Amcor plc (AMCR) Q3 2013 Earnings Report, Transcript and Summary

Melanie E. R. Miller - Vice President of Investor Relations and Treasurer Scott B. Ullem - Chief Financial Officer and Vice President Henry J. Theisen - Chairman, Chief Executive Officer, President and Member of Executive & Finance Committee

Adam J. Josephson - KeyBanc Capital Markets Inc., Research Division Scott L. Gaffner - Barclays Capital, Research Division Alaxandar Wang - BofA Merrill Lynch, Research Division Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division Chip A. Dillon - Vertical Research Partners, LLC Usha Chundru Guntupalli - Goldman Sachs Group Inc., Research Division Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division Daniel Moran - Macquarie Research Mark Wilde - Deutsche Bank AG, Research Division Philip Ng - Jefferies LLC, Research Division Phil M. Gresh - JP Morgan Chase & Co, Research Division George L. Staphos - BofA Merrill Lynch, Research Division Gabe S. Hajde - Wells Fargo Securities, LLC, Research Division

Good day, and welcome to the Bemis Company hosted Bemis Third Quarter 2013 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Melanie Miller. Please go ahead, ma'am.

Thank you. Welcome to our third quarter 2013 conference call. Today is October 24, 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 Chairman and Chief Executive Officer, Henry Theisen; and our Vice President and Chief Financial Officer, Scott Ullem. Today, Scott will begin with comments on the financial statements and outlook for the year, followed by Henry with comments on business performance and market trends. 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 yourselves to 1 question at a time with a related follow-up and then fall back into the queue for any additional questions. 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 in the supplemental schedules on our corporate website under the Investor Relations section. 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 on increased cost in our selling prices, unexpected cost related to production transition, interest rates 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, 2012. Now I'll turn the call over to Scott Ullem.

Thanks, Melanie. Good morning, everyone. Thanks for joining us on this third quarter call. I'll start with a reminder that the third quarter supplemental schedules are available on bemis.com under the Investor Relations tab. The supplemental schedules provide more detail relating to this morning's press release and financial statements. The first slide details the adjustments to reconcile from GAAP to non-GAAP earnings per share. This quarter, these adjustments reflect 2 activities. First, we recorded a gain on sale of property totaling $0.02 per share. This property was not related to the facility consolidation program. Second, net charges of $0.10 per share associated with the facility consolidation program include final direct costs associated with the closure of these 9 facilities. These costs include about $0.07 per share related to a multiemployer pension liability associated with 2 of our closed facilities. This $0.07 per share charge reflects an estimated increase in the withdrawal liability. We expect this multiemployer pension liability to be settled within the next 12 months. While we do not expect any additional direct charges associated with the closure of the plants, we are experiencing higher-than-expected production costs related to the installation of certain relocated equipment. These installation costs and production inefficiencies are not included in the GAAP to non-GAAP reconciliation, but are instead reflected on Slide 2 of the supplemental schedules as a reduction in our realized program savings in the second half of this year. The net of these 2 adjustments brings us to our non-GAAP earnings-per-share of $0.60, consistent with last year's third quarter results and in line with our guidance of $0.57 to $0.63 this quarter. Slide 2 of the supplemental schedules shows the total expenses, cash payments and net savings associated with our facility consolidation program, including expectations for the remainder of this year. It…

Thank you, Scott, and good morning, everyone. This quarter, we are pleased to have achieved profits that reflect our strategic initiatives to improve profitability and sales mix. Gross margin increased to 19.7% compared to 19.2% last year. U.S. Packaging segment operating margin held steady at 13% despite lower sequential unit sales volumes. Global Packaging operating profit increased by 20%, partially offset by the weaker Brazilian currency, as Scott has mentioned. And operating margins in our Pressure Sensitive Materials segment increased sequentially to 5.8%, consistent with last year and a nice improvement from the second quarter. While these are all steps in the right direction, we did have some performance issues this quarter. The modest sales growth that we expected for the second half of this year has not materialized. In addition, while we completed the final plant closure during the second quarter, we were not able to efficiently accommodate the transferred volume due to some mechanical and electrical issues with the equipment being relocated from the closed facilities. Not having a full capacity available created inefficiencies in our U.S. business that required higher costs to be incurred to meet customer commitments. We expect the capacity to be completely repaired and operational in the first quarter of 2014. Sales volume presented a tough comparison with 2012 because we experienced an increase in unit volumes during the third quarter of 2012 with the commercialization and ramp-up of several new liquid products in addition to new cheese business in the United States. While we continue to service these customers and win new business, customer order levels have normalized now compared to the initial ramp-up of 2012. While certain applications have been experiencing weaker consumer demand in the beverage category, we expect growth opportunities on liquid packaging where broad categories of historically canned products…

[Operator Instructions] We'll go first to Adam Josephson with KeyBanc.

