Bemis Management Discusses Q3 2012 Results - Earnings Call Transcript

Oct.25.12 | About: Bemis Company, (BMS)

Bemis (NYSE:BMS)

Q3 2012 Earnings Call

October 25, 2012 10:00 am ET

Executives

Melanie E. R. Miller - Vice President and Treasurer

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

Scott B. Ullem - Chief Financial Officer and Vice President

Analysts

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

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

George L. Staphos - BofA Merrill Lynch, Research Division

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

Todd Wenning - Morningstar Inc., Research Division

Chip A. Dillon - Vertical Research Partners Inc.

Michael A. Hamilton - RBC Wealth Management, Inc., Research Division

Ernie Ortiz

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

Operator

Good day, everyone. Welcome to the Bemis Company Third Quarter 2012 Earnings Release Conference Call. Today's call is being recorded. For opening remarks and introductions, I will now turn the call over to the Vice President and Treasurer for Bemis Company, Ms. Melanie Miller. Ms. Miller, please go ahead.

Melanie E. R. Miller

Thank you, operator. Welcome to our third quarter 2012 conference call. Today is October 25, 2012. After today's call, a replay will be available on our website, www.bemis.com, under the Investor Relations section. Joining me for this call today are Bemis Company's President and Chief Executive Officer, Henry Theisen; and our Vice President and Chief Financial Officer, Scott Ullem.

Today, Henry will begin with comments on the performance of the business, followed by Scott with comments on the detailed financial results. After our comments, we will answer any questions you have. [Operator Instructions]

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

Henry J. Theisen

Good morning. Today, we are pleased to announce adjusted earnings per share of $0.60 for the third quarter. This was above our guidance range and reflected higher sales volumes for barrier packaging products compared to our original expectations. As we look at the quarter, there are a number of factors that positively impacted performance.

First, we experienced unit volume increase of 3% to 5% for high barrier packaging for meat and cheese, dairy and liquid products and dry foods, including coffee. These products require multi-layer film technology to protect shelf life and provide high-performance sealant strength. The increase in meat and cheese packaging reflects the successful ramp-up of new business compared to last year's third quarter.

As I discussed last quarter, we're also winning new dairy and liquid packaging business with our high performance semi-rigid cups and lidding materials, which provide an environmentally friendly solution to customers looking to eliminate PVdC from packaging. Both single-serve and bulk coffee packaging volumes also increased compared to last year's third quarter.

The second positive factor was that resin costs were relatively stable during the third quarter, with some benefit early in the quarter from lower commodity resin costs offset by stable and the increase in specialty resin costs. We anticipate resin cost to have a negligible effect on results through the rest of the year.

Lastly, we're about halfway complete with our facility consolidation program, which will improve the efficiency of our global manufacturing operations by consolidating the business from 9 different locations into other facilities. We have closed 4 of the 9 locations through the end of the third quarter. During the third quarter, we started to realize some of the cost savings associated with this progress to date. The remaining 5 facilities will be closed during the fourth quarter of 2012 or the first quarter of 2013. We expect almost all of the remaining business relocation activity to occur during the fourth quarter.

So as we head into the fourth quarter, we expect to maintain the sales mix and cost-saving improvements we realized during the third quarter. But some of this benefit will be offset by increased inefficiencies associated with the transition of production from the remaining facilities being closed. Our teams have worked diligently to provide customers with a smooth transition as production is moved to other locations, and I am pleased with the progress we have made.

As I have said in the past, we continue to take pricing actions to improve our margins and performance metrics in those pieces of business that did not give us an appropriate level of return. This is not a broad action but is surgical and related only to those specific pieces of business that did not meet our margin requirements. To date, these actions are accomplishing our goals.

Briefly highlighting our business outside of North America, our Latin American operations are managing through a challenging economic environment that is impacting our customers in that region. We continue to see customers on track to modernize their products, using flexible packaging to reduce waste and improve shelf life, as well as consumer appeal and convenience features.

In Europe, our medical device packaging operations are enjoying increasing volume levels capped compared to 2011. But customers remain cautious about predicting future demand. Our other European base, Flexible Packaging operations, continue to face a difficult environment in which customers are hesitant to invest and competitors are desperate for volume. In this environment, we are carefully managing our customer relationships and adjusting our cost structures as needed to account for specific volume declines.

