Amcor plc (AMCR) Q1 2013 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Bemis First Quarter 2013 Earnings Call. This call is being recorded. For opening remarks and introductions, I would like to turn the call over to Vice President and Treasurer for Bemis Company, Ms. Melanie Miller. Ms. Miller, please go ahead.

Thank you. Welcome to our first quarter 2013 conference call. Today is April 25, 2013. 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 CEO, Henry Theisen; and our Vice President and CFO, Scott Ullem. Today, Henry will begin with comments on the performance for the quarter followed by Scott with comments on the financial statements and outlook for the year. [Operator Instructions] On today's call, we will also discuss non-GAAP financial measures as we talk about Bemis' performance. Reconciliations of these non-GAAP measures to GAAP measures we consider most comparable can be found in the press release and supplemental schedules on our corporate website under Investor Relations. 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 costs associated with information systems, changes in customer order patterns, our ability to pass along increased costs in our selling prices, unexpected costs related to our facility consolidation efforts, interest rate fluctuations and regional economic conditions. A more complete list of risk factors that's included in our regular SEC filings, including the most recently filed Form 10-K for the year ended December 31, 2012. Now I'll turn the call over to Henry Theisen.

Good morning. I am pleased to report that this quarter we achieved record first quarter adjusted earnings per share, continuing the momentum that we started in 2012. Our improving performance reflects the benefits of our 2012 facility consolidation program, the initiatives we have implemented to optimize and leverage our scale and the overall improvement of sales mix as we commercialize new business in our higher-margin product areas. Our facility consolidation program includes the closure of 9 locations and the consolidation of production into our remaining 74 plants. Eight of the 9 locations have been closed with the last one expected to close during the second quarter. With 8 of the 9 plants closed and most of the cost eliminated, we still expect to deliver total program cost savings of $45 million in 2013, which represents an incremental $37 million of operating profit compared to 2012. The total estimated cost of the facility consolidation program has not increased, and we will continue to highlight those costs separately in our financial statements to provide you with adjusted results that better reflect the trends of the ongoing business. The first quarter of the year is normally one of the slowest per unit volume, and this year was no exception. While customer orders were strong throughout the quarter, shipments did not accelerate as they normally would in late March. We believe that the coolest spring weather in many parts of the U.S. slowed the start of the normal seasonal sales increase. In Latin America, we have seen year-over-year declines in packaging volumes as the market adjust to a slower growing economy. We are uniquely positioned in this region to participate in the growth and modernization of this emerging economy, and we are making capital investments in 2013 to establish high-barrier capacity in both the…

Thanks, Henry, good morning, everyone. Today, I'll go through the consolidated and segment financial details of this quarter's results. There's also supplemental financial information on our website near the link to this webcast. This quarter, we reported adjusted diluted earnings per share of $0.53, 8% ahead of last year's first quarter and in line with our first quarter guidance. This improved performance was primarily driven by cost savings from the facility consolidation program. It is important to note that this quarter's effective tax rate of 31% is an annual anomaly and did not contribute any extra tax benefit to our operating profit, net income or EPS. I will explain why, just as we did last year. In a prior acquisition, Bemis assumed a potential non-U.S. tax liability from a seller. And the seller completely indemnified us in the event that tax liability is ever realized. The seller's indemnification is reflected in a non-tax-deductible receivable, which we reversed in this first quarter because the potential tax liability was not realized. The reversal of the liability provided a $4.5 million reduction in our tax expense. At the same time, we reversed the related $4.5 million non-tax-deductible receivable. So pretax income was $4.5 million lower and tax expense was $4.5 million lower and net income and EPS were unchanged. Turning to our segment results, beginning with the U.S. Packaging. Net sales decreased 2.5% due principally to volume declines in over-wrap for beverage applications, as well as diaper and tissue products. This effect was partially offset by higher unit sales volumes in packaging for meat and cheese, as well as dairy and liquid products. As Henry mentioned, weather played a part in some of the volume weakness that we experienced in certain markets, and we also reduced our exposure to low margin sales volume…

[Operator Instructions] And we'll go first to Ghansham Panjabi with Robert W Baird. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: I was wondering if you could quantify the exit of the lower margin business from a topline perspective? And also, Henry, who's picking up the share. I mean you guys are one of the bigger players in the industry, and if it's not as profitable for you, I can't imagine it's profitable for others. So is it private companies that are typically picking this up?