Henry, what are your customers in North America telling you about why packaged food and beverage volume has been disappointing, recently? I mean, as far as I know, they haven't raised prices on their products to any appreciable extent and can you highlight specific categories that have been weaker than you expected? I know you mentioned beverage, but if you wouldn't mind elaborating on that, that would be great.

In the U.S. Packaging area, if you look at -- I look at markets that are consider value-added, which really follow food-safety type things, meats, dairies, liquids, those types of things. There -- some are a little up, some are a little down, but basically, they're kind of flat overall. Where we saw a -- really, the drop in volumes kind of fall into 2 areas. One is beverage, and that would represent our multipack business and our labels business for things like carbonated soft drinks. The other area would be really in those commodities type areas that we have taken aggressive pricing actions or have been willing to walk away from business. So what I really want to point out is the areas where you have value-add, it's been kind of flat. A little bit of things -- some are up, some are down, but the main area that we were kind of a little bit surprised by is the beverage area which is the multipack and the labels business. As far as what our customers are telling us, they're still positive. I think they're just trying to figure out what really went on too and -- I don't know. It could just be a lack of real confidence going forward. Nothing specific.

And then just one follow-up. Obviously, a large competitor of yours in North America announced -- recently announced a sizable price increase. What are your thoughts on that increase? Do you plan to follow it? Any thoughts would be helpful.

Just to get it out of the table, the price of polyethylene did increase $0.05 going into this quarter. And our people are very dedicated to making sure that when our raw materials increase, they pass those along to our customers. And I fully expect that to happen before the end of the quarter. As far as the comment by one of our large competitors, I haven't seen that -- we haven't seen that in the markets where we compete directly. And in fact, I'd have to say that they're more aggressive than they have been in the past in areas where we compete directly.

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

Henry, you mentioned with the production issues that you had, you didn't have the full capacity to meet customer needs. And so, I was just wondering, how did you make up for that? I mean, you mentioned you spent more money to make up for that. Did you use outside suppliers or how did you go about selling those needs of the customers?

Well, the first thing I want to do is make a comment on -- I don't want to leave anybody with the idea that we have capacity problems. This was a very unsteady state where we were moving 2 significant pieces of business. Now that those pieces of business are installed, the parts are going to be in and installed here in early November, we will have more than plenty capacity to handle this. And if we have a problem someplace in a steady-state arrangement, this would not be a concern for us. Where we talked about the efficiencies is in order to meet the customer commitments that we had, we moved business to other facilities within the organization. So we had some higher waste with materials that were being produced at startup of these things. We also generated some additional logistics costs, some additional graphics costs, some additional waste costs, as we serviced our customers out of other facilities and met all of our commitments.

And then just following up on the competitive landscape in some of the flexible pouches that you mentioned, it seems like the 1 product I'm thinking of mostly is the thing you've -- the frozen alcoholic beverage flexible pouch. It seems that a lot of competitors are utilizing a me-too strategy and following on on that. Can you just talk about some of the competitive dynamics in some of those newer products? Is it greater than you would expect? Or does your technology advantage help you out with those customers?

I think our technology advantage is the reason we get the business in the first place. There's a lot of technology that goes into sealing liquid products and not having leakers or sealing around. There's a lot of technology that goes into the design of hot tack or so when it's hot, it holds together and doesn't open up as you drop 16 ounces of liquid in there. So I think our technology gives us an advantage in getting the business. It also separates us and keeps us in line for that business for a longer period of time. It gives us pricing power. But in all things, eventually your competition catches up. But our technology puts us in first place. Our technology gives us a better pricing in the beginning and it holds on longer on that price curve than you would without that technology advantage.

And we'll take our next question from George Staphos with Bank of America Merrill Lynch.

It's actually Alax Wang sitting in for George. First question, just how did Pressure Sensitive business do during the quarter? Did you guys see a strengthening or weakening throughout the quarter? Maybe you can talk a little bit about that.