Our business in Asia Pacific is expanding with the additional capacity added to our food packaging plant in China and the acquisition of 2 small distributorships in the Australia and New Zealand market. As we further develop our capabilities in this region, we are focusing on value-added products such as barrier packaging for food products, retort packaging and pouch making, as well as medical device packaging. As we have said in the past, it is not our intent to be the largest in Asia-Pacific region. Instead, we want to grow our Asia-Pacific presence with unique products that position us over the long term for a leadership position in packaging solutions that protect food safety and sterility.

Our pressure sensitive materials business segment is performing well in this challenging economic environment. The third quarter is a seasonally slower period for this business, and sales and profit continue to match the prior year levels. Going forward, we are executing our plan to deliver consistently improving performance metrics with initiatives that leverage our scale, identify investments in focused growth areas and accelerate innovation to deliver value to our customers and improve profitability to Bemis.

Now I'll turn the call over to Scott for his comments on the financials.

Scott B. Ullem

Thanks, Henry. Good morning, everyone. Our record-high adjusted diluted earnings per share for the third quarter of $0.60 represented an increase of about 7% over last year's third quarter, an 11% increase sequentially from second quarter, and was above our guidance range of $0.51 to $0.57.

I'll start this morning by commenting on volumes. We are especially pleased with our earnings performance because we've done it despite having to overcome tough volumes all year. Recall, we started the year expecting stronger volumes for the second half based upon our customers' forecasts of end-market demand and their pricing and promotional plans. By the end of the second quarter this year, our expectation was reduced to flat second half volumes. And now, at the end of the third quarter, we've seen volumes actually turn negative year-over-year.

In spite of the volume headwinds, we drove solid earnings by improving sales mix and delivering cost savings. Starting with flexible packaging and excluding the impact of currency and acquisitions, net sales decreased about 1.8%, reflecting a 3.7% decrease in volume, partially offset by increases in price and mix. Specifically, volume increased in several of our high-value-added product areas, such as packaging for meat and cheese, dairy and liquids and dry foods. In our other product areas, volumes were generally down with the exception of pet products and fresh produce, where new business increased volumes modestly compared to last year. We experienced volume declines in a number of product areas, such as packaging for bakery, confectionery and snack, beverage, specialty food and health and hygiene applications.

Dividing these trends by geography, in North America, net sales decreased by about 3.5% due entirely to overall volume declines. Sales mix generally reflected the overall trends that I just mentioned. In Latin America, net sales excluding currency increased by about 6%, principally driven by increasing prices reflecting higher raw material costs compared to the third quarter of 2011. Sales mix also improved but was more than offset by lower sales volumes. European Flexible Packaging volumes were higher in our medical device packaging business, while our food packaging business continues to experience lower year-over-year volume levels.

Moving on to the pressure sensitive materials business segment, unit volumes were up about 3% in label products, partially offset by a decrease of over 5% each in graphic and technical products. Since label products continues to represent over half of the sales in this business segment, the overall positive unit sales volume driven by growth in label products was more than offset by a negative impact from price and mix during the quarter.

Bemis' consolidated gross margins improved from 16.5% in the third quarter of 2011 to 19.2% in the third quarter of this year. Again, this improvement reflects improved sales mix, a better alignment between the cost of raw materials and our selling prices to customers compared to the third quarter of 2011 and some savings associated with the facility consolidation activities completed so far this year.

Now I'm going to provide an update on our facility consolidation program. As Henry mentioned, we started realizing net cost savings benefits in the third quarter, which is earlier than we originally planned, driven by 2 factors. Number one, we've talked previously about the fact that the cost savings that hit in 2012 this year would be largely offset by short-term inefficiencies such as lower machine productivity and increased waste when we restart equipment. As it turned out, the expected inefficiencies will be deferred to future quarters.

Number two, our teams have done an excellent job of delivering cost savings ahead of schedule for the plants we've already closed. Based upon our assessment of savings specifically associated with actions taken to date, approximately $5 million of cost savings were realized during this quarter. This represents annualized cost savings achieved of approximately $20 million as compared to our total program estimate of $50 million in annualized savings.

