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Executives

Melanie E. R. Miller - VP and Treasurer

Gene C. Wulf - Sr. VP and CFO

Henry J. Theisen - President and CEO

Analysts

George Staphos - Bank of America

Ghansham Panjabi - Wachovia Capital Markets, Llc

Tim Thein - Citigroup

Claudia Hueston - JPMorgan

Christopher Manuel - Keybanc Capital Markets

Reik Read - Robert W. Baird

Ross Gilardi - Merrill Lynch

Alton Stump - Longbow Research

Mark Wilde - Deutsche Bank

Bemis Company, Inc. (BMS) Q2 FY08 Earnings Call July 29, 2008 10:00 AM ET

Operator

Good day, everyone. Welcome to the Bemis Second Quarter 2008 Earnings Release Conference Call. This call is being recorded. For opening remarks and introductions, I will turn the call over to the Vice President and Treasurer for Bemis Company, Ms. Melanie Miller. Please go ahead.

Melanie E. R. Miller - Vice President and Treasurer

Thank you and good morning, everyone. Today is July 29, 2008. 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 performance. 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, consumer buying trends, our ability to pass along increased costs in our selling prices, 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, 2007.

Now I will turn the call over to Gene Wulf.

Gene C. Wulf - Senior Vice President and Chief Financial Officer

Thank you, Melanie, and good morning everyone. Today Bemis reported second quarter diluted earnings per share of $0.46. This result is within the upper range of our previous guidance announced last April of $0.44 to $0.47 per share, which reflected our anticipated results given the current environment of tempered demand and announced increases in raw material costs.

Since that time, there have been several additional dramatic announcements of raw material cost increases in May and June. The financial impact of such increases will not be reflected in our cost of sales until the third quarter when the finished product, which has been made with the higher cost materials, has been shipped.

This quarter's results of $0.46 per share compares to $0.47 per share in the second quarter of 2007 and is 10% higher than the first quarter of 2008. The tax rate for the second quarter of 2008 was 37.2%, which is close to the rate used in the second quarter of 2007 of 37.3%. Our current estimate for 2008 tax rate is 37.2%.

The 2008 earnings per share are benefiting from a lower number of outstanding shares compared to the previous year. Weighted average shares outstanding decreased by almost 5 million shares from the second quarter of 2007, as a result of an accelerated share repurchase program for 4 million shares in August of 2007 and an additional 1 million shares repurchased during the first quarter of 2008 as part of an annual 10b5-1 program. The 10b5-1 program was established several years ago in an effort to offset the dilutive impact of stock award programs.

As you are well aware, the U.S. economy continues to be very sluggish. We are beginning to see somewhat of economic pressures on the European economy. Consumer continues to feel pricing pressure on the family budget as food and energy costs do not appear to be showing much relief. We are now beginning to see other costs impact the family budget with the pass through of costs related to minerals, metals and distribution. This expanding pressure on the family budget is impacting the families purchases of other nonessential goods.

Last year, we discussed what we call the destocking of the pantry. The consumer is still very careful. As a result, we continue to see some slower consumer buying trends in certain markets. For example, this year's cool and wet weather throughout North America has adversely impacted consumer demand for certain products. Sales of beverages and summer picnic foods have declined the spring and early summer due to this cool and wet weather.

Moving on to the details of this quarter, second quarter net sales for Bemis increased 6.3% from the second quarter of 2007. Excluding the benefit of currency, net sales would have increased 1%.

Flexible packaging net sales increased 7.3% compared to the second quarter of 2007. Currency benefits provided 4.9% sales growth. The remaining 2.4% growth was driven primarily by increased sales in markets representing 67% of our flexible packaging net sales. The following net sales changes by market exclude the impact of currency.

Our largest market for flexible packaging, meat and cheese, represents nearly 30% of flexible packaging net sales. Bemis net sales of packaging to meat and cheese markets increased over 4% compared to last year's second quarter, driven primarily by volume growth. We are pleased with the commercialization of new business over the past year, and the interest we are seeing in both North America and European customers in new products.

Packaging sales to dairy and liquid markets, representing about 8% of flexible packaging net sales, recorded strong double-digit growth with increased sales volume from condiments, yogurts, and edible fat packaging in both North and South America.