Sure, Alex, it's Scott. Our Pressure Sensitive Materials business held in pretty well. It was really a consistent quarter from start to finish and we're pleased that we were able to improve our operating margins a little bit during the third quarter over the second quarter. It was really pretty steady during the course of the last 3 months.

And is it still early to talk about 4Q volumes in Pressure Sensitive?

It's a little early to talk about 4Q volumes. Any volume changes really will come during the second half of the quarter. And at this point, we don't have any different expectations than the conditions that we've seen in the third quarter.

And we'll take our next question from Ghansham Panjabi. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: The optimization effect you discussed that's related to the impact on sales, Scott, how should we model that in 2014? Is there still going to be a headwind through sort of 2Q of next year and then you kind comp through that? Or how should we think about that?

This is Henry. Gansham, I believe that all of the effects of our closing plants, getting equipment reinstalled, all of those things will be completed in the fourth quarter. There should be no overlap or run into the first quarter of next year. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: But I guess, in terms of the business you walked away from? Sorry.

But I think that's over.

Yes, so that should be anniversaried, hopefully by the end of December. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Got it. Okay. And then Scott, just in terms of the profitability profile in '14 versus '13, I know you had some savings from the cost savings program that you have been working so hard on, but do you expect operating profit to be up year-over-year '14 versus '13 if volumes don't pick up?

We do and we'll talk more about that in the next quarter's call. But we just spent, in addition to the optimization, the facility consolidation program, we've been spending a lot of time making sure that we're getting paid an appropriate margin for the technology differentiation that our products deliver to our customers. And so we are very focused on improving our operating margins going forward. We expect to see that improvement in 2014.

Then we'll go next to Chip Dillon with Vertical Research Partners.

Scott, that was very good rundown and I just must have missed it, but you did say, as we go through these 3 segments, if we kind of look at the organic volumes, as you look at it, I guess the U.S. was down in packaging. But could you tell -- and I believe you said in Global that Europe was up and LatAm was down, but overall it was flat, but if you could verify that? And then also, what were the organic volumes, as you look at them in Pressure Sensitive, year-over-year?

This is Melanie. Let me go through that briefly with you and then I can go through that again with you offline if you'd like. But with regard to U.S. Packaging, if you look at the components of change in net sales scheduled that's in the supplemental schedules that we included, organic U.S. Packaging sales were up 0.9%. And that represents increased price in mix, partially offset by volume decline in total. On the Global Packaging side, organic was up 2.1%, which represents substantial increases in price and mix really around the globe as offset by a decrease in volume in Latin America, specifically. And in Pressure Sensitive, the organic price and mix -- organic volume was down about 0.50%. That represents a slight decline in price mix as volume in roll label was flat and volume in graphic products was down modestly.

Okay. And then just a quick follow-up. I know, Henry, you mentioned one of your competitors was being a bit maybe more competitive or at least at their markets, could you just give us an idea of the specific markets in packaging you felt might be a little bit more competitive?

Well, I think that all markets are competitive. I think it really hasn't changed. It's very competitive. You have a no-growth environment out there, or very slow-growth environment. And our competitors will chase new business just as we chase new business. I don't think it's really drastically changed.

And we'll take our next question from Usha Guntupalli with Goldman Sachs.

So for the quarter, could you quantify the savings from facility consolidation and the headwinds from equipment transition costs? I know you gave us a net number but what would the individual buckets be?

The individual pieces of what was -- what the savings was and what the costs were?

Exactly.

I think that's what you're asking. So in the third quarter, we had talked about the facility consolidation-related savings to be achieved would be about $12.5 million a quarter. And if you broke it apart, we could argue that a large part of that $12.5 million was realized, but offset by additional costs associated with what Henry had mentioned about the logistics costs and the increased waste associated with moving production around because the equipment that had been identified for that production to move to was not yet completely installed. So we had to do -- we had a lot of increased costs associated with the moving around of production that reduced it -- reduced our savings in the third quarter to $6 million, which is $6.5 million under what we had expected. And that's on the Facility Consolidation Financial Summary on Page 3 of the supplemental schedules.

That's very helpful. And then for the acquisition in China, that is NCS, how do you think about the annual EBITDA contribution and earnings accretion in 2014?

Sure. We have not announced what the earnings accretion will be and we may talk more about that in the upcoming call. What I can tell you is that it was an attractive acquisition and the margins of that business reflect the fact that this is a specialty film producer and is going to put us in a position where we can differentiate ourselves with our customers and our offerings in China, beyond just being a converter. But we have, at this point, not disclosed what the profitability margins are going to be, like I say, we may talk more about that next quarter.

