Bemis : 2018 Q3 Earnings Call Transcript

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EDITED TRANSCRIPT

BMS - Q3 2018 Bemis Company Inc Earnings Call

EVENT DATE/TIME: OCTOBER 25, 2018 / 2:00PM GMT

OVERVIEW:

Co. reported 3Q18 results. Expects 2018 adjusted EPS to be $2.77-2.82.

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CORPORATE PARTICIPANTS

Erin M. WintersBemis Company, Inc. - Director of IRMichael B. ClauerBemis Company, Inc. - Senior VP & CFO

William F. AustenBemis Company, Inc. - President, CEO & Director

CONFERENCE CALL PARTICIPANTS

Arun Shankar ViswanathanRBC Capital Markets, LLC, Research Division - AnalystBryan Nicholas BurgmeierCitigroup Inc, Research Division - Associate

Daniel Dalton RizzoJefferies LLC, Research Division - Equity AnalystDeborah Anne JonesDeutsche Bank AG, Research Division - Director

Edlain S. RodriguezUBS Investment Bank, Research Division - Director and Equity Research Associate, ChemicalsMatthew T. KruegerRobert W. Baird & Co. Incorporated, Research Division - Junior Analyst

Molly Rose BaumBofA Merrill Lynch, Research Division - Research Analyst

Salvator TianoVertical Research Partners, LLC - Analyst

PRESENTATION

Operator

Good day, and welcome to the Bemis Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would now like to turn the conference over to Erin Winters, Director of Investor Relations. Please go ahead.

Erin M. Winters- Bemis Company, Inc. - Director of IR

Thank you. Good morning, everyone. Welcome to our third quarter 2018 conference call. Today is October 25, 2018. 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 Senior Vice President and Chief Financial Officer, Mike Clauer; and our Vice President and Chief Accounting Officer, Jerry Krempa. Following Bill and Mike's comments on our business and outlook, we will answer any questions you have. (Operator Instructions) 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 schedules.

On today's call, we will 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 are 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.

William F. Austen- Bemis Company, Inc. - President, CEO & Director

Thank you, Erin, and good morning, everyone. We delivered another strong earnings quarter, in line with our expectations. Our teams did an excellent job of delivering our plan despite headwinds from currency and freight. Year-to-date adjusted earnings per share have increased 18% compared to last year and adjusted operating profit is up $20 million.

I continue to be encouraged by our actions to improve operationally, to lay the foundation for long-term growth and to deliver our earnings commitments. The Agility mindset to fix, strengthen and grow Bemis continues to permeate our thinking and actions. Our progress goes beyond creating an effective cost structure through the strengthen and grow aspects of Agility, we are building a strong foundation to position our business strategically, to penetrate short run opportunities and drive value for the long term.

During 2018, we have hired new sales reps who are incentivized to pursue and win our new business targets, established our core spec offering to ensure we quickly and appropriately leverage our existing innovative product portfolio, completed robust customer account reviews to focus our sales efforts and uncover growth opportunities and developed and implemented a broad range of operational and sales process improvements such as a simplified application process for new customers, a quick quoting procedure, a faster sample role delivery process and a shorter lead time offering. Simply put, our approach aligns our people, assets, processes and products to serve the pockets of growth available in North America.

Early customer feedback has been positive, and we continue on pace to reach our target of $25 million of incremental short-run business during 2018. Over the long term, we will continue to serve our solid base of long-run business while adding in these identified short-run opportunities.

I'll turn the call over to Mike now for a review of the financials and then I'll come back to discuss our planned combination with Amcor.

Michael B. Clauer- Bemis Company, Inc. - Senior VP & CFO

Thanks, Bill, and good morning. Today, I will discuss the financial details of our segments and total company followed by comments on the balance of 2018.