During the third quarter, we incurred charges of $21.4 million and cash payments totaled $11.2 million. You can see the facility consolidation programs' complete financial timing and expense details on Page 2 of this morning's press release.

Continuing through the income statement, selling, general and administrative expenses in 2012 will continue to fluctuate, reflecting the impact of changes related to the facilities consolidation program, the addition of businesses we already acquired and the adjustments of incentive compensation in response to business performance expectations. We expect total year 2012 SG&A to average 9.5% to 10% of net sales.

Adjusted operating profit for the flexible packaging business segment increased 170 basis points to 11.5% compared to 9.8% in the third quarter of last year and 10.1% in the second quarter of this year. In the pressure sensitive materials business segment, operating profit margins were very close to the levels of 2011, reflecting our focus on prudent cost management in this challenging volume environment. Our effective tax rate was 36.1% for the third quarter, and we continue to expect the effective tax rate for the total year 2012 to be 36%.

Moving on to the statement of cash flows. Cash provided by operating activities totaled $147 million for the third quarter. Working capital provided $42 million of cash flow during the third quarter, while facility consolidation payments used an additional $11 million of cash. Reiterating our expectations for future cash flows, we expect cash provided by operating activities to be in the range of $350 million for this full year, growing to $500 million annually beginning in 2014. Our adjusted earnings per share guidance for the fourth quarter of 2012 is $0.47 to $0.52 per share, which would mean full year adjusted earnings per share guidance of $2.10 to $2.15.

In this range, 2012 would be the first or second best year of earnings in Bemis history. There are some specific headwinds and tailwinds that will influence our earnings in the fourth quarter. If we can maintain the sales mix improvement and continue to deliver the cost savings ahead of our original forecasts, we could end up at the top end of our range. Of course, that means there will be fewer incremental savings coming in 2013 since we're starting to recognize them in 2012.

Aside from our typical season slowdown in the fourth quarter, the biggest hurdle we are trying to clear is continuing weak volumes in many of our end markets. Mix improvements and cost savings are helping fuel earnings growth in a declining volume environment but we can't cost cut our way to profit growth over the long-term. Our customers, especially the CPG and food companies, are battling declining volumes and so we are too, and expected food-cost inflation won't help drive consumer demand. So our business teams are vigorously chasing down profitable revenue opportunities around the world, and Bemis' industry-leading products are helping us compete against others in our industry who are chasing the same volumes.

One last note before we open the call for questions. Our EPS guidance range assumes no further weakening in the Brazilian and European currencies and no raw material spikes. And now, operator, please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And first, we'll go to Adam Josephson with KeyBanc.

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

Do you have reason to expect your improved sales mix to continue into future quarters? And if so, why?

Henry J. Theisen

Yes, I do expect that to continue. Our products in the high barrier and in the areas of sterility -- food safety and sterility are excellent products. The thermal formability, the sealability, the barrier properties are prized by our customers, and we have good quality and consistent films. We also have a good backlog of new products and new developments coming out of our R&D organizations. In addition, part of the price mix improvement that we see are some of the pricing actions that we took as we looked at our various facility consolidations. And products that did not satisfy the margins that we feel we need to move the business, we took the appropriate actions. So it's kind of a combination of the products that we make are taking market share, we have a strong bench of new products to offer for high barrier, food safety and sterility, and the specific pricing actions also help.

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

Henry, just related to that answer, what degree of pushback did you get from your customers in terms of raising prices on those certain products?

Henry J. Theisen

Oh, we had a lot of pushback. No one likes to accept price increases, and they just had to make a decision at the end of the day whether they wanted to stay to be a Bemis supply customer or whether they wanted to find somebody else. And there was a lot of pushback and it was a -- our marketing and sales team did an excellent job of managing through that. Again, I want to point out that, that is a small part of our business. It was not a major thing. It was taking a look at what materials that we make in the plants that we are closing and is it appropriate to spend the money and the time and the effort to move that business, or is it not appropriate.

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

Got it. And what accounted for the savings from the facility consolidation program being greater than you expected 3 months ago? Forgive me if you already touched on this and I missed it.

