Amcor plc (AMCR) Q4 2007 Earnings Report, Transcript and Summary

Good day everyone. Welcome to the BMS Fourth Quarter 2007 Earnings Release Conference Call. This call is being recorded. For opening remarks and introductions, I will now turn the call over to the Vice President and Treasurer for BMS Company, Ms. Melanie Miller. Ms. Miller, please go ahead.

Thank you operator. Today is January 29, 2008. A replay of this call will be available on our website www.bms.com under the Investor Relations section. Joining me for this call today are BMS Company's Chairman and CEO, Jeff Curler; our President and Chief Operating Officer, Henry Theisen and our Senior Vice President and Chief Financial Officer, Gene Wulf. Today, Jeff will begin with a few comments about the market environment, followed by Gene with comments on financial details and then, Henry will provide some additional color on operating performance and 2008 outlook. After our comments, we will 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 would 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, 2006. Now I'll turn it over to Jeff Curler.

Thank you, Melanie. Before Gene and Henry get into the analysis of 2007, I wanted to make a few comments about our 2007 accomplishments and opportunities in 2008. This year BMS is celebrating its 150th anniversary of our founding, by Judson Moss Bemis in St. Louis, Missouri. In 1858, the foundation of this company was built on a platform of innovation as Judson brought the new technology of machine-sown cotton bags to the millers of that era. For a company to operate successfully for 150 years, it has to be able to adapt to market changes and provide innovation to maximize those market changes. That is exactly what Bemis has done over the decades and what the current management team continues to deliver today to our customers throughout the world. In 2008, we at Bemis will remember the accomplishments, challenges and the successes of our history. We are excited about the future and the continued growth of our company. 2007 was a very challenging year at Bemis. As we entered the year, our annual review of our business was very encouraging. For the past several years, we have been investing in our strengths by building product platforms that extend our technology advantage in the market and increasing our capacity for products for which we anticipate steady market growth. We have also been putting a significant amount of effort toward improving our cost structure to ensure that we are cost competitive and maximizing our return on the capital investments that we've made. During 2007, inflationary prices for food and fuel had a dampening effect on consumer spending and the economy began to show signs of weakness. At Bemis, we consider our market exposure to be diversified and defensive, including products in every aisle of the grocery store. Unfortunately, consumer spending slowed in virtually every category we follow, which reduced our sales volumes in 2007 and negatively impacted our performance. Our teams have responded well to these market changes, reducing costs and adjusting production schedules to match current demand or retaining the flexibility to meet customer needs for new products. I am also pleased with our progress in our European flexible packaging operations. We implemented improvements in 2007 that support our growing momentum in European proprietary film sales and will deliver better profit performance going forward. I am confident that the improvements that we have made over the past several years through out Bemis Company have prepared us well for the challenges that may come with 2008. While it may again be a challenging year for consumer markets, Bemis is well prepared to deliver sales and profit growth. Now Gene will go over the specifics of the financial results.