And we'll take our next question from Chris Manuel with Wells Fargo Securities.

A couple of questions for you. First, I guess I'm a little confused with something, so I want to kind of go back and take a look at specifically what I'm thinking about the U.S. Packaging business. You talked about losing some revenue is part of optimization impact and some stuff that was sold in the revenue section. And when you look at the operating profit section, you talked about -- if we've estimated this right and listening from earlier part, it sounds like it was maybe $6 million or so impact from moving some of the production facilities around. But even if I net this all up and I look at the $24 million difference in revenue and I look up what the profit differential was, making this adjustment, it still suggests that the detrimental margin is something in the high 30s, low 40% range. So I guess where I'm confused is either the business that you sold from Clysar was wickedly profitable or the lower margin business was really, really high profit business that you're walking away from. Can you help me maybe understand why that detrimental margin might have been so high? Or what I might be missing when I'm thinking about it this way?

This is Melanie. Maybe -- it will probably helpful for us to go through the details of what you're looking at more specifically. But just to comment on -- maybe this will help. As you look at Page 4 of the supplemental schedules and the breakout of what happened with U.S. Packaging, it's -- the volumes, excluding optimization effect where we walked away from volume as a part of facility consolidation program, volumes were also down for the quarter in U.S. Packaging. So the decline in volumes, in addition to the -- or the increased costs associated that we said essentially offset the facility consolidation savings we had been expecting, all of that impacted the results of the quarter in addition to -- and we haven't -- I mean, you still have the optimization effect decline in sales. But you're right, those were low margin sales, not high margin sales. So I think perhaps the answer, looking through all of these that we can go through the details, is the sales volume decline. It was the 1.5% due to optimization effects related to facility consolidation closings, but we also had low volumes ignoring that. And all of that together is going to result in lower operating profit number than you otherwise would've had. Does that answer part of it?

Yes, I'll follow back up. I guess, second -- my second question had to do with this. I look at where you've been adding business or doing some of the growth in Asia Pacific acquisitions, et cetera. Today, the global piece is roughly 30-ish or so percent of revenue. What's your target as you look out 5 to 10 years and how does the profitability of this acquired business and these pieces that what you're seeing in Asia compared to maybe what you're seeing compared to Europe or South America or the segments as a whole? How do you view this kind of playing out with respect to profitability?

First off, the Foshan acquisition, though it is small in comparison to a lot of the other divisions within the Bemis company, was really done for a long-range plan. It gave us a specialty film extrusion business that can feed our strategies. And our key strategies for growth are around food safety and sterility in the medical device and pharma products. And this gives us a base to make the types of sealants and the types of films using multilayer extrusion and various polymers for that growth. Our growth will depend upon a lot on how fast the middle class develops so that you see more packaged foods rather than foods sold in open air, frozen environment. So we're going to continue to see growth both in Latin America, as a developing area, as it picks up its economy and in Asia Pacific, especially China, as the middle class develops and the need for our type of products that provide food safety and sterility grow.

I'll just add, we don't have a specific target for sales mix 5 years from now, but what we can tell you is as you can tell from our acquisition investments, we are clearly focused on growing outside of the U.S. And we're focused on profitable growth outside of the U.S. So you should expect to see that not only will the top line be growing nicely in Global Packaging but the return on sales will continue to improve over time as well.

And we'll take our next question from Al Kabili with Macquarie.

This is Danny Moran in for Al. Just going back to the U.S. organic volumes, can you give us some color on what you're seeing as far in October? And can you talk about how the volume progressed during the third quarter?

During -- throughout most of the third quarter, as Henry suggested, we saw sort of just softening volumes in beverage and -- as well as -- or not sequentially but year-over-year lower volumes in, say, meat and cheese, dairy and liquids area because last year was such a tough comp. September volumes were not any different than the others. It was sort of, I guess, slow. We didn't see the increase we would have expected. And I think October is just further carry on from September. So good volumes but not as good as we saw such strong volumes last year in the fall.

Okay. And just a follow up. Have you seen promotional activity pick up as a consequence of what has been softer volumes?

Not really. That would be interesting to see if that occurs in the fourth quarter, but I don't think we saw a lot of promotional volumes pick up in the third quarter.

And we'll take our next question from Mark Wilde with Deutsche Bank.