Scott B. Ullem

Adam, they're not -- we're on the same program, which is that we expect that $50 million in annualized cost savings as we get into 2013. The only difference is that we got more of those net cost savings, net of some of the inefficiencies associated with them, earlier than we would've expected. So that's why we ended up with about $5 million in the third quarter of benefit. That's a little earlier than we expected.

Operator

Moving on, we'll go to Ghansham Panjabi with Robert W. Baird.

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

It's actually Mehul Dalia sitting in for Ghansham. Can you update us on your strategy for Europe in flexibles given that some large competitors are rethinking their footprint there and even considering exiting the market? What is your outlook on the region?

Henry J. Theisen

Our flexible packaging in Europe? We are closing a facility. We had announced that, I think, about 3 months ago. So we are shrinking our footprint a little bit. Our strategy in Europe, as it's always been, is to make value-added products. And we have 2 businesses in Europe. One is in the medical device area, and that's a very good business for us and we're very happy, and it's continuing to provide appropriate margins and profits. We have a food packaging business that is suffering as the economy suffers. So let's say, we adjusted one footprint, one plant is going down, we're moving some equipment around and we're concentrating on those value-added products and the technology that we offer and going forward.

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

And as a follow-on, can you update us on the competitive landscape across your businesses and price competitiveness that you're seeing?

Henry J. Theisen

I think that across all of our businesses, as far as price competitiveness, it is the same as it's always been. And our customers are always looking for savings. We're always trying to develop products that put us ahead of our customers -- our competitors, excuse me, and we win some and we lose some. And I don't think it's changed over the last few years.

Operator

And next, we'll go to George Staphos with Bank of America Merrill Lynch.

George L. Staphos - BofA Merrill Lynch, Research Division

I guess, first question I had, obviously you've a very busy season coming up in terms of closure programs for the remaining facilities. And I know you've been planning this, Henry. But how do you prevent against -- why do you feel comfortable that you won't have any disruptions in terms of moving the business around to the remaining facilities? Then I had a follow-on.

Henry J. Theisen

I think that we have planned this with the operating guys. The operating guys are on board. We have a timetable laid out. We have specific action items that we know each of our business units are responsible for. We know, inside those business units, which individuals are responsible to accomplish the specific tasks that need to accomplish this. So we have a very good plan. We have the people identified. The people know exactly what their responsibility to deliver is, and we're going to do this very successfully and our customers will -- this will be seamless to our customers.

George L. Staphos - BofA Merrill Lynch, Research Division

Okay. My second question's a two-part, but I'll keep it quick, I promise. On the one hand, we've begun to see some pickup in the takeaway or point-of-sale data for various food categories. Have you begun to see that as well? And one of the things that we heard about in the third quarter from some of your peer companies is that some of the larger food companies had some larger than normal operating programs, which prevented them from ordering as much as they normally would. Did you see that at all, in terms of some of your customers were going through some structural changes?

Henry J. Theisen

Well, I can answer the last part of that first. I don't believe we've seen that. No. I couldn't identify that. So -- and the other part is we have seen some uptick in some volumes in our high-barrier area that we pointed out, meat and cheese, liquid and dairy. And then we've seen some of our other products which are more on the competitive side, the side that we've taken more pricing actions with and been more firmer, in the bakery and some of those type areas, candy, cookies, snacks, we've seen some of those tail off a little bit for us.

Operator

Okay, next we'll go to Chris Manuel with Wells Fargo Securities.

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

A couple of questions for you and then I'll jump back in the queue. First, Scott, could you -- I know it's maybe a difficult question to answer, but if we were to put everything in a vacuum, just help us with -- you said $20 million on an annualized basis this year. What would be the differential between 2012 and 2013 if I were to just take from restructuring savings in a flat volume environment, all the other stuff steady, that you would have 2013 versus 2012 and savings that we would realize, let's say, EBIT dollars up x kind of scenario?

Scott B. Ullem

I'm not sure I understand the question, but let me try to answer it and you tell me if I got it right or not. So far, through the third quarter, we are on track to -- we have recognized cost savings amounting to $20 million on a annualized run rate basis. By the end of, call it the second quarter of 2013, we will be on a $50 million annualized cost savings run rate. And so the slope between here and Q2 of 2013, I can't be any more precise than that, but that's the path that we're on.