Thank you Jeff. Good morning everyone. This quarter, diluted earnings per share reported on a U.S. GAAP basis were $0.42 compared to $0.39 for the fourth quarter of 2006. During last year's fourth quarter, we recorded a restructuring charge of $4.1 million related to our 2006 plant closures. Excluding the impact of this restructuring charge, last year's earnings per share would have been $0.42 per share. This year's fourth quarter results benefited from a lower tax rate and a lower number of shares outstanding. During the fourth quarter of 2007, we recorded a $0.02 tax benefit related to dividends from foreign subsidiary. In addition, the weighted average shares outstanding decreased from 2006 due primarily to our first quarter share repurchase program to offset dilution from long-term stock-based incentives in our August accelerated share repurchase program. During 2007, Bemis purchased a total of 5.15 million shares. Total Bemis net sales for the fourth quarter increased 1.3% compared to the fourth quarter sales levels of 2006. Excluding the benefit of currency translation, net sales would have decreased 3.6%. In Flexible Packaging, net sales for the quarter increased 1.6% compared to the fourth quarter of 2006. Excluding currency translation benefits of 4.8%, net sales would have decreased 3.2%. As we look at specific flexible packaging markets and excluding the benefit of currency in each, only about one-third of our flexible packaging markets reported increased sales levels compared to the fourth quarter of 2006. As we have been doing for the past three quarters, we obtained consumer spending market data in order to look at overall demand for food and consumer products in the markets that we serve to help us better understand the consumer trends and their impact on our order volume levels. While this is backward-looking information, it does explain the slow volume trends that we are experiencing in our flexible packaging business in the United States. In packing for processed meat and cheese, which represents about 30% of our global flexible packaging sales dollars, Bemis net sales were down about 1.9%. Although we are pleased with the success of specific new products, in total, we are experiencing weakness in this category consistent with the market data reports of volume trends in these process meats and cheese market categories. In Europe, where meat and cheese represents over 60% of our European flexible packaging total sales, we noted healthy net sales increases in markets representing 77% of our totals net sales in this region. As Jeff mentioned, sales of our proprietary film structures continue to gain traction in this region of the world. Globally net sales for dry food packaging were down about 7% this quarter. Sales in this market represent about 5% of segment sales. This decrease reflects the impact of lower sales of packaging for products such as powdered milk, dry ingredients and rice. Representing about 4% of segment sales, bakery goods packaging decreased about 2.5% compared to last year reflecting the same volume declines we noted in the market data reports. The bakery market has been negatively impacted by higher cost for wheat in 2007. Net sales of our confectionary and snack packaging would represent about 8% of the flexible packaging total net sales, were down about 11% compared to last year. This decrease reflects a combination of volume declines in our South American market and some price mix erosion in our North American markets. Pet products packaging sales decreased over 10% compared to the fourth quarter of 2006; related to reductions in sales volume for multi-wall paper bag pet food packaging. This decrease reflects a general market slowdown that we have also noted in the market data. Pet products represent about 3% of flexible packaging sales. Packaging for industrial products also decreased about 4.5% compared to last year. Industrial products include packaging for such items as shingles, rout, other housing and construction related products, which have been impacted by the decline in the housing market. Industrial products represent about 4% of flexible packaging sales. Now let's move on to the markets where we have recorded improvements compared to last year. Dairy and liquid market packaging sales increased over 11%. This year-over-year improvement reflects new business in both North and South America for living stock, dairy thermoformed cups for yoghurts and edible fats and portion controlled condiment packaging. In this market, we enjoy competitive advantage because of our proprietary film materials and features. Medical device packaging which represents about 6% of segment in that sales increased about 1.6% from the fourth quarter of 2006. This division completed the startup of major tandem coating capacity and the expansion of one of our Wisconsin plants, in addition to the decanter we moved to our Northern Island state-of-the-art facility. We believe the slowdown we experienced during the second half of 2007 for this market, was specific to our plant relocation efforts. We expect to return to double-digit volume growth in 2008, as we benefit from our investment in new equipment over the past two years. Other non-food packaging sales which represent about 10% of flexible packaging decreased... increased about 2.5% by increased sales of thin gauge string film. In the pressure-sensitive material segment, net sales for the fourth quarter increased 0.3% to $157.8 million, reflecting soft unit volumes offset by 6% benefit from currency translation. Of our total segment sales 57% are labeled products, 33% are graphic products and 10% are technical products. Once again, I will exclude the impact of currency from my specific market comments. Labeled product sales were down 6.2% compared to last year's sales levels. In Europe, we experienced a volume loss of about 10% while in North America our volume decreased about 3%. In this market, lower sales volume reflect slower global economic conditions along with the impact of new industry capacity being introduced in the North American market. Graphic product sales increased by just under 1% in the fourth quarter. In this market, we experienced a slowdown in volume in both North America and European operations compared to last year's fourth quarter. This volume decrease was offset by an improvement in price mix in our European operations, where the bulk of our graphic business is centered. Sales volume in this product line historically tend to reflect regional customer marketing budgets and general economic conditions. Net sales of technical products decreased over 10% compared to last year's fourth quarter. In technical products, a change in sales mix can have a significant impact on net sales because of the price per unit can vary substantially from product to product with this market. Although this sort of... although this quarter saw reduced sales volume, the change in the North American sales mix of technical products was the primary contributor to the decreased sales level. The impact of a soft housing market and weaker medical patch customer sales are the major factors in the volume reduction and the decrease in price mix. The total Bemis gross margin for the quarter was 17.6%, a decrease of 120 basis points from the gross margin of last year's fourth quarter of 18.8%. During the fourth quarter, we remained behind our pass-through of increased resin prices, especially for polyethylene-based products. A large portion of the resin increases have been passed through as of January 1st. However, new rounds of increases have been announced and could have an impact on the first half of 2008. With a challenging economy in 2007, we have remained aggressive at controlling our selling, general and administrative expenses. Our selling, general and administrative expenses have been very fairly steady in 2007, with both quarter and year at 9.4% of net sales. Continuing through the quarterly income statement, other cost and income included about $8.3 million of financial income reflecting the investment interest from cash balances and fiscal incentives at international occasions. While it's classified as other income, fiscal incentives relate to flexible packaging operations and are included in our calculation of segment operating profit. Now looking at segment operating profit, flexible packaging operating profit was $83.3 million for the fourth quarter of 2007 or 11% of net sales. Currency translation benefits added 2.4 million to operating profits. Excluding the impact of restructuring charges, operating profits as a percent of sales was 10.9% for the fourth quarter of 2007 compared to 11.8% for the fourth quarter of 2006. Our operating results in 2007 have been negatively impacted by lower volumes as well as raw material cost increases. Operating profit in our pressure-sensitive material business segment was $6.7 million or 4.3% of net sales for the fourth quarter, including $670,000 of currency benefit. This is compared to operating profit of $9.2 million or 5.9% of net sales for the fourth quarter of 2006, when we exclude restructuring charges. Results in this segment have been impacted by lower volumes and the negative change in sales mix in our graphic and technical product sales during 2007. Total debt to total capitalization was 32.9% at the end of 2007, which is nominally the same as last year end when the ratio was 33.0%. We are quite pleased with the results, considering the level of capital expenditures this past year and the share repurchases we made in 2007. Cash flow from operating activities was a $106.9 million in the fourth quarter of 2007, driven primarily by improvements in working capital. For the year 2007, we achieved a record $399.4 million in cash from operations. Although we came up just short of the $400 million mark, we look forward to the opportunities to achieve another record in 2008 by breaking through the $400 million level. In 2007, priorities for our cash included completing our multiyear capital expansion project for which we spent $179 million, dividend payments of $90 million and share repurchases totaling a $154 million. Back in July, we announced a 4 million share accelerated repurchase program. This was completed by the beginning of December. Looking forward to 2008 we expect to execute in the first quarter, our normal 10b5-1 share repurchase program to offset the dilutive impact of long-term stock-based incentive programs. We have a total of 5.1 million shares remaining in our Board authorization for share repurchase and we will also make opportunistic share repurchases during the year. Now I will turn the call over to Henry for more details on the 2008 outlook and capital spending.