Dry food market sales grew nearly 10%, driven primarily by improved price and mix. Dry food markets include rice, baking ingredients, cereal and coffee. Recent trends in single service items such as stick packs and one cup coffee packaging has incorporated many of the packaging technologies that Bemis offers. Dry food represents about 6% of flexible packaging sales.

The bakery market represents about 4% of our segment sales, and enjoyed a healthy double-digit increase over last year's sales levels. Products sold in this market are predominantly polyethylene based. In this category, we saw a nice volume growth, coupled with substantial price mix increase.

Net sales to pet product markets also increased about 2%, reflecting the net impact of lower unit sales volume, offset by improved price and mix. Pet products makes up about 3% of flexible packaging sales.

Health and hygiene market sales were up over 6% due to improved price and sales mix. This represents about 11% of flexible packaging net sale.

Medical product packaging now represents about 7% of flexible packaging sales, and recorded sales growth of nearly 4% in the second quarter. This increase was driven by price and mix improvements as volumes for the quarter were about equal to the second quarter of 2007. In this market, we are pleased to see the volume at this level since the second quarter of 2007 was the last quarter for orders in advance of the plant move into new facility in Northern Ireland.

We spent the summer moving equipment into this new state-of-the-art medical packaging plant and re-qualifying products for our customers. In anticipation of the move, many of our customers preordered larger than normal quantities for the second quarter to stock up in advance of the transition into the new facility. To have matched that higher volume level this year is a sign of strong demand in that market.

These net sales increases were partially offset by decreases in sales to confectionery and snack markets, as well as multi-pack market. Confectionery and snacks markets represent about 8% of flexible packaging net sales. This market has been weak for a number of years now, and while net sales decreased about 4% compared to last year, we are encouraged by the flattening of the volume price mix drivers and hope we will soon begin to record year-over-year growth in this market category.

That sales for multi-pack markets represents about 5% of flexible packaging sales, and we are severally impacted by lower consumer demand for bottled water during this cool wet spring. Historically, this market has enjoyed double-digit volume growth. However, 2008 may be a pause in that trend since high inventory of multi-pack market products may reduce the customers' demand for new packaging throughout the year.

In our pressure sensitive materials business segment, net sales for the second quarter of 2008 increased 1.6%. Excluding the impact of currency, net sales would have decreased 5.6%.

Looking at specific pressure sensitive product markets, net sales of our label products declined 6% due to a general weakness in our European label product sales. Our North American label products business is flat in spite of the challenging competitive environment we face in that market.

Our graphic products reported healthy volume growth that was more than offset by a move to lower price alternative product offerings. Our technical products, down low double digits, continue to be impacted by a change in sales mix and a general slowdown in the U.S. housing and industrial markets.

Moving on to gross margin as a percent of net sales, we reported 17.6% for the second quarter of 2008, a decrease from 19.2% in the second quarter of 2007, but a 40 basis point improvement from the first quarter of 2008. After the second quarter of 2007, Bemis faced lower volume levels reflective of a slowing consumer economy.

Spending for SG&A expense during the second quarter was in line with the previous quarter and previous year. SG&A expenses as a percent sales decreased as somewhat higher selling prices and good cost management impacted both sides of the equation.

Other costs and income include $8.7 million of financial income, about 40% of which represents interest income from cash balances held. The rest of the financial income reflects fiscal incentives at international locations.

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

With regard to segment performance, operating profit as a percent of net sales was lower than last year's second quarter level, due primarily to the impact of a weaker economy and a rising cost trend for manufacturing inputs.

For flexible packaging, we recorded $88.9 million of operating profit for the second quarter of 2008. This equates to 10.9% of net sales. Currency translation benefits added about $2.9 million to the operating profit. Last year we reported $93.6 million of operating profit for the second quarter or 12.3% of net sales.

Our operating margins have been roughly at this 11% level for three of the past four quarters, as we have faced unexpected volume declines, believed to be the result of the impact of higher energy and food costs on the family budget, followed by substantial increases in raw materials.

While the cost increases will continue to put pressure on margins until there is a period of stability, flexible packing volumes appear to be more stable in 2008 and our cost take-up programs are delivering hard savings to offset higher energy, shipping and supply costs. The pace and magnitude of raw material cost increases will be a significant factor in our ability to grow operating margins in the second half of the current year.