U.S. Packaging segment. During the third quarter, our U.S. business performed in line with our expectations. Sales dollars of $688.4 million were up 2.4% compared to the prior year, reflecting higher selling prices partially offset by unit volume decline of 2%. Approximately half of this volume decline related to the infant care business at our Shelbyville, Tennessee facility that we exited this year, and the remainder is simply a function of timing and a stronger-than-normal third quarter last year.

U.S. Packaging sales are within our expectations and include the pace toward our full year target of $25 million of incremental short-run business. U.S. Packaging operating profit of $93.4 million was lower than the $99.6 million last year. You will recall that during the third quarter last year, profits benefited $4 million from the reversal expenses related to specific customers under an incentive.

U.S. profits this third quarter reflects the benefits of Agility and improving operations, partially offset by freight costs, current-year customer incentives and the impact of stronger full year results on employee pay-for-performance awards, again all within our expectations.

Turning to Latin America Packaging. Third quarter sales of $148.3 million were down 19.3% as compared to the prior year, driven by a 23.7% decrease from currency. Remaining organic growth of 4.4% was driven by increased selling prices and mix versus 1 year ago, offset by unit volumes down 15%, driven primarily by the impact of some laundry detergent packaging volume in Brazil that is converting to another format.

To a lesser extent, unit volumes were impacted by one customer's conversion to a smaller-sized packaging format, which impacts volumes but not profits and also by some fine-tuning of our portfolio at a couple of plants where we had some high mix, low margin products that we decided to exit.

Latin America operating profit of $8 million increased from $7.3 million last year. Currency translation hurt profits by $1.7 million, and the implementation of high inflation accounting in our business in Argentina hurt profits by another $1.4 million, leaving an operational improvementof $3.8 million during the third quarter, which is driven by planned variable and fixed cost reductions implemented due to the challenging economic environment in Brazil, partially offset by the volume impact -- margin impact of our customer who's converting their laundry detergent to another packaging format.

We continue to focus on what we can control in this region. The environment for our business in Brazil is stabilizing, and we will continue to deliver our planned cost reductions initiated 1 year ago, given the economic environment in Brazil. Our business will be well-positioned as the economy improves.

Turning to the Rest of World Packaging. Our Rest of World business delivered another strong quarter. Third quarter sales of $189.7 million were up 6% compared to the prior year. Currency translation decreased sales by 0.8%. The acquisition of Evadix increased sales 1.2%. Organic growth of 5.6% reflects increased unit volumes of 4% and increased price and mix.

Strength in our Global Healthcare Packaging business continued. Rest of World Packaging operating profit increased to $22.2 million compared to $17.3 million in the prior third quarter. This improvement was driven primarily by the impact of strong volumes in Healthcare Packaging and solid operating performance throughout the segment.

Now on to consolidated Bemis results. Total company SG&A expense of $90.9 million for the third quarter decreased $5 million compared to the prior year, reflecting Agility savings and strong cost controls, partially offset by inflation and the impact of achieving annual pay-for-performance targets in 2018 plan.

Total company research and development expense was $9.3 million, down slightly from the prior year and in line with our expectations. Other operating income was $4.4 million, down from $7.8 million last year. During the prior year, there were some unique items driving benefits such as the true-up of accruals related to a prior divestiture. Current year results are in line with a more normal trend for this category.

Interest expense was $18.9 million compared to $16.7 million last year due primarily to increased rates. Income tax for the third quarter was 23% as compared to 32.2% (sic) [29.2%] here, driven primarily by lower rates due to the U.S. Tax Reform. Operating cash flow of $142 million this quarter increased from $99 million in the prior year. Restructuring and other transaction cash costs were $16 million this year and $6 million 1 year ago. Primary working capital as a percentage of sales is 14.6% at September 30, improved from 15.2% 1 year ago and within our target range of 14% to 16%. Total company net debt to adjusted EBITDA was 2.4x at September 30, 2018.