Thank you Gene. We do expect many of the same challenges that we dealt with in 2007 to continue into 2008. These challenges include volatility around resin costs. This volatility is not only driven by the cost of oil and natural gas but also by the global demand for resins. The current economic conditions are another serious headwind for Bemis. Whether or not, we are currently in a technically defined recession. In these markets that we serve, the consumer is acting like we are in recession. As we enter, 2008 we have already made many improvements that will help offset the negative economic impact to these issues. During 2007, we took the world-class manufacturing practices used successfully in our South American operations and began implementing them in our European flexible packaging operations. This program affected a change in a way that we operate in Europe that will improve our profit potential in that region in the years to come. We have also expanded these world-class manufacturing practices to our operations in Mexico and in 2008, we will begin programs of selective locations in our U.S operations. These programs incorporate improved performance measurement disciplines with accountability at all levels of a plant organization and I am confident that we will quickly see these programs deliver visible and measurable improvement to our operations. We have adjusted workforce and production schedules to accommodate more volatility in production volume levels that comes from the weaker demand environment we are in and we have made some select changes to our management structure to bring more cost focus to those specific operations. Looking forward to 2008, we expect diluted earnings per share for the first quarter to be very similar to the past two quarters in the $0.40 to $0.43 per share range. For the total year, we expect diluted earnings per share to be in the range of a $1.78 to a $1.88, demonstrating growth from our 2007 results. Obviously the results of the year will be impacted by the severity and geography of the global recession as well as pressure on raw material costs. That said, we are confident that the new business opportunities that we have in front us will support our growth expectations. We expect 2008 to be another record year of cash flow from operations. Our priorities for cash flow in 2008 continue to be acquisition opportunities, dividend payments, new capital expenditures and share repurchase opportunities. In 2008, our capital spending will slow substantially from recent levels. Next year, we expect to spend about $125 million on plant and equipment. This is compared to spending levels ranging between $158 million to $187 million over the past three years as we build up our capacity, and our capabilities, in a number of key product and technology platforms. Now with this capacity in place, we have the right tools to drive growth in the high value-added product lines, using improved mix to boost both the top and the bottom lines in 2008. This includes our investment in our polyester platform used primarily for meat and cheese packaging, our new and expanded medical device facilities, our new proprietary polypropylene and polyester sealant films for livestock applications, and additional capacity for multipack. In addition, we have invested in unique pressure-sensitive adhesive coating capabilities for our technical products. We have positioned ourselves to capture opportunities to add case-ready meat packaging and pharmaceutical packagings to our product lines, both of which are growing markets with great opportunities incorporated by unique packaging technologies. In our more competitive markets, we continue to focus on taking cost out of the process and improve profit margins. In 2008, we have a targeted list of improvements to make to those markets that will further reduce our costs, improve our customer service, improve our quality and strengthen our competitive position. Regionally, we are pleased with our European platform for proprietary film materials and expansion of our polyester platform to Western Europe and expect to use those assets to fuel growth in 2008 and beyond. Our South American operations are growing with the regional economy and serve as the packaging leader in that region. We do expect Asia to be a focus for growth over the next few years, as we establish ourselves in the region. We currently have a plant in Malaysia that we expanded recently to accommodate food packaging in addition to its legacy medical device packaging products. Today, I am pleased to announce our commitment to establish a greenfield converting facility near Shanghai, China. This plant is located near existing customers and represents a low-risk entry point from which to grow our presence in the Chinese market. Although, we are facing many macroeconomic issues as we enter 2008, I believe we are in great position of entering the New Year and with the expansion over the last few years behind us, our business teams can now focus on our growth opportunities. We will now open up for any questions. Question And Answer