Operating profit in the pressure sensitive materials segment was $9.1 million or 5.5% of net sales, compared to $10.2 million or 6.2% of net sales for the second quarter of 2007. Reduced sales of high margin technical products, coupled with a negative change in sales mix for graphic products have lowered operating profit in this segment.

Our technical products were generally industrial-adhesive applications sold to customers with exposure to the housing and automotive industries. With weaknesses in both of those sectors this year, orders have slowed for our products.

Turning now to debt and cash flow, we paid down about $10 million of debt this quarter. But debt levels are still above the outstanding debt levels of December 31st. Our outstanding debt increased during the first half of 2008 primarily as a result of higher working capital balances and the purchase of 1 million shares of Bemis stock.

Debt to total capitalization, calculated as total debt plus deferred taxes plus equity, decreased as of June 30th to 32%. This compares to 32.9% at last year and year-end, and 33.4% at the end of this year's first quarter. Normally, we would have paid down this ratio with cash flow over the past 12 months. But we used $145 million during that period to repurchase 5 million shares of Bemis common stock.

Cash flow from operations for the second quarter of 2008 was $72.4 million, an increase from the first quarter, but lower than the strong cash flow of $115 million achieved during the second quarter of 2007. The difference from last year to this year is primarily driven by increased levels of working capital. Higher inventory unit prices and quantities, along with higher accounts receivable due to higher selling prices, has increased our working capital.

Depending on the timing and magnitude of future raw material cost increases, our cash flow for the total year may be adversely impacted by this higher cost, which could result in cash flow levels below the record levels of 2007. We continue to expect 2008 capital expenditures to be in the $125 million range, well below the levels of the past few years.

As we move into the second half of the year, the headline remains the same: soft economy and higher input cost. As a result, we are taking the opportunity to slightly reduce our earnings per share guidance for the total year from the range of $1.78 to $1.88 to a somewhat narrow range of $1.75 and $1.83. We are comfortable with this range given the current backlog and expectation for volumes for the remainder of the year, and our aggressive efforts to recover cost of these increased material costs.

This estimate assumes that all the cost increases that have previously been announced by our suppliers are implemented, but does not anticipate incorporating any unannounced raw material price increases. Our guidance for the third quarter is $0.42 to $0.46 per share, reflecting the normal lag time to pass along offsetting selling price increases.

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

Henry J. Theisen - President and Chief Executive Officer

Thank you, Gene, and good morning everyone. I probably don't have to talk about the resin market this quarter because if we follow our industry at all, you've seem the headlines. Resin cost are up dramatically, not just one or two resins, but every one of them. This would include high performance resins that have typically been more price-stable such as nylons, polyesters, polypropylene, EVAs, EVOH and plastomers. But I do think it is important to put those resin increases in the context of Bemis business portfolio.

Last quarter we talked about the fact that polyethylene had ultimately remained neutral during the first quarter. We also mentioned that we experienced first quarter cost increases in many other important raw materials, including paper, adhesives and numerous specialty resins, which are not often mentioned in the headlines. This did give us a chance to catch up with our selling prices in certain businesses during the second quarter. In response to these new increases, our business teams have diligently implemented necessary price increases and achieved margin improvement from first quarter levels.

Beginning in May, the first of two dramatic raw material cost increases were announced. The May increase of 20 to 25% was followed in June with another 25% increase. In the light of such dramatic price increases, the importance of prompt implementation of selling price adjustments is absolutely critical. As a reminder, our business model for contract customers has various trigger points for passing these cost increases along to our customers. These pass through arrangements are limited to cost only.

For non-contract customers, we have the opportunity to pass on these price increases much more rapidly. With price increases as dramatic as we have seen recently, it is fair to say that we remain behind in the pass through process.

In recent days, we have seen the cost of oil moderate, if you consider $125 per barrel of oil a moderate cost. However, these resin price increases have not been solely the result of oil and natural gas increases. To better understand many of these increases, you have to understand the source of the monomer to make these plastic resins.