I wonder, either Henry or Scott, or maybe both of you, if I look at the Global Packaging business, your margins are quite a bit lower than what they are in the U.S. and I wondered if you could help us and just thinking about sort of the 3 or 4 kind of main levers that you're working on right now to improve margins in the Global Packaging business?

Well, the acquisition of Foshan is one of the first ones, and that's to get a film base so that we can transport more of our technology, and they're higher-end. But the -- was China or Brazil, the smaller middle-class, you still have a lot of products that are really packaged in dust covers. I look at getting in and therefore, the overall margin is less in that area. As there's more middle-class, as people want more things for food safety, for instance, in China where they've had the various scares. Now they performed their first version of the FDA to try to regulate some things. People want those materials, the food safety and the sterility. And as those increase, our margins will increase because then you have more value-added products to sell.

Mark, I'll add 2 things. First, in Europe, we've been fighting a difficult macroeconomic environment for our Flexible Packaging business for a couple of years and we've been working very hard to right size our cost structure for European Flexible Packaging. So one of the plants that we closed was in that segment of our business and we've now seen a little bit of strengthening in sales and in margins in Europe, which has been a nice improvement. Second, in our Global Packaging, our Global Medical Packaging business, we're continuing to see strength and really exploit the fact that we are a critical part of medical devices and pharmaceuticals that are in our packages and we need to get paid for that technology and protection that we're delivering to the end-user. So you're going to continue to see improvement in our profit margins across the Global Packaging enterprise.

Do you have any targets, Scott, for what you want -- what type of margin you'd like to see in that Global segment and what you think a reasonable timeframe is?

Yes, I think at this point, we're not going to give specific targets for Global Packaging or component pieces. Again, I think the better time for us to be talking about that is when we give guidance for the full year 2014 next quarter.

And we'll take our next question from Philip Ng with Jefferies.

On Global Packaging, I know the first two quarters of this year, you're lagging pretty tough comps due to the price increase. How should we be thinking about organic growth of that business in Q4 and going into '14?

Well, I think it -- in our global business?

That's right, Global packaging business.

You're going to look at our South America or Latin American businesses is being relatively flat. There's not a lot of growth in the economy. Unfortunately, there's been a double-digit growth in food pricing, which I think just leads to kind of a flat environment for that part of the world. In China, I think we're going to see mid-to-high single-digit growth in our Food Packaging business, but it is so small compared to our Brazilian. It's not going to have that great of an effect. And of course, food packaging, flexible Europe, it's small again in relationship to our Latin American business. And hopefully, the economy improves a little bit but it's not going to be substantial enough to really change anything.

Got you. And then I guess switching gears to U.S. Packaging. You saw some deceleration in the quarter and, I guess, you had some new products, but didn't seem materialize as much as you would've anticipated. How should we be thinking about '14? And I know you guys like to prune some low-margin business. Could we see another low- to mid-single digit type volume decline or it's kind of flattened out at this point?

I think you're going to see more, like in the U.S. Packaging business, a very modest increase. I think we'll still be very proactive in how we deal with the lower margin commodity business and that will probably cost us a little bit of volume. I think we're going to see an increase in our CapEx spending going forward. It won't be the same as $130 million because our product development people have some good projects in line with some of our customers and I think that will drive some of the growth for us going on into 2014.

We'll take our next question from Phil Gresh with JPMorgan. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Just a question on -- you've talked in the past about cash from operations in 2014 having a target of $500 million plus. You lowered your cash from operations view for this year but a decent amount of that sounds transitory. But with the softer volumes and things like that, is there any reason to think that it might be a bit of a longer data target to hit that $500 million, or how are you thinking about that now?

We feel good about the $500 million target. There will be 3 things different in 2014 than in 2013. Number one, we won't have the facility consolidation payments going out the door. Number two, we had a $40 million pension contribution in 2013 that we do not expect to repeat in 2014. And number three, our business is going to be more stabilized after completely [indiscernible] all these -- the moving pieces from facility consolidation. And so things like inventory should come down and improved working capital will help drive cash flow to that $500 million level.

We'll take our next question from George Staphos with Bank of America Merrill Lynch.

I guess, first question I had, perhaps you've already answered this. If you have, apologies. Where do you stand, Henry, in taking out the low margin amount of business within your portfolio? I realize it's an evergreen process every year but looking at your portfolio right now, how much more volume do you think you need to remove that doesn't really meet FEMA standards and if you could quantify that at all, that would be great.