Thank you Mr. Theisen. The question-and-answer session will be conducted electronically.[Operator Instructions]. We will go to our first question from Ghansham Panjabi with Wachovia.

Hi guys, good morning.

Hello Ghansham.

Two related questions if I could. First off are you expecting any sort of resident relief in your '08 guidance, may be in the back half of the year?

Henry do you want to answer that question

No we are not expecting any, what we have built into our plan is flat resin.

Flat versus the end of the first quarter or would you project --

Flat at the end of the first quarter.

Okay, alright. And then just in terms of your overall business, particularly flexible packaging, have you seen any change in the market environment during the fourth quarter. For example is December better than October and also how is January tracking? Thanks so much.

Ghansham, as far as tracking the business in December, it was fairly weak in flexible packaging, but January has started off very strong. So we are encouraged by that. But we have had a couple of years in a row 2006 and 2007, where we had a weak December and then followed up with a good January. So it's a little to early to say but we are encouraged by the strong order intake and shipments that we have seen in January to-date. So little too early tell but we are encouraged.

And we will go to our next question from Steven Nissan with Mindflow Capital [ph].

Yes thanks very much guys. Congratulations on a decent quarter in a very challenging market.

Thank you.

You guys have talked about obviously this year is going to be very, very challenging for your company, and also the industry as a whole. Going forward what are going to be your operational proven initiatives, regarding meat manufacturing, and Six Sigma throughout plants so that you can improve throughput and how you prepare to see some benefits of that impact?

Steven as we mentioned in our call, I have mentioned in last quarter's call, we have a real commitment to changing the culture of Bemis Company and putting more focus on the cost side. We have always done a very good job on leading with technical innovation. But the commitment to cost is really becoming the number one commitment for our company right now, especially in some of the businesses that are more affected by lower margin product offerings. We have not only commitments with ourselves, but we have commitments that we have made with outsiders that are helping us in accomplishing the goals that we have and we will be looking for millions of dollars of cost tick out and I don't want go through each individual operation, but just as an example in our largest flexible packaging business, we are looking at about $25 million of hard cost take out in 2008. So we do have plans for each specific business unit and we will accomplish those, as we go through the year.

My follow up to the question, going forward from main issue, one metric that you guys are going to be using to measure if you may have to make sure you are productive, are you looking at OEE, and also going forward what systems and solutions are you going to be putting in place to accelerate these great CI initiatives, Continues to Improve initiatives, so we can see the improvement in the stock price.

OEE is a measurement that we will be incorporating throughout our company and as Henry mentioned, we are rolling it out in a number of locations in North America as we speak. But that's a good point. We will be measuring OEE and that will be good one to help us track the progress that we are making in the cost take out and productivity improvement area.

And we will now go to Ross Gilardi with Merrill Lynch.

Good morning. Thank you.

Good morning. Ross.

Good morning Jeff, I just had a question, your CapEx guidance; so you are guidance to $125 million for 2008. I understand that several of your larger projects are hopefully now behind you. Do you think the $125 millionish-type range is a level that's sustainable several years out?

Ross it's our objective to be more disciplined at how we look at capital expenditure going forward. We do feel that we have spent in the right areas in the past couple of years to expand the platforms that we know, drive the new products and the higher margin products that we feel, we have a competitive advantage with. But we are certainly going to be flexible enough that if good opportunities do come forward that we are not going to say no, that we will be flexible in our ability to capitalize on good opportunities. But we are taking a very disciplined approach and we feel that $125 million is a good number for us for 2008.

And can you guys just elaborate a little bit on how you are taking up your best practices from South America to European and now you are... some of your North American facilities?

In South America, we were very surprised when we made the acquisition of Dixie Toga, a couple of years ago, to how disciplined our manufacturing and management team was down there as far as cost control. And they had a number of techniques that they used and one of them was following OEE that we weren't using in the rest of our locations around the world. And instead of starting over from scratch, we thought we would take those good ideas and in fact, we moved some of the people from South America to other regions in the world. The individual heading up our manufacturing organization in Europe now actually came from South America and was a leader in that region of the world. So, we have been taking those good techniques from South America, moving them to Europe, moving them to Mexico, moving them to the U.S. and just taking those the systems and utilizing them. As we know that they have been proven and that we will roll those out in the rest of the regions of the world as we go through 2008.