Turning to 2018 guidance. We maintain the midpoint of $2.80 per share with our updated 2018 adjusted EPS range of $2.77 to $2.82 as compared to our June -- guidance in June, we do have headwinds from currencies in Brazil and Argentina, the folding box business in Brazil that is now confirmed as transitioned to the new format for the entire second half of the year and the impact of no share repurchases as limited by the pending merger with Amcor.

However, we did a good job of overcoming these headwinds in Q3 and expect to continue with strong operational performance, particularly in the U.S. as we have plans underway to strongly implement -- control costs during holiday shutdowns. Our current guidance range contains many of the same assumptions we shared at the beginning of the year. We continue to expect that Latin America and Rest of World Packaging to deliver 100 basis points profit improvement for the year and continue to expect Agility benefits of $35 million in both top and bottom of our range. And we continue to expect headwinds from reinstating pay-for-performance and customer incentives.

Where we are in the range will depend on a few factors: currency and the macroeconomic environment in Brazil and Argentina; input costs such as freight and our ability to offset them; and our ability to tightly manage costs and operational performance during the seasonally slow fourth quarter.

Turning to cash flow. We are maintaining our full year cash from operations guide in the range of $410 million to $430 million. Total expected restructuring and other transaction costs, including our 2018 guidance, are $60 million, of which approximately $12 million is related to the announced merger with Amcor. Our teams are doing a great job of pushing hard on cash flow during the fourth quarter, which will help us overcomewhat otherwise would have been a cash flow headwind versus our July guidance. We continue to expect capital expenditures in the range of $150 million to $160 million for 2018. We continue to expect our GAAP tax rate at approximately 23% for 2018.

As we head into the fourth quarter, we are focused on delivering our operating plan and continuing to find ways to drive value and position our business successfully for the long term. I will now turn the call back to Bill.

William F. Austen- Bemis Company, Inc. - President, CEO & Director

Thanks, Mike. We had a good quarter in line with expectations. In early August, we announced the plan to combined with Amcor to create the global leader in consumer packaging, which I will speak to next. But first, with that announcement as the backdrop, I would sincerely like to thank our global leadership team for its diligence in keeping our regional and functional teams focused on the objectives required to deliver our operating plan. Great job by leadership and great job by all of the teams around the world. Let's remain focused on delivering the year.

Turning to the combination. These 2 organizations will drive significant value for shareholders, employees, customers and the environment over the long term. Bemis shareholders will have the opportunity to benefit from a significantly increased dividend and the value creation driven from not only the $180 million of cost synergies identified as part of the transaction but also additional potential revenue synergies.

All internal workstreams supporting regulatory filings and integration planning are on pace to our expectations. And we remain on track for the transaction to close in the first quarter of 2019 after regulatory and shareholder approvals are received.

For Bemis, this is the next exciting chapter in our evolution, and our employees will carry forward the Bemis legacy as they showcase their skill and passion for providing inspired packaging solutions as part of the global leader in consumer packaging that is being created through this transaction. Until the transaction closes, we will continue to operate as an independent company and will remain focused on serving our customers and delivering our operating plans.

We are making progress to improve Bemis today and for the future. We are delivering our plans, which include 100 basis point improvement in operating profit in both Latin America and Healthcare Packaging. We are finding ways to continuously improve operational effectiveness and efficiency in our factories and our administrative functions. We are serving our customers better through improved quality and service, and we are laying a strong foundation for long-term net growth, bolstered by our Agility efforts to penetrate short-run opportunities.

I'm proud of our business. We have an outstanding customer base, a committed and talented workforce, a comprehensive and innovative product portfolio, a strong asset base and good positions in the markets we serve. We are confident and focused as we position our business for the future.

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

QUESTIONS AND ANSWERS

Operator

(Operator Instructions) And our first question comes from Ghansham Panjabi from Baird.

Matthew T. Krueger- Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst

This is Matt Krueger sitting in for Ghansham. So what end markets are growing within your U.S. Packaging business? And which end markets could represent a potential headwind in the years to come? And then can you elaborate on what specific factors are driving growth? Or maybe some of the headwinds that we could expect?