The biggest volume that we exited were really in the Global Packaging segment. We closed 3 facilities that are not related to food, they're into things like folding cartons. And that is just volume that exited our system because it doesn't -- it just didn't make any sense any longer. That's where the majority of it is. The amount of business that we would -- in the U.S. Packaging segment that didn't stay with us, was minimal. It was just 1 or 2 smaller accounts and it was minimal. Most of that business did transfer, and it did transfer at higher pricing. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: And then in terms of the working capital increase in the first quarter, I guess it's normal from a seasonal standpoint, but it's still quite a bit higher than was last year even with volumes down. Was any of the build, given the pending closure at last facility also?

Yes. Our build -- we have the normal amount of build that occurs going into our busy season for the second and third quarter. And then we also -- as we transferred this down, and we're going to be closing our last facility in the second quarter, we had to build volumes at each one of these stages so that we could transfer the material without causing the customer any concern. So it's a combination of both. And we should expect to see the amount that was built in there for facility consolidation to go away in the second quarter.

We'll take our next question from Scott Gaffner with Barclays.

I was hoping you could just talk a little bit about the U.S. Packaging business. A little bit about the grocery products that were impacted by the cool weather that you mentioned later in March, I think it's what you mentioned.

Scott, we generally see, and I've been here since 1976. At the end of March, you generally see a kind of surge in sales and that surge is related to the summer -- the winter season turning to the summer season. You see it in -- we saw it in paper bag for charcoals. We saw it in our meat business, the things you would normally grill like hotdogs and sausages on a grill. We saw it in our bakery business with hamburger buns and hotdog buns. We saw it in our bundling of shrink films for drinks. We saw it generally across the entire board. Everyone of our major product lines that you would associate with the summer season, we didn't see that surge in the last couple of weeks of March.

Okay. And then you talked a little bit about improving the profitability in your European business. Is that more around what we've been talking about getting rid of this lower-margin business? Or is it more of a cost-focused? Can you just talk a little bit more about how you're going to improve the profitability in the European business?

Well, we closed 1 facility late last year. And that will help our profitability. The other is, we're going to be concentrating now on more niche products, more niche markets, and we're going to be concentrating and putting extra emphasis on our continuous improvement programs that we have in the European continent.

We'll take our next question from Adam Josephson with KeyBanc.

What steps are you taking to address the declines in Brazil such that, that region doesn't remain a drag on results at the extent it was?

We have 2 things. During the course of last year, we exited the folding carton business in box set folding cartons, which is a big chunk of our Dixie Toga operations. The second thing is, we passed through price increases in the first quarter that were substantial.

So you don't expect Brazil to be a drag in the subsequent 3 quarters?

I do not. I expect Brazil to be a good part of our company. I expect it to make its profit and plans. And I expect it to do well.

We'll take our next question from Chip Dillon with Vertical Research Partners.

This is kind of a high-level question, but if we look at the incremental improvement that we should expect from the facilities consolidation, $37 million, it looks like it's about $0.23 a share, and it looks like your guide is, for I guess, for a $0.15 to $0.30 improvement when you consider $2.15 being the operating number for last year. So it's almost substantially all of the improvement and given the absence of such a plan for next year, should would we expect some of the business shifts you're talking about going to more niche markets and higher-end markets will sort of drive the growth next year and could it match the growth that we expect to see in EPS this year?

I -- if you look at what's going on in our business, the areas that we really want to grow are high-barrier and our food safety, sterility, our medical device business. Those businesses continue to show growth. And I expect next year, because of the investments we're putting in this year, we'll continue to have more growth. And as you look down at the chain of the new product lines and the new markets -- the new products that we're offering, those should see growth. So I expect the areas that we want to be in are going to show growth this year and next year.