And Claudia Houston [ph] from J.P. Morgan has our next question.

Hi. Thanks very much, good morning.

Hello Claudia.

Hi. Just a couple of question on the flexible packaging business. When I look at margins in our business, they were pretty flat quarter-to-quarter, but were down year-over-year and I guess just as I think about 2008, you have given all the attention on the cost reduction. I mean how much of that should we expect really translate to margins in 2008 and sort of how should we think of the timing of that going forward?

Claudia, obviously the big issue we have with the margin in both of our business units and we are really talking about Flexible to start with here is what's going on with raw materials. And we do have raw materials that have increased in the fourth quarter of 2007 that need to be passed through the marketplace. And Gene had mentioned that we are lagging in those pass throughs and that's just how it works with our process and how we accomplish the passers. So we are lying on those and now that we are sitting here looking at what's going to happen in the first quarter of 2008. We know that there are announced increases for polyethylene products that remains to be seen. What's actually going to happen but they have been announced and the manufacturers of those products do have a global marketplace that they are looking at. So if those raw material costs go into place... increases is going to place [ph] we will be lagging on those through the first quarter of the year. That's why we made comments about the uncertainty within the first half with what happens with resin. And then, we are thinking that in the balance of the year, the later part of the year that those raw material increases could disappear. But we don't know that's for sure that's just what we are using in our planning. So that's a big part of what happens to our margin going forward. Now as far as our cost take our programs, we would like to be able to say that we can generate through cost savings all of the other inflation that we have in the business, we can cover that by good ideas that come out of our operating people, by using the techniques that we have put in place. So that the raw material increases we need to pass those through. All the other inflation that we have in the business; it's our objective to pass on that and cover it with a cost take out. So we don't pass out longer our customers will only pass on the raw material increases.

Alright that's really helpful I appreciate it. And then just as a follow-up on the Flexible side. I was hoping that you just talk a little bit more about the commercialization of the new products you have got for the first half of the year and may be just a little bit more color on sort of early market penetration and how you're seeing those products in market. Thanks.

We have talked about... this is Henry. We have talked about our polyester platform and we talked in the past of all the bacon package at Oscar Meyer and we are seeing that style package grow across other ones in meat product lines. We are seeing interest in the cheese area, we see interest in other areas involving the rigid polyester. The program of using polyester as a sealant in Europe for instance in rigid applications is gaining ground. We are seeing gains and grounds in polyester sealants and polypropylene sealants at various livestocks I have talked about and another key area that we see growth is in the stick pack in the powder drinks and the convenience features that that brings. So those are just some of the products that we are introducing in the last part of 2007 and starting to get traction in '08.

Another good one Claudia too is the kind of the revolutionizing again the cheese package that's in the marketplace. Bemis Company for the last 50 years has led natural cheese packaging and have always come out with the leading material in this market and in 2007, we started offering the new generation of cheese packaging and that's getting a good acceptance in the marketplace. And what happens in any product offering you come out with the leadership position and over time your competitors' kind of start knocking away at your competitive advantage. Then you have to come out with a new offering and this will be a really over a 30... excuse me, over 50 years. So, it really be our third generation of new materials for cheese packaging. So it goes to show how long once you do have a new product, how long it can last. But we are very excited that new offering in the marketplace.

And we'll now go to Tim Thein with Citi for our next question.

Yes thank you. Hi good morning.

Good morning Tim.

My first question is on the... could you just remind if you can in terms of your contracts breakdown within, again within Flexibles in terms of when in a... the breakdown between the contract that have escalators in them as well as the open contracts, and when you think should the first quarter or second quarter whenever it is marked, a hopeful peak in the commodity resin cycle win, you think your price realizations will start to catch up with that and then the second part, Jeff if its possible, can you just kind of generalize in terms of the tone from some of your negotiations with your... or your talks rather with your many customers in terms of their new products launch initiatives for 2008. Have they seen a step up or is that a step down in terms of their aggressiveness given that the raw material cost inflation and input cost inflation that the meat and cheese manufacturers had been facing. Thank you.

