 2018 and 2019.

Operator

And we'll go ahead and take our next question from Jason Freuchtel with SunTrust. Please go ahead.

Jason Freuchtel

Hi. Thanks for taking my follow-ups. Have you seen any incremental business wins recently as a result of your new Innovation Center or how would you characterize the quantity of volumes that have – that have benefited from your Innovation Center, and does that Innovation Center serve customers, both in the U.S. and Global Packaging segments?

William Austen

Yes. Jason, the tail end of that first, it's a global center. We've had customers from every region of the world, come and collaborate with us in that facility. Since the facility has been open, we've had over 200 collaboration sessions with customers in that facility either using our labs, looking our equipment, doing some things differently, having ideation sessions. We – some of the recent wins that you may have seen in the marketplace is a flexible standup pouch for salad dressings that are single-served, on the go convenience type of products.

All of the protein snacking that you might see out in the marketplace today that incorporate protein, whether it comes from cheese, processed meat, or nuts and dried fruits, those have all been innovated from our center. Some of the food service applications that we've had for the food service industry for cook-in types of products have been coming out of the Innovation Center, so I mean I could go on and on. The Center is at the heart of what we do, which is focusing on the customer, bringing the customer in, helping them innovate their products, so they can get their brand off-the-shelf faster than their competitors.

Jason Freuchtel

Okay.

Operator

[Operator Instructions] And we have no further questions at this time.

William Austen

Excellent. Thank you, all for joining us today. This concludes our conference call.

Operator

And that's concludes today's program. Thank you for your participation. You may now disconnect.

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!