Got you. And as a quick follow-up. Are the markets you're moving more into that are showing that growth, how do you feel the competitive landscape is versus some of the more traditional markets that aren't as specialized? Do you feel there -- you guys have a more unique position? Are they more consolidated areas where there is less -- fewer players? Or is that not the case?

If you look at the markets that you'd want to call commodity, really where the packaging is a delivery system or it does cover. There are numerous small competitors in that marketplace, and it's very fragmented and it's very competitive. As you move up the chain into food safety and sterility, where a person can get sick if it isn't done properly, there's more technology in the film, there's more complexity in the film, there's fewer players and it is less competitive than the dust cover. And there's a risk for customers to move the business.

We'll take our next question from Phil Gresh with JPMorgan. John M. Royall - JP Morgan Chase & Co, Research Division: This is John Royall sitting in for Phil this morning. So it sounds like you expect volumes to improve for the rest of the year to get yourself back to flat. Is that all going to be in high-barrier? Or is there also going to be some growth in low-barrier?

I think there will be growth in high-barrier, growth in our medical device, pharma sector, and pretty much flat in the low-barrier area. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Okay, great. And can you give us a -- some sort of the sense for the impact of resins in your 2Q guidance?

The resin has been pretty stable this year. You had a nickel going in early in the year. I think you have $0.04 going towards the end of the year. Those are -- that type of magnitude going in is not going to affect our business at all. We will pass through, as we normally do in our escalator-deescalator contracts. This is not a significant number and it's going to impact us at all.

We'll take our next question with -- from Chris Manuel with Wells Fargo.

Let me start with -- when we look at kind of business wins-losses, things of that nature, in the quarter, you guided that in the year that things will be essentially flat. And again, appreciating that I don't have the same 10-year perspective as you do, Henry, but at least in the last decade, those that I have been covering the company, there seems to be a constant churn, if you will, of picking up more high-barrier business, shedding more low-barrier business. So my question has kind of 2 parts. One, as we look out over the next couple of years, do we reach a point where we finally shed all of the low-barrier business we intend to, or this always be an ongoing exercise that essentially gets us to flat? Number 1. And #2, as you sit today, what is the rough mix of business as you think about it whether it's in the global piece or in the U.S. piece that you would better high-barrier stuff versus more commodity like, low-barrier stuff?

Well, we want to take the low-barrier part of the business. I think that will be relatively flat. It won't be a growth item, that will be flat for us. There'll be constant churn in that. The reason we exist in that business is, almost of our key customers have businesses that are in that area. They have a mix of business that would fall in the high-barrier. They have a mix of business falls in the low barrier. I think it's important to be able -- to be a full-line supplier to our key customers. I also believe that those volumes of resins and things are important in our negotiations with our suppliers. So we do not want to totally exit that. We want to control our investments and I think it will be rather a flat part of our business for the near future. I think you'll see our growth coming in those high-barrier. And our growth will also come in the medical device and pharma. And finally, we've made investments last couple of years ago for Mayor Packaging in China, and we continue to make investments into our Dixie Toga, our Latin America business in global to move into high-barrier and take advantage as their economies change. So I think you're going to see some good international growth. So our growth are really going to be internationally in all kinds of areas. And here in the U.S. Packaging, more on the high-barrier and the medical device pharma sector.

And then the other part of my question was, how do you look at the mix in those businesses today? So we have a sense as to what piece is flattish and what piece should be growing.

I'm not sure I really understand the question.

Well, so for example, if in your global businesses, is half of it high barrier and half of it...

Okay. I understand.

Just that I get a sense of what piece might be flat and what piece is growing? So I can think about my own assumptions for net business wins or losses the next few years?

I think our U.S. business -- U.S. Packaging is roughly 60% in high-barrier area. I think it's different in the global business. And I put our high-barrier sector more into that 40%, 30% or the 40% area. They kind of flip-flop each other.

We'll take our next question from Debbie Jones with Deutsche Bank.