Well Tim, I wish I could give you a simple answer on the pricing question. Unfortunately, our pricing depending on what business unit you're in is all over the place. We have customers that... well first we have probably 50% to 60% of our total business in flexible packaging that is contract with escalator de-escalators and then in some units it's even higher than that. But those price triggers are not consistent throughout the company. It's not like every quarter we raise price. Some of the contracts are still six-month contracts and obviously there we lag more than in the quarterly contracts. But they are not all triggered on calendar quarters, some are half way through a quarter. So it again depends on individual negotiating position with individual customers. So it kind of continues through the first quarter, we will catch up and then in the second quarter it could be other contracts that we will be catching upon at that time. As far as the climate with our customers with regard to new products, the largest food and consumer products companies that we have are always very, very keen on introduction of new products and the big piece of the business that we have in meat and cheese, all of those large meat companies are looking for innovative new products. So we are very comfortable continuing with them and see no slowdown there. Obviously we have customers that are concerned on what's being going on with the price of their product in the marketplace and how it's affected consumer demand. I know there has been discussion recently in the marketplace about the increased pricing that's going on for protein products and confectionery products out there and that certainly bothers our customers, and how that's going to effect the demand for their product. But they're all still very, very excited about new product offerings and we will continue to participate with them in those new products.

We will now go to Reik Read with Robert Baird and Company. Reik Read - Robert Baird & Co.: Hey good morning. Jeff may be you could follow up on that last question and just with the state of rising food prices, can you talk a little bit about what that may be doing to the mix and if you can throw some geographic flavor in there as well, that would be great?

As far the mix we were encouraged in that the convenience packages that we are participating in a lot of, they still seem to be in a high demand. We haven't gotten to the point where the consumer has decided to go out and buy 50 pounds of beans and rice and change their daily diet. But there is a concern with our customers that there could be a shift in the... what's going on long-term. What we have been thinking here at Bemis Company in the latter part of 2007 is that there was possibly a kind of the individual inventory adjustment by the consumer household and that people were not wasting as much at home and they were kind of going through their pantries and making sure that everything was being used instead of maybe throwing out 30% or 40% of what you have in your home. We think that that's behind this, so as 2008 starts up that we should have more of our normal demand. But there is still a concern about what's happening when the price of wheat goes up by about 70% or so in 2007. How that's going to affect the consumption of bread and some of these other products that we package. But we are encouraged again in the fact that the convenience-type products still are very much at the top of the discussion with our customers. It's where they make the most margin and we feel that they are going to continue to stress those packages. Reik Read - Robert Baird & Co.: Okay and then, just on the status of the margin improvement. Can you guys talk a little bit about the timing of the benefit in terms of the teams like Europe has furthest along than Mexico and North America. As you make these changes, when do you really start to see the benefit and can you also talk a little bit about the amount of charges that maybe coming as a result of these initiatives?

Well as far as charges go, we are not going to have any charges for these. These are everyday ongoing expenses for the units and we are not going to be talking about charges for these cost take out programs. In Europe, we are having the benefit of good cost take out momentum and also the acceptance of these new products that we have been talking about for the last year. We are finally starting to get customers buying in reasonable quantities these newer higher margin materials. So we talked about margins in Europe lagging the U.S for quite some time and I think if you talk to anybody that's in this packaging world, they will talk about how depressed margins have been in Europe for a long time. And that's why we are taking this more of a specialty approach was what we do in Europe. But we are gong to start to see our margins climb in Europe and they have been a less then half of what we have in North America and we expect them to start gradually moving up and in 2008, they will better then they were in 2007. To talk a little bit about Mexico; Mexico we brought a depressed money losing operation a number of years ago and has taken as longer than we expected to get our heads above water. And in 2008, we expect to be there. We are starting to get sales momentum in that region and we have a good management team in place now that understands the objectives. And you put that together with the cost take out efforts and we are going to see good improvement again in Mexico. We had good improvement in 2007 over 2006 and 2008 will be better yet. The real challenge for us in 2008 is in right here in our own backyard in North America, where it's been traditionally a highest profit generating part of our flexible packaging business and we need to see cost take out become a bigger and bigger part of what our teams accomplish here. So there's going to be a lot of discussion and a lot of work being done right here in our own backyard to move the margins back up, and that will happen. We are confident going into 2008 and we will make the plan that we put in front of you.

And our next question comes from George Staphos with Banc of America Securities.

Thanks. Hey guys, Good morning.

Hello George.

How are you? Jeff I just wanted to come back to that question. If productivity benefits are going to offset inflation in North America and pricing is going to offset resin ultimately, obviously there is some natural lag in your contracts. How do you actually get margins to improve then in North America, because as they were described, those two functions are basically a push. So how should we see margins expand in North America from the way you described it and then secondly, can you be a bit more specific within Europe in flexible packaging, what type of dollar or a percentage margin improvement should we see in margins in 2008? Thanks.