For example, base materials for polypropylene and polystyrene occur as a byproduct of a gasoline refinement process. With incredibly high gasoline prices, our nation has seen a drop in the consumption of gasoline. As we find less gasoline, there are less of the byproducts available for the manufacturer of polypropylene and polystyrene. Shortages have not occurred, but the smaller supply supports our suppliers' higher prices.

As another example, nylon resin prices are affected by the increasing cost of ammonia and sulfur used in the fertilizer industry. As you can see, this is not simply an inflated oil and natural gas cost situation.

I am very happy to report that our flexible packing operations in Europe are making great progress implementing the world-class manufacturing program. This quarter, those operations recorded substantially higher operating profits than the second quarter of last year. The improvement was driven by increased sales of proprietary polyester packaging, in addition to impressive process improvements through world-class manufacturing initiatives.

World-class manufacturing is a formal program that we first saw in action when we purchased our South American operations. It is a program that establishes consistent performance measurement principles. What makes it so successful at Bemis is that this program is able to successfully change the culture and create a unifying objective. This means that these improvements are not one-time isolated opportunities, but are hard dollar improvements and improved capacity utilization with momentum to grow. There are no large capital investments and there is no related restructuring program. It is all about setting goals, and everyone rolling in the same direction.

We are generally pleased with the volume trends that we are experiencing this year. Volume is increasing in areas of our business where we have invested in technology and capacity. Volumes in the second half of the year should show a nice improvement compared to the weak second half of 2007.

Demand for our multi-pack packaging was lower than expected this quarter, due to a combination of cool, wet weather and higher has prices. We believe that consumers are reacting to higher prices at the pump and at the grocery store, by curbing their spending on certain items. Clearly, there is still weakness in a number of the markets that we serve, and it is difficult to predict what the consumers' response will be to the ever increasing food and fuel prices. Interestingly, there seems to be a trend that favors eating at home, portion control, or stemming shelf life that is positive for Bemis.

For example, we see growth in singe serve coffee and stick packs for beverages. These packages are used for powders, for drinks, or high quality single cup coffees for use at home or office. We continue to see a preference for quality products that are alternatives to take our food.

In our pressure sensitive materials business, we are also aggressively adjusting selling prices to respond to similar raw material cost increases. The primary issue that we are facing in this business segment is the weakness in demand for our value-added technical products in North America where customers are exposed to slowing housing, industrial and automotive markets.

This segment, as seen in our graphic products, impacted by a shift to lower price digital product lines. While volumes for the highly competitive label products remain steady in North America, we saw our European volumes decline this year.

We continue to monitor our capital spend for 2008. Our capital expenditure target has been and remains $125 million. At mid-year, we have carefully reviewed projects for 2008 in light of the current economic conditions. We have deleted some projects that can be postponed due to improved capacity utilization created by world-class manufacturing processes, or because a slower economy does not want an investment at this time. We have replaced those projects with the new project to substantially increase our polyester capacity. With a growing strong demand for the polyester products, we are forecasting capacity shortages as early as mid-2009.

We have implemented a new capital project designed to satisfy the forecasted demand. In light of today's economic situation, we are very excited to see this product line grow with such strong demand.

The key to our success for the second half of this year is quite simple to state, but will be a challenge for our operating teams. Faced with raw material cost headwinds, we have to continue to aggressively pass through these price increases as quickly as possible. We have to maintain a momentum for our world-class manufacturing programs. We do not have time to rest with our success. It is not only raw material costs that are unfavorably impacting our company, the cost of energy, transportation, supplies et cetera are having an adverse impact on our business. We have to continue to find new ways to improve our cost to manufacture, we have to improve the management of our working capital. The impact of raw material cost increases on our free cash flow is unacceptable. Our teams have to find ways to be more efficient at inventory management to improve cash flow. Now I'll open it up for your questions.

Question And Answer

Operator

Thank you very much. The question and answer session will be conducted electronically [Operator Instructions]. As a reminder, two questions will be permitted each time your line is open. Should you have additional questions, you will need to re-queue [Operator Instructions]. We will go first to George Staphos with Bank of America. Go ahead.

George Staphos - Bank of America

Thanks, Hi everyone, Good morning.

Henry J. Theisen - President and Chief Executive Officer

Good morning, George.

George Staphos - Bank of America

How are you? First question is and I realize, it's very difficult to do this across all of your product lines. What do you expect your second quarter volume was in flexible packaging in real terms? And the question behind the question, I'm really try to get out, what kind of pricing you saw... pricing and mix you saw in the quarter?