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

So it sounds like if -- wherever you're in, in the year 2012, kind of looking at these run rates as though there's opportunity for EBIT to be up $30 million due to cost takeouts and things, absent everything else. Am I capturing that kind of the right way?

Scott B. Ullem

I think we expect all $50 million on an annualized basis to fall to the bottom line. Those are cost savings. By the end of the year -- I can't give you more precision around, by the end of 2012, what run rate we'll be on. And in the third quarter, we would've expected, actually, to have more onetime inefficiencies like what I talked about, lower productivity from equipment, higher waste on equipment that's being relocated. And so we actually didn't expect that we were going to get this $5 million in net cost savings in Q3. And I think, in Q4, there may be more offsets to some of those cost savings.

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

Okay, that's helpful. So to my second question is, over the last several months, we've seen a pretty good tick up in slaughter rates, as many of the farmers just are having trouble meeting -- not getting the prices they want for whatever protein they've got with respect to input feedstock and other stuff, feed coming higher. And as part of that, we've seen actually some dairy cows and things that look like they've been slaughtered for lower grades of meat and such. As you -- I'm realizing that dairy's a good portion of your business. Does that give you any pause or concern as you think about what things could look like next year, that a, that creates a lot of inflation and b, that maybe there's not as much there for certain dairy packaging, things of that nature. So how do you think about it or have you seen any of that kind of activity, number one? Number two, do you -- is it a risk that you may have for 2013?

Henry J. Theisen

I think the fact that you're seeing some of these slaughter rates go up and you do know that it takes, from the time that they start building the herds, it takes about 3 years to build that herd back up. We factor that into our plans. It does cause us to think about it, to put it into our CapEx plans, put it into our business plans, but -- and we do know that rising food costs will affect the volumes. However, when we look at our business, we look at how much business we can take from our competitors based on the quality of our -- and consistency of our products. We also look at adding new features, new barriers, new structures and new products to serve the protein business. And so we think we can overcome that. As I said, we have a very strong development line coming through, various new products. And I think that's going to overcome any challenges we may have on volumes, just related to the size of the herds.

Operator

[Operator Instructions] We'll next go to Todd Wenning with Morningstar.

Todd Wenning - Morningstar Inc., Research Division

Could you give us an update on your progress in converting some of the legacy Alcan contracts into some shorter polyethylene past-due schedules?

Henry J. Theisen

I think, by the end of 2013, we will have substantially completed that effort. Excuse me, by the end of 2012, we will have substantially covered that, and our customers' terms will be in line with the Bemis strategy.

Todd Wenning - Morningstar Inc., Research Division

Great. And what are you seeing in terms of conversion trends to plastic packaging from alternative packaging types, particularly in the U.S. food market? Are there any specific food types converting better than others?

Henry J. Theisen

I don't think there's any specific change that's occurring right now. I think it's just a general trend that continues.

Todd Wenning - Morningstar Inc., Research Division

Okay. Were there any specific food types that are doing better than others?

Henry J. Theisen

I don't see so. I know there's a lot of talk about changing from cans to pouches and things, but we haven't seen that really kick into our volumes yet.

Operator

Okay, and next we'll go to Chip Dillon with Vertical Research.

Chip A. Dillon - Vertical Research Partners Inc.

I'm sorry I missed this, did you give the breakdown in the flexible packaging segment between how much the prices were up on average and how much the volumes were down on a unit basis?

Melanie E. R. Miller

In -- one, in total count, if you just look at flexible packaging, volume was down a little over -- it's about 3.7%, and then that was offset by improvements in both price and mix. It gets down to a total change in price volume, excluding acquisitions and currency, of a decrease of 1.8%.

Chip A. Dillon - Vertical Research Partners Inc.

Got you. So in other words, 1.8% is of revenue decline excluding federal -- FX, basically, just including the impact of volume, price and mix?

Melanie E. R. Miller

Exactly. And volume was down over 3.5%.

Operator

And next we'll go to Mike Hamilton with RBC.

Michael A. Hamilton - RBC Wealth Management, Inc., Research Division

Could you give some insights into what you're trying to accomplish tactically right now in Brazil, what you see kind of the opportunities and concerns are as you look out over the next 6 months?