Hi George, we have spent a lot of time talking about cost in this call, but the real driver of our long-term growth and health is new product innovation. And we do have a lot of new products that are coming out into the marketplace as we talk. The expansion of our polyester-type products which are extremely good margin items for us and we have invested heavily in this area in the last couple of years. That's going to help us move margin up. Our new cheese packaging material that I talked a little bit about, that's going to help us improve margin. So we're continuing to work on those new products and we have them in every business unit and those are still a big, big part of the future of Bemis Company. So, part of that is called off to little bit too much emphasis on cost, but innovation is still extremely important and that's where we are going to get the margin improvement. As we started driving volumes in these new products, which have a very high margins that drives right to the bottom line. As far as the European margin improvement, like as I have mentioned before it has been operating at about half of what or less than half of what North America has been operating and we are expecting that to go up a couple percentage points in Europe. It's still going to have us lagging North America quite a bit, but its moving in the right direction. And we combine that new product offerings that we have along with the cost take out plan and I think we have some fairly reasonable goals to get there in Europe.

And our next question comes from Mark Wilde with Deutsche Bank.

Hi. Good morning. Just a following up on Europe; any sense over in Europe that we are seeing any kind of ripple effects in terms of slowing, in terms of European demand?

Not in the specialty businesses that we are working in, but as far as the overall economy, I think there has been talk about Europe slowing. So like we have ripple effect around world what happens in the U.S. is not decoupled from the rest of the world. There still is a coupling and there is concern about the overall economy there. But we feel with our approach, more of a specialty approach that it's not really going to affect this. We are going to concentrate on the convenience features over there, like we are concentrating on here and that will be a positive for us.

Okay, just if possible for you to give us a little more color on that Chinese project that you outlined this morning, what particular markets you are going to be aiming at?

I think Henry is our Chinese expert here. So he will give you an update on that.

It really is a converting operation, where we will be putting in some equipment to service the medical business that we have. We currently service a substantial amount of medical business out of our Malaysia facility and that will put it closer to the customer. And then we have also started to get some sales in the protein market in the Chinese area and this will give us an opportunity to better service those customers. So we see it both in our food packaging arena and in our medical device packaging.

Mark and I think it's important that as you know that we do have sales in China to say we have not been producing in China. So this will be our first production site in China. So we do have sales and sales people in place over there and now they will just be selling product that's manufactured right there near Shanghai.

And we will now go to Sanjita Jain with Lehman Brothers.

Hi good morning. Thanks for taking my question. The first question I had was --

Hello Sanjita.

Hi how are you?

Great.

The first one on Europe, just following up on Mark's question. Can you tell us if you are seeing any... I understand your competitive positioning, but if you are seeing any signs of consumer slowdown the kind that you saw in the U.S. last year. And also in South America if you are seeing any coupling effect from the U.S. slowdown. And secondly on your overall tax rate; your tax rate has been coming down for three years in a row and I was just hoping for some guidance on how we should look at 08 tax rate? Thanks.

Well Sanjita as far as the European economy goes and how would it affect us, we can make the macro... again the macro statement that there is probably a slowdown starting in Europe, following what's going on in North America. It hasn't been affecting us, because we have really been pushing the sale of these new products that we have been talking in about for the last few quarters and our management team over there in Europe is pretty bullish on being able to sell more of that product in 2008. So we are feeling good about that and again coupling with that with our cost take out plans over there. We are comfortable with our planning for 2008 in Europe. And in South America, South America we saw a volume growth in 2007. We expect additional volume growth in 2008. In past calls, we had commented about some of the difficulties that we have had in Brazil, in particular and the fact that their currency have strengthened so much that it has allowed them to be kind of what we call being attacked by all of the surrounding countries that have had weaker currencies. So we have had a some effect down there with good volumes, but with price problems. So in 2008, we are starting up a packaging operation in Argentina to the help with sales to our Argentina customers and we are going to continue to watch with what happens with the currency in Brazil compared to the surrounding region down there. We are still very bullish on South America. We have a very good management team down there and it's a part of the world where we would like to continue to grow. And so we will be looking at available acquisitions down there and we will be continuing to expand our capabilities down there. And Gene is going to answer the question on taxes, because he is our tax expert here or Melanie may be.

I will take that question. As you look at our tax rate going forward you can expect it to be nominally 37%, little bit below 36.8% to 37% out of your good guide for you in 2008.

And Chris Manuel with KeyBanc Capital Markets has our next question.

Good morning gentlemen.

Good morning Chris.

If I kind of connect the dots from some of your answers and discussion from previous questions, it sounds like cost pressures sort of offset by productivity and resin by price et cetera and some of the last, I think starting November or December of last year or actually of '06 is when the volumes decline so to began. It sounds like moving forward, you are anticipating that base volumes begin to improve. What sort of volume levels do you have embedded into your full year earnings guidance?