Melanie E. R. Miller - Vice President and Treasurer

As you suggested that's a difficult question to answer because of the fact that it's... as I have explained to a lot of people, its kind a hard to add the up and lows but I think we're still seeing... while we've stronger lines in many of the categories; we're still seeing weakness in others. And Gene went through the details of where the strong volumes are. We also ended up... especially in areas where we had increased pricing in specialty chemicals prices. We had price improvements from our price increases I guess price and mix changes from second quarter of '07 to now?

George Staphos - Bank of America

Well Mellie, I appreciate that, obviously we can't be that precise, we understand that, would you think that most of the difference that was not accounted for by currency was made by volume or by pricing in the quarter.

Melanie E. R. Miller - Vice President and Treasurer

I think you would argue that it was price and mix, that is better in mix even though you look at if we measure volume as million square inches, you would look at the fact that we are selling more of the higher priced items that may have perhaps fewer million square inches than the inexpensive unprinted that type of items.

Henry J. Theisen - President and Chief Executive Officer

George, I would like to stress though that we do see volume growth in the areas that we invested, the things that we will rolled [ph] around our polyester platform, rigid sliced lunch and meats, bacons, slice cheese is going on the market, or coffee program - our technologies for convenience food and stick pack [ph] are those areas where we have spent our capital dollars over the last couple of years are areas that are seeing volume growth.

Operator

Thank you very much and we will go next to Ghansham Panjabi [ph] with Wachovia.

Ghansham Panjabi - Wachovia Capital Markets, Llc

Hey guys, good morning.

Henry J. Theisen - President and Chief Executive Officer

Good morning.

Ghansham Panjabi - Wachovia Capital Markets, Llc

Just in terms of some clarification, assuming that all of your announced resin price increases do go through from the supply side. Do you expect to reach price-cost parity by the fourth quarter. I just remembered that some of your contracts have a pass through on the flexible packaging side. So I just wanted to get that clarification, thanks

Henry J. Theisen - President and Chief Executive Officer

To reach 100% parity will probably take through the fourth quarter, but the way our resin mechanisms work and the way these things are laid out, we will be making good gains throughout the third quarter and throughout the fourth quarter. So we should be getting closer and closer to the parity every month that we move through. But it takes generally to about end of the year for this to totally go through.

Ghansham Panjabi - Wachovia Capital Markets, Llc

Okay and just so I am clear, also the resin usually fades towards the end of the year. Are you assuming that in terms of resin prices going doing in the fourth quarter.

Henry J. Theisen - President and Chief Executive Officer

No we're not, we're little scared though to try to predict what's going happen in this environment in the energy markets. What we did is we just took the announced increases when we factored those in to our customers.

Operator

Thank you very much. We'll go next to Timothy Thein with Citigroup.

Henry J. Theisen - President and Chief Executive Officer

Good morning Tim.

Tim Thein - Citigroup

Hi, good morning. Thank you. So, again just to follow-up on the last point, Henry. So the range from the low end into the high end, to get through low end of your range that... just again to be clear, that assumes everything has been announced in the commodity side, some of which probably had was when natural gas was four or five bucks higher than we are today. But that assumes they all were in permitted [ph] correct?

Henry J. Theisen - President and Chief Executive Officer

That is correct.

Tim Thein - Citigroup

Okay and secondly on the Gene's comments about the cash flow. Was it... you're hoping that you get the operating cash flows or free cash flow back to '07 level?

Henry J. Theisen - President and Chief Executive Officer

Well with the strong resin pricing right now, it's going to be a challenge for us to reach those levels in 2007. Right now, one of the things that hurt us, not only is the price increase arenas, but we've taken every opportunity we can with escalating prices to increase the quantities we have in - on our stocks to get them at the lower prices. So we have both quantity impact as well as price impact.

So our goal is to see what we can do as the year progresses to get those quantities back down to what are - what I would consider to be appropriate levels, so that will help us in the second half of the year.

Melanie E. R. Miller - Vice President and Treasurer

But you're Tim, we really talked more about operating cash flow because... free cash flow gets the benefit of the substantially lower CapEx this year.