Henry J. Theisen

Well, the Brazilian economy has slowed a little bit. It's gone from kind of growing from 6% to 8% to having very low growth. Our strategies are the same as they have been before this change. We continue to want to invest in materials and in products that attack food safety and that attack sterility, and we're going to continue that program of transferring technology and putting higher technology products for food safety and sterility into that marketplace.

Operator

[Operator Instructions] We'll next go to Albert Kabili with Crédit Suisse.

Ernie Ortiz

This is actually Ernie filling in for Al. Can you just talk a little bit about your new product pipeline and how we should think about it?

Henry J. Theisen

Well, I think that we have excellent product pipeline. We're trying to always improve things like barriers. We're always trying to improve things around sealability. We're always trying to improve things to get better formability, extended shelf lifes. And no matter what market it is, those are the things we work on, and adding convenience features, easy open. We try to attack things to improve sustainability. We have a new rigid program that eliminates PVdC in a lot of these cups you use for dairies and liquids. We have programs that are expanding into retort packaging, aseptic packaging. In many parts of the world, they don't have refrigeration like we have, so we're attacking those markets. And the core understanding of our polymer science is what allows us to make products that satisfy our customers' needs.

Ernie Ortiz

That's helpful. And I guess just a last one. How would you describe your more cyclical end markets, like technical products on the PSM side? And then kind of what's your outlook for the quarter?

Scott B. Ullem

Could you ask that question one more time, please?

Ernie Ortiz

Sure. What are you seeing in your more cyclical end markets, like more like technical products in the PSM side, and your outlook on that end for the quarter?

Scott B. Ullem

And so as we've mentioned, we've seen pretty strong volumes in the roll label side in our pressure sensitive materials segment. We've seen volume weakness in our graphics and technical products. This is a seasonal slow period for us in pressure sensitive, and we're pleased with the performance that we've seen just in terms of tracking year-over-year performance consistent with where we were in 2011. We're not going to give a specific forecast, though, for the fourth quarter in pressure sensitive materials.

Operator

And next, we'll do Phil Ng with Jefferies.

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

If I heard you guys correctly, it sounds like most of the legacy Alcan contracts will be repriced. So one, should we assume less share leakage going forward and two, with the contracts reset and your restructuring taking hold, should we expect operating margins to get back to that 12% to 13% range for flexible, maybe, in the back half of 2012 -- I mean 2013 or early 2014?

Henry J. Theisen

As far as our margins improving in our flexible packaging business, the best thing that could happen for us is to get just a couple of percent growth overall in our packaging business. So if we can get a little bit of growth, we can keep moving that margin up.

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

Okay. All right, that's helpful. And then for me, balance sheet standpoint, maybe a question for Scott, it sounds like you guys should be back to your target by the end of the year. Historically, you guys didn't -- buying back stock more to offset dilution. Is that the loss which [ph] shift a little bit? It looks like 2013 should be another strong free cash flow year.

Henry J. Theisen

Yes, we expect 2013 to be another strong free cash flow year, marching from $350 million this year up to $500 million in 2014. Our priorities for cash are unchanged: number one, we're going to continue to pay an increasing dividend; number two, we're going to fund sufficient return internal growth investment; number three, we will fund -- we will help fund episodic acquisitions, which will likely be on the smaller side and likely be outside of the U.S. moreso than in the U.S.; and then finally, using the balance sheet to manage the debt-to-equity ratio. And so, you won't see us -- we don't want to get too far below 2.0x. And if we do, then we're going to be in the market buying back shares.

Operator

[Operator Instructions] We'll next take another question from Chris Manuel at Wells Fargo Securities.

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

I wanted to ask about specialty resins. It looks like we're starting to see some uptick there as we move in to 4Q and into next year. Can you give us a sense as to what you're seeing and what you -- how you anticipate that playing out?

Henry J. Theisen

I think the best answer to that question is, we're basing in our plans for the fourth quarter a flat resin market, open specialty and on the commodity area.

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

Okay. But are you seeing any inflation, I guess, is what I'm asking for specialty? You mentioned earlier that you're seeing some uptick, I think, in some prepared remarks. But is that something that is coming now, coming later, or -- that's what I'm asking.