Most of my questions have been answered, but I was just curious -- kind of a three-part question here. What are your current operating rates across your portfolio? And then what are you seeing kind of quarter-to-date in your volumes? And then I think, last quarter, you mentioned that most of your customers seemed fairly optimistic, about 1/2 do? And I'm just wondering if that's still the sense that you're getting.

I'll take the first part about our capacities. Because I think we did a very -- I think our operating guys did a very good job of planning the restructuring and what pieces they were going to move, and where were they going to move and what equipment they would maintain and move. So I think we've had excellent execution by our operating people. And we operate the best, roughly in the mid-80% -- 85% capacity, give or take a little. If you go above that, and you get near 90%, you have problems servicing your customers. If you get down below 80%, you have problems covering your fix cost. I think we're in an excellent position, with the planning our operating guys did, to be right in that right window around mid-80s.

And net volumes quarter-to-date, like April volume.

Visibilities that you have.

Our volumes to date here in the month of April put us on plan. I think they're consistent with what you normally expect to see in April.

We'll take our next question from Todd Wenning with MorningStar.

Your R&D spend this quarter was slightly above historical trend. Is that one-off? Or should we expect that pace to continue going into the rest of the year?

I think that we're putting an emphasis on R&D. We've -- it's one of our key strategies. Innovation. I think we have the best innovation pipeline and the best R&D group that operate in our space, and we're going to continue to invest in that. I think you're going to see us continue to spend more and more because it's a key part of our growth.

Okay, great. And then on PSM, how are you finding the competitive landscape in the U.S. market? And what will it take to improve margins going into the rest of the year?

Well, it's certainly a competitive landscape in the U.S. and even more so in Europe. The U.S. business is actually pretty stable and trending to be more attractive for us. Our real headwinds and challenge in pressure sensitive are in Europe and are really directly tied to the macro economic conditions that we're facing in the key countries where we compete.

We'll take our next question Al Kabili with Macquarie.

I guess the first one is on the emerging markets. If you can talk about as you expand there in high-barrier, do you get kind of similar margins on those products as you would in the U.S.?

I think you get very similar margins. They're not better, but they're similar in those high-barrier areas. I wish we had a lot more of them.

Yes, fair enough. And along those lines, do you think the expansion in emerging markets, plus the cost savings you're getting this year, will that -- do you think that's enough to offset sort of ongoing weakness in Europe and your guidance to hold sort of global packaging earnings flat through the balance of the year? Or the challenges in Europe, kind of near term, will continue to overwhelm these factors?

Well, I think, as we put out, we maintain our guidance for the year, $2.30 to $2.45. I think that our business, both in U.S. Packaging and in Global Packaging will more than offset the European struggle.

[Operator Instructions] We'll go next to George Staphos with Bank of America Merrill Lynch.

I guess my first question is regarding your overall. Now over the last number of years, the company had difficulty in Europe both within flexible packaging also within pressure sensitive material. It sounds like that was the biggest reason why your results were a little bit less positive than your larger competitor who reported yesterday. Henry, would there be any ability or notion to perhaps hiving off the European operations at some point, because it's not just this quarter, they've struggled for a number of years even in better economic times. If you agree with that premise, help me understand what the puts and takes are there, and then I have a separate unrelated question.

In the Flexible Packaging business, we're still a small player. It's not that significant part of our business. Our customers are there. And I think it's important, when our customers are there, for us to maintain a presence. Certainly isn't something that we want to go out and invest greatly in right now, but I think it's important to be there for our customers. And that affects our overall sales on a global basis. And that's why we need to be there.

And what about Pressure Sensitive Materials, just -- that was part of my first question.

George, your question on Pressure Sensitive, is it Europe specifically?

Well, yes, again, Pressure Sensitive in Europe has been not performing at the level, if I recall correctly, as your U.S. operations for a while. Would there be any ability to split that from the portfolio over time without impairing the business on a global basis?