Operator

Thank you very much. And we will go next to Claudia Hueston with JPMorgan.

Henry J. Theisen - President and Chief Executive Officer

Good morning, Claudia.

Claudia Hueston - JPMorgan

Good morning. Thanks very much. I was just hoping you could talk a little bit about your priorities for cash, and how you're thinking about the M&A environment, and maybe where acquisitions might fit on your priorities right now, and then any comments you just have on the environment as a whole. Thanks.

Henry J. Theisen - President and Chief Executive Officer

You know, on our M&A activity, our desire to grow through acquisition, and our targets are really no different than any we talked about in the past. We look for geography growth, where we can find it, and we look for technologies that can add to our portfolio. And almost everything that would go on in our sector, or in our area of flexible packaging or pressure sensitive, we would have an opportunity to see, and we review those things, and we're kind of hopeful maybe with private equity not being in the position it was, some of these things will be in a range that a strategic customer like ourselves can take advantage of.

Gene C. Wulf - Senior Vice President and Chief Financial Officer

Claudia we also we value the technology, I think that's importance to us and so you can see in our capital expenditure this year as we have evaluated at mid-year our capital budget. We saw opportunities in demand for our growing markets with the technology in polyester and so we made decisions to invest in that and other markets that we could defer because demands are not there right now, we are able to defer and invest in what we think is a really going market for us.

Claudia Hueston - JPMorgan

Thanks very much I appreciate that color.

Operator

Thank you and we are going next to Chris Manuel with Keybanc.

Henry J. Theisen - President and Chief Executive Officer

Good morning Chris.

Christopher Manuel - Keybanc Capital Markets

Good morning, how are you today.

Henry J. Theisen - President and Chief Executive Officer

Good and yourself?

Christopher Manuel - Keybanc Capital Markets

Fine, it's another exciting day. Hey, a couple of questions for you, first, as you worked through the quarter, have you seen any adjustments in your customer's buying patterns, in another words maybe are they looking to trade down or they looking - there's order flow change and that are they going to smaller orders in light of material costs or were they really trying to pre-buy through the quarter, anything of that nature. Could you talk a little about the order trajectory that you seen changed a little bit.

Henry J. Theisen - President and Chief Executive Officer

Well, what I found was interesting in the USA News Today. There is an article from one of our key customers in there and they talk about seeing the business that restaurants would have going more to home use and individual packets and more people going home and cooking themselves in their house rather than going out. So we hope that those trends are true and we'll see growth in our packaging related to people doing more cooking and more home meals.

And the other part of your question is, no we don't see it's a major change in our customer ordering habits.

Christopher Manuel - Keybanc Capital Markets

Let me follow it up with a similar type question, as your customers are coming to you looking for new technologies or making changes in their packaging that level picked up one and off with what they are asking for innovation. In other words sometimes we understand that customers want to get the material environment a little more stable before they are ready to make changes. In other hand they use this as an opportunity to strike, if they perceive more stay at home volume as your suggesting, any change in the level of interest in your new products.

Henry J. Theisen - President and Chief Executive Officer

There's no change in the interest in the level of new products. In fact I think it's gets heightened as they look for ways to set themselves apart in the marketplace and ways to provide food safety and ways to provide extended shelf life.

Part of your... we have a mix bag of customers, some of them do get worried about the rise in raw materials and try to set back some of their new products to later [ph] launches, some try to move them forward, it's kind of even based.

Melanie E. R. Miller - Vice President and Treasurer

Another thing Chris, that that we see in this type of market is the fact that our customers are dealing with higher ingredient cost, higher food ingredient cost and a lot have been with packaging and Henry was saying extend shelf life or improve the processes in their plants for their packaging and they may be able to find cost savings in that approach also.

Operator

Thank you and we will go next to Reik Read with Robert Baird.

Reik Read - Robert W. Baird

Hey, good morning.

Henry J. Theisen - President and Chief Executive Officer

Good morning.

Reik Read - Robert W. Baird

Henry, I was wondering if you could, just may be follow-up and provide a little more specifics in your comments on your - it sounds like you are making some very good progress there. Can you talk about, where the operating margin is with some of the improvements is been, where you think that might go and can you may be segregate a little bit in terms of the comments you made before, how much is coming from volume from new products and how much is coming from the operational improvement and can you give us some specifics on some metrics that you may be using internally with... to monitor those process, improvements to understand the level of institutionalization there?