Henry J. Theisen

I don't -- this is my guess. It's not anything that -- we're not factoring in inflated markets for the specialty resins.

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

The other question I had is actually a follow-up on part of your last answer with respect to some of the acquisitions. You did 2 distributors in Australia and, as I look back over the last 1, 1.5 years, you've been pretty active in terms of a number of things. I think there was a JV earlier this year, there were Chinese acquisition and another one here in North America that got you into some industrial markets. Can you maybe give us a little color just on the most recent 2, the Australian ones? They're a distributor. What's the -- how big a markets for flexible packaging are those there? And what you think the opportunity is? Were you selling to those distributors presently? So is there -- maybe some additional color would be helpful.

Henry J. Theisen

Okay. I can take that one. These 2 distributors, when we bought the shrink bag business, were distributors for this case at the time, which is -- who've company we acquired the shrink bag business from. So we continued to work with them and they were our distributor of the shrink bag product lines. When we acquired Alcan, we also acquired a manufacturing site and a sales organization in New Zealand that we're selling into the market. So we were finding ourselves competing with ourselves. And this was just an opportune time that came up for us to eliminate that -- to manage that much better by buying out the distributors now, and we receive their sales force and those customers and it just strengthens the operation that we already have.

Operator

And next, we'll go to Adam Josephson with KeyBanc again.

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

Just one, how do you compare your sensitivity to changes in resin prices to what it was a year ago? And what do you expect the situation to be a year from now?

Henry J. Theisen

I think we have to talk about -- if we have a market that goes up and down or goes up slowly or in some kind of a uniform way, we can handle those ups and downs of the resin market. The problem that we had about 1 year ago or a 1.5 years ago is that it shot up like a rocket and we could never catch up. So, I mean, if we hit markets where you're adding 5%, 10% increase in raw materials month over month over month over month, so that in a short period of time, your basic normal raw materials go up a third, that puts us behind the 8 ball and it takes us a little bit to get through it. If we're going to have modest increases or increases that occur over a uniform time in a more gradual operation, our systems and how we handle those increases, we're able to deal with that.

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

Okay. And just one other one on returns on capital. You guys have talked about focusing more on that measure, and this quarter is clearly a step in the right direction. To use a baseball game analogy, what inning would you say you're in, in terms of improving on your returns on capital?

Scott B. Ullem

Adam, I'm not sure I can, I'm not sure I can give you a baseball inning analogy. What I will say is we're very focused on making sure that we're getting appropriate returns on our investors' capital. And to be more specific, we spent a lot of time analyzing our business by division and by geography to assess where we've got the best opportunities to put capital to work on internal growth initiatives, on external acquisition initiatives and on financially engineering the balance sheet. And what I guess -- what I can tell you is, the management team, our board, all of our employees are very focused on improving our returns on invested capital.

Operator

And we'll take one more question. [Operator Instructions] That's Chip Dillon with Vertical Research.

Chip A. Dillon - Vertical Research Partners Inc.

And again, apologies if you reviewed this. I know you've made a couple of acquisitions, I believe, one -- at least one in China that probably helped on the volume front. So the 3.7% volume decline, does that -- is that sort of the organic number or does that -- what was that? Would it have been a little bit lower if you didn't include acquisitions?

Melanie E. R. Miller

No, that's the organic number. Acquisitions actually did have a positive impact of 1.3%. So if you ignore FX and you ignore acquisitions, both of those impacts, you're left with an organic 3.7%.

Chip A. Dillon - Vertical Research Partners Inc.

Great. And then last question real quickly is, do you feel you gained any market share in any major segments? I know some of -- one of your competitors has been a bit distracted. I didn't know if that had -- I know it's somewhat fragmented, but have you seen share gains in any categories, especially on the food side?

Henry J. Theisen

Well, I think that we've gained share in cheese, meat, dairy and liquids.

Operator

[Operator Instructions] Okay, we have no further questions, so I'd like to turn it back over to our speakers for any additional or closing remarks.

Melanie E. R. Miller

Thank you, operator. And thank you, everyone, for joining us today.

Operator

That does conclude today's conference. We thank everyone again for their participation.

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