Well, look, there's no reason to split the two. There's a lot of synergy between Europe and the U.S. for Pressure Sensitive Materials business. And I think that business is actually performing very well given the lousy conditions where they're operating. And our Pressure Sensitive business in Europe is especially weighted towards graphics markets, where marketing and advertising spend has just been down severely, and we're doing I think a pretty good job of hanging on until we reach the same kind of stability that we've now gotten to in our Flexible Packaging business in Europe.

We'll take our next question from Chris Manuel with Wells Fargo.

Just 2 quick follow-ups. One for you Scott. Capital allocation the balance of the year. I saw you did some repurchase here during 1Q. What's the intent with your free cash flow the balance of the year? If memory serves, I was thinking you were trying to move down a little lower on a debt-to-EBITDA basis, but I'm not sure what the target. Can you help us a little with allocation the balance of the year?

Yes, sure. The repurchase in the first quarter was really directed at offsetting the dilutive effects of long-term incentive stock compensation, and so that's what we've tackled in the first quarter. Over the rest of the year, you're right. The long-term debt-to-EBITDA target, which is how we think about leverage principally, is around 2x. I think just the reduction of working capital as we get into our seasonally stronger quarters, is going to bring down that leverage metric, and so I think we'll do what we've been doing historically and focus very carefully on, first investing in production and markets where we can get superior returns and profits. Second, funding episodically and strategic acquisitions. Obviously, continuing with the dividend payment is #1. And I would just balance share repurchase and deleveraging. And I think we're going to continue to be active in the share repurchase arena because we'll have excess cash, and it's an important part of giving back capital to shareholders.

Okay, that's helpful. And then the second question -- the follow-up I had was, price cost recognizing timing of some of your mechanisms and things that work through and timing of some of the resin increases we did see. How would you look at -- with respect to revenue, you give us now an organic number in the slide to show us what volumes were, but I do appreciate that some of that has to do with pricing and things as well. Is there a way to help us on split out? What -- within our organic growth decline number would be attributable to price? And what would be more core organic, absolute volume levels?

I can help a little bit with that as you look at the components of change in net sales that we included and also essentially seeing the same commentary that Scott included in his discussion earlier. U.S. packaging organic growth essentially declined 2.5%, most of that was related to volume. There was a little bit net improvement in price mix, but most of that decline is volume related in U.S. packaging. In Global Packaging, there's very little change on an organic basis. If you look at that, it's a decline of less than 1%. That reflects high single-digit decrease in volume offset by almost an equivalent increase in price mix, mostly driven by increases in price. And as Henry talked about, that's been the approach to the Latin American market in particular. In the Pressure Sensitive side, volume was pretty flat in Pressure Sensitive, so most of that -- the decline represents 3.6% decrease in price mix, mostly driven by mix because of the reduction in sales of graphics and technical products. And stability are increased in the sales in global.

We'll take our next question from Scott Gaffner with Barclays.

Henry, I just wanted to follow up on your previous comment on the emerging market margins. You said they were similar on the high-barrier product to North America. I just -- I think the last call, we talked about the strategy in the emerging market, maybe it was the global markets was to come in at a lower price point and eventually work your way up in the margin structure. Can you just parse the two? What the strategy is? And maybe the high barrier is still at the same margin, but you're not selling as much of it? Can you just...

I remember that from the last quarter. We talked about -- or maybe it was 2 quarters ago. We've talked about our acquisition of Mayor Packaging. We've been following and wondering when we should enter the China market and do more in Asia-Pacific region. And until we found Mayor, Mayor really is in the retort and I kind of call that the median barrier. It's above the dust cover. It's got some technology, it is -- that was a place where we could enter the market, avoid the dust cover, commodity fighting with everybody, have some technology around printing, laminating surviving the retort chamber and to build on that, as the Chinese market goes up, as they move from the wet market to prepackaged meats, as they go into more refrigerated products and things like that. So we found a spot to enter, that I want to call median barrier, and we have a chance to build on that.

Okay. And then Scott, could you go walk us back through the last part of the issue with the tax, how it doesn't impact EPS? I didn't quite understand the last part of the math there.