Henry J. Theisen - President and Chief Executive Officer

I think in Europe we are getting benefits from two areas. We made a major move about 18 months ago and we took key person out of our Dexi Toga, South American operation and moved him to Europe to run our operations and to incorporate our world class manufacturing. And we're seeing substantial improvements as he has instituted this program in all of our manufacturing operations in Europe in the Flexible divisions.

The other thing we done and it kind hurt us for a number of years as when we acquired - most of Europe was acquired from other people like UPM give us [indiscernible] plant, we picked up our Shrink bag from Viscase [ph]. We have our Chrysler operations came from DuPont and we look at this and we installed our core technologies into this areas and getting all the European different countries and cultures to work together, getting our technologies incorporated in their... getting their mindset change from instilling volume to instilling value was a major improvement and you start to see some of our core polyester technologies are Peel Seal technologies or reseal technologies, or high barrier shrink wrap technologies all growing in the market place and we find an opportunity where people realize we can solve their problems in the European market place. So it's general growth all of our key products.

Reik Read - Robert W. Baird

And could you talk a little bit about some of the... as you brought in the individual there to make the changes what are some of the key metrics that you guys are focusing in on in and can you give us a sense for how far you into that process?

Henry J. Theisen - President and Chief Executive Officer

Well I think we focus on many other things that most manufacturing operations would look at, reducing the waste, reducing inventory levels, higher up times, higher line speeds, higher productivity, I think we look at all the common things that you would look at in the manufacturing operations.

And there is space or room for us to continue to grow in that area.

Operator

Thank you very much. We will go next to Ross Gilardi with Merrill Lynch.

Henry J. Theisen - President and Chief Executive Officer

Good Morning Ross.

Ross Gilardi - Merrill Lynch

Hey, good morning, Henry, nice job in a tough environment.

Henry J. Theisen - President and Chief Executive Officer

Thank you.

Ross Gilardi - Merrill Lynch

Yes I just had a couple of questions. Could you elaborate what you were saying abut the increased polyester capacity. You guys were planning, you commented on shortages potentially in 2009, are you referring to shortages for polyester resin or you are referring to shortages of the converted polyester product that you are planning on producing?

Henry J. Theisen - President and Chief Executive Officer

Well, it's not polyester resign, what we are looking at is... we see the growth in sliced cheese, we see the growth in the bake and package, we see the growth in the coffee area, we see the growth in shared luncheon meats and just the use of rigid polyester platform is growing and it is growing at a fast rate then we had expected. So we could see that our capacity would be used up some time in 2009 which is why we went forward and put together a capital program to increase that capacity and have it on board before our current equipment is running at a 100% capacity.

Ross Gilardi - Merrill Lynch

Okay, given that, do you think given the 125 million in CapEx that you are still planning for 2008, I mean is that lower level of CapEx, do you think sustainable of going out in the 2009, 2010, realizing its hard for you to forecast that far out. Can you just give general thoughts.

Henry J. Theisen - President and Chief Executive Officer

I think 125 million will be difficult for us to maintain going in the future. But I don't see us going back in the near term to where we at 175 or 180 million. So I think slightly higher than 125 is what to think about.

Operator

Thank you and we will go next to Alton Stump with Longbow.

Henry J. Theisen - President and Chief Executive Officer

Good morning Alton.

Alton Stump - Longbow Research

Thank you, good morning. Just had a quick question on the resin cost, obviously as you mentioned some huge spikes for the end of Q2 and in to early part of third quarter, it looks like earnings guidance is actually looking for a slight lift year-over-year and they're more of a flat number sequentially, just trying to get an idea obviously, with a lag usually inherent within your business, how you think you are going to be able to keep that type of earnings range in a quarter where we have seen such spikes in resin cost?

Henry J. Theisen - President and Chief Executive Officer

Well, one is we are diligently trying, we are diligently passing these price increases... this increased cost on to our customers. Everyone of the people in our business units knows that this is there primary responsibility, it's something they have to get accomplished. And we are being very aggressive in making sure that happens, so that these increases don't sit on our laps.