We have volume guidance increase of what we have in our plan trying to remember, say 6% to 7% volume. In our flexible business 6% to 7% volume increase, we have in our plan for 2008. One other things that we have committed ourselves to, Chris is that we are going to defend the house, is some of the terminology our people are using and we are a major player in packaging in North America and we are going to be aggressive with how we look at businesses that are put out for bid and we combine that with a strong cost take out program that we will be able to compete in that market. So, we are going to be not allowing competitors to as easily come in and take volume away from being in this company. But we are going to be more aggressive on the sales side of our business.

Okay that's helpful. And then my second follow up question is, as you think about some of the cost take out opportunities that you have, I think you mentioned in your biggest business, I guess I am assuming that's probably your meat and cheese business that you had about $25 million or so of cost available to take out is. When you are talking about that cost take out, is that sort of a net number of you would expect in EBIT or an operating could have proven and would it be fair to assume that something for a whole company might be... or what would you assume for a whole company?

I don't have that number right in front of me here Chris but the... those are hard dollars that we are talking about and those are goals for one of our largest business units and I don't have that. Henry, do you have a better feel for that right in front of you there?

No I don't have --

That's one, we will have to get back at you at the next call. We will try to have a little better number around that.

And we will now go to Tim Burns with Cranial Capital.

The question I got for you is what will you be seeing innovation in chicken feet packaging with this Chinese initiative?

I know I understand it's a quite a delicacy, Tim. So you probably know more than we do about that but, we are going to be initially looking at expanding our medical business and just kind of having a base for our sales people up there or over there to sell some of the more higher value-added products that we manufacture at the Bemis Company. But it's not a humor, as we do have a big position in South America with Sadia and that's one of their big --

Export spot.

Export businesses is chicken feet to China. So there is a demand for that product we know that.

Good I hope you guys get a big share there. The last couple of years have been you know not only difficult from an economic standpoint, resin cost standpoint, but I just get the sense and just on the house type thing. It truly reflects the fact that you're meeting more competition than you have in the past. You are now speeding up innovation and you are now taking out costs. It sounds like you are taking on some of these competitors in their core markets. Cups, lids, case-ready beefs etc. We have one of the big guys relatively focused on other matters and maybe, maybe in either of the cases there's been some volume grab if you will to make things look better, but does this settle down now? I just get the sense that you guys aren't going to take any crap moving forward. We have seen that at OI where they were the best supplier and they weren't going to just give in on price but they would walk away from bad business. Am I seeing that correctly?

Well, Tim you know, what's going on in the marketplace as well as anyone, there's always things that are happening that affect the overall in the macro business and things that are kind of out of your control. All we can do at Bemis Company is to put ourselves into a position to do what is best for our shareholders and employees and customers and we are going to continue to do that and we are going to hopefully do it better than most if not all of those that we compete with. We feel that we have the financial resources to do that, we have the experience, we have the best experience that's out there consistent, it's been there for 150 years, some of us feel like we have been there for more than a 150 years. But we're going to be doing the right things for our company and leading with elevation and we are not going to take a backseat to anybody on innovation. But we are going to make sure that we are going to be able to compete in all other markets that we have traditionally been competing at and we are not going to let people come in and just kind of knock us off, because they think we are rolling over a high-class supplier. So that mentality and culture is being talked about every time we get together with our management team and we are very serious about it. So I think we are in good shape and going in to 2008 and our goal is to perform and do what we are telling you we are going to do for the year and not be a disappointment as we have been in 2007.

Hey Jeff, the European market you have done study after study looking at various components of packaging and you are right; the profitability is anywhere from a 100 to 300 basis points lower. A lot of it has to do with I guess the kingdoms throughout each country that weren't willing to join the Pan-Europeanization as big consumer product company set up one shop to serve the entire market. Are you guy... and obviously legacy costs and severance costs so in and so forth, but are you guys better positioned now to drop in plans to serve such customers?

Right now we are the best positioned, we have been and since we have made our foray into Europe. We have a good leadership from a manufacturing standpoint. We have our sales team in place now. As you know, we got to where we at by making a number of acquisitions and we have acquired a lot of different cultures that really weren't inline was we were trying to do. So we are in a best position and then we have been in the past and it's... we are going to continue to work the plan that we have since the beginning of being a kind of mix supplier of value-added products that deliver convenience and are very good for our customers. So I think we are finally starting to get a little bit over the hump there in that region of the world.

Operator. Are there any other questions?

And it appears that there are no further questions at this time

Alright, thank you. As Jeff mentioned we are proud to be celebrating our 150th anniversary this year and to kick off our celebration, we will be celebrating at the New York Stock Exchange this Thursday with the ringing of the closing bell. More details about this event will be sent out tomorrow. This ends our conference call for today. Thank you all for joining us and have a good day.

Ladies and gentlemen that does conclude our conference. Thank you for your participation and please have a wonderful day.