Sure. Let me just take you through it. In a prior acquisition, we picked up a non-U.S. tax liability from a seller for activities prior to the acquisition. The seller indemnified Bemis completely in the event that there's ever any tax payment required. And so, we booked a receivable in the -- from the seller that we would recognize in the event that we ever have to pay the tax. So because -- in this annual review on the first quarter, we determined that there was no tax liability realized, we also had to reverse that receivable. The effect was $4.5 million reduction in pretax income because we reversed the receivable and a corresponding $4.5 million reduction in our tax expense. So the net of that, and because the receivable was non-tax deductible when we reversed it, the net of that was 0 impact to net income and EPS. Obviously, all of this was below the operating profit line, so no impact to operating profit either. And we wanted to walk through it early in this call because I think there was some confusion in some of the early notes we saw this morning. And the fact is, just like last first quarter and just like next year's first quarter, when we have to talk about this again, it will not impact net income or EPS.

We'll take our next question from Adam Josephson with KeyBanc.

You talked about expecting a generally stable raw material cost environment this year. Obviously, recently, oil and nat gas have moved in different directions. So I'm just wondering what gives you confidence that there won't be much movement in resin over the balance of the year?

This comes from conversations we have with our suppliers. It comes from conversations there. Things that we follow and the literature. We don't see a big push in raw material feedstocks. Earlier in the year, there were numerous outages or scheduled maintenance in some of the cracker facilities. Those have come up successfully so that capacity is back online. And there just doesn't seem to be a big growth momentum anywhere in the globe for the basic polymers. And that's just our thoughts, whatever our thoughts are.

And have commodity and specialty move in similar directions recently, Henry?

No. I would say the commodities -- we've got a slight increase in PE first part of the year and now it's been stable since then. And our higher or more sensitive materials have been flat through the year.

We'll take a follow-up from George Staphos with Bank of America Merrill Lynch.

Follow-on, you may have talked about this earlier. I've been bouncing between conference calls today. One, are you at the full run rate right now in terms of the cost saves related to your realignment on a run rate basis again? And then my other question would be, to the extent that you haven't already covered it, what are your customers saying about the health of the consumer and the likelihood that they are coming back and opening up their wallets at the retail level? We've seen some improvement now for a couple of months since some of the Nielsen data in packaged foods. Hopefully, that bodes well for you. But are your customers seeing an improvement as well? Or are they a little bit more cautious on the outlook?

First, as far as the run rate on the restructuring. We should be at the full run rate at the end of the second quarter. As I said earlier, we still have 1 facility to close here. So at the end of the second quarter, we should be at the run rate. As far as our customers and what they're telling us, we expect to see an uptick in the second half the year in our volumes. What our customers are telling us is kind of a mixed bag. Some are saying that there's going to be an uptick. Some are a little more cautious. There's really no firm pattern in discussions we have with our customers. It's really kind of a mixed bag.

And we'll take our next question from Philip Ng with Jefferies. Philip Ng - Jefferies & Company, Inc., Research Division: Guys, hopped on the call a little late. I apologize if you touched upon this already. You guys have done your part to be more proactive on pricing and resetting some of this below-market contracts and one of your larger competitors have been pretty vocal about that on that front as well. Have you seen any real behavior in the marketplace? And is there opportunity for you to get real some pricing in excess of your passthrough right now going forward?

I know what you're talking about, and we compete really in the small areas, generally less than 5% of our business. And we just -- it was really in the fresh meat area. We really don't see any evidence of that. Philip Ng - Jefferies & Company, Inc., Research Division: Okay. What about your business? I know you guys have been trying to get some -- get pricing more in line for Legacy Alcan. But is there an opportunity for you to get some more real pricing on top of that for the rest of your business going forward?

I think there is. We understand the value of our pricing. We have numerous programs. And as I said, we're going to diligently price our products. We're going to look through our portfolio. We're going to find out where we're being compensated and where we're adding value. And we're going to be very, very diligent in our pricing going forward.

And it appears there are no further phone questions at this time.

Thank you, everyone, for joining us today. We'll hopefully see you sometime during the quarter at the conferences.

This does conclude today's conference call. We thank you for your participation.