The second thing is we're seeing good growth and good margin materials with our new products that are coming out that we talked about the stick packs, the coffee packs. We talked about the rigid polyester platform. Our ice technologies, we have good new products going through the stream. So it's a combination of we know we have to past the price increases through, we have a good product development stream and we have a working - we have our world class manufacturing programs that the people are diligently paying attention to and know that those things have to happen.

Alton Stump - Longbow Research

Okay, thank you. And then just a real quick follow up, with your flexible packaging business, I guess to follow on what George was asking initially. I think the last quarter; you said you're expecting modest growth on the volume side within that segment for '08. Is there any change to that guidance based on your 2Q results?

Henry J. Theisen - President and Chief Executive Officer

No, I don't think so. I think we're still looking at something in the lower single digits for our volume growth, especially with some of the uncertainties in the food and fuel prices.

Operator

Thank you and we'll go next to Mark Wilde with Deutsche Bank.

Mark Wilde - Deutsche Bank

Good morning.

Henry J. Theisen - President and Chief Executive Officer

Good morning, Mark.

Mark Wilde - Deutsche Bank

I wondered if you could talk, Henry just a little bit about that growth that you're seeing in meat and cheese and whether you think that is... that growth rate is at risk at all over the next three or four quarters, if we continue to see pressure on meat prices and on dairy prices?

Henry J. Theisen - President and Chief Executive Officer

Well, I don't want to... I think this is a very good platform for growth. In fact, I refer to that article that was in the USA News today where one of our key customers is talking about their volume growth and their ability to pass on food costs. And if they see the trend from restaurants to home use and people doing more cooking at home, and with a lot of these products that we're talking about is new products really are going after the takeout market, they're going after the deli market, they're going right after the core areas where if you were to stay at home, you would want to buy something to bring home that would be in a convenience package, that would be a high quality food product. And I think it's right up the alley of where we want to be.

Mark Wilde - Deutsche Bank

Okay. And so, is the growth that you're seeing right now, that 4% kind of year-on-year growth, is that from new products or just more throughput of existing products?

Henry J. Theisen - President and Chief Executive Officer

I think the vast majority of that comes from new products. I don't know if we can quite break it out, but I'll say a little more than half is new products and the other part would be just growth that we're getting. But new products is what generates it.

Operator

Thank you. [Operator Instructions]. And we will go to a follow-up question from George Staphos.

George Staphos - Bank of America

Thanks. Hey, Henry. When you look at the very strong demand for your polyester-based products, the capacity that you'll be running out of over the next two or three quarters, how are you utilizing that position to implement the requisite price increases that you need, obviously within polyester, but perhaps even across the rest of your business if your customers buy more than one type of package or core material from you?

Henry J. Theisen - President and Chief Executive Officer

I don't know if we specifically go out and try to leverage that particular component. We go out in to marketplace where we have to have a price increase and we bring all the resins that have to be increased, and we treat them pretty well equally. I don't think you can take one product and leverage it over the rest of the product line.

George Staphos - Bank of America

Okay. And is the customer less accepting of that, Henry, or I guess the question is, if you have a good product, then customers are demanding it increasingly. How do you evaluate the value that you bring to them in terms of getting a fair return?

Henry J. Theisen - President and Chief Executive Officer

I think everyone of our customers that buys that product or wants to buy that product recognizes the value that they get because they increase their market share and they increase their ability to price a product in the marketplace. And they recognize that we bring that to them and a lot of the other competitions can't bring them those new things. And that's really the reason they bring us in as a supplier to begin with.

Gene C. Wulf - Senior Vice President and Chief Financial Officer

George, to clarify too, for those polyester technologies that are unique to Bemis that you can't buy anywhere else in the world, we charge a premium price for those. And so we... when we make these decisions to expand our polyester technology, we are basing it on the pricing structure that we have for those product lines.

Operator

Thank you. And there appear to be no additional questions or comments. At this time, I will turn the conference back over for any additional or closing remarks.

Melanie E. R. Miller - Vice President and Treasurer

Thank you very much, operator. And thank you everyone for joining us today. Have a good day.

Operator

It does conclude today's conference call. Thank you for your participation and have a great day.

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Source: Bemis Co., Inc. Q2 2008 Earnings Call
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