I don't know if I can really quantify it for you because a lot of that is going to depend upon how our competition behaves and what pricing levels and how competitive they get in that arena. What I can say is a lot of the optimization cost that we had in dealing with these prices or these lower margin areas were related to the fact that we had to move the business. And when you looked at it, it just didn't make any sense to move. So right now, I'm happy with the amount of the business that we have in those areas. It's settled in our facilities. It's part of our program going forward. We're going to compete in those markets. It will kind of depend just upon what our competition wants to do.

Okay. And I want to follow on. I forget who asked the question but ultimately, next year -- and I realize there are no guarantees in life. We're not going to hold you to this. But as you see the world, U.S. food packaging, U.S. Packaging, you would expect volume to be up modestly in 2014 even when considering any additional product calling in your mix. Is that a fair statement?

I think that's a fair statement, George.

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

Henry, I know you've talked about Brazil earlier but can you compare the conditions you're experiencing there now to what you've experienced in the last few quarters? Have they gotten any worse, better?

No. I think this year has been pretty stable. 2, 3 years ago, I used to see 6%, 8% growth and now you're just not seeing any growth. And I think that's been consistent through all 3 quarters of the year and I would expect that to be the same thing in the fourth quarter.

And just on your mix in U.S. Packaging, how would you characterize your opportunity to keep improving that mix? And can you give us any sense as to how meaningful that mix shift could be to your future sales growth, profit growth, et cetera? It's difficult to see with all the moving parts, obviously.

I think that mix improvement is very important to our growth in the future. We turned a big corner here through this facility consolidation. You see our return on sales, you see our margins have improved, you see our metrics are better. And then a lot of that is related to being able to offer products that solve our customers' problems. We have a very extensive and an excellent R&D staff and we rely on them for a lot of our growth. And I think that client will continue into the future.

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

It's -- this is actually Gabe. I was looking at fourth quarter last year, particularly in U.S. Packaging, and was there anything unusual in terms of profitability? I mean, it was -- I think margins were about 17% there. And as we're thinking about raw materials, and maybe this feeds into Chris' earlier question about what may have impacted the third quarter here, sort of anything you're thinking about that was an aberration last year that may not repeat?

This is Melanie. If you look at the fourth quarter of last year, we did have some unusual items in there. One of them, and it was in the disclosures for the fourth quarter, but we had something that we call a harmonization effect because we changed so many accounting policies that increased the margins above that 17% level. If you exclude that, margins are still close to 15% and that included just some adjustments, onetime adjustments in the fourth quarter due to adjustments to incentive comp accruals and such because of the way the GAAP results were reported last year. So as -- what we had talked about in January, as you look at total year operating profit for 2012 for U.S. Packaging, it was in that 13% range and that we had thought that, that was a reasonable target for 2013 given that we thought volume was going to be flat year-over-year.

Henry, anything on the raw material front?

No. Hopefully, raw materials stay stable but nothing different than that.

Yes, other than the small trending increases that we've had, really for the last 12 months or so, raw materials have been fairly flat and so that's been easier to manage.

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

Henry, Scott, Melanie, as you look at growing internationally, and it seems like you're focusing more on China, what are the lessons you've learned thus far? What are the learnings from your expansion into Brazil in years past? And for that matter, what you've seen around the rest of packaging? What do you think you will do more effectively, perhaps given your existing experience that will make your expansion in China and elsewhere around the world even more profitable than it would've been otherwise? And then I have a follow-on question.

I think the major thing as you look at expanding into various parts of the world, and the one thing I think I learned from Brazil is the absolute need and the value that a good management team brings to you. If you want to expand, you need to have a top-level leader in that area and good management team run the operations, that do the financials across the board. You can't replace the need for a good management team.

And the other question I had, and I'll turn it over, I think you mentioned again in response to one of the other folk's question that you were looking at extending capital spending in 2014. And I think you attributed to you have lots of good growth projects in the organization that are bubbling up. As you think about this, as we think about it and considering the fact that it sounds like your food customers are having a lot of difficulty with their own growth strategies, otherwise you'd be putting up better volume growth, what are the puts and takes in investing in this capital? You may have great projects, but if your customers can't move the ball in volume, how effective do you think those projects might be?

I think they're very good prospects because they're really going around the change of the rigid where it's glass or cans into a flexible format. You can think about the baby food aisle and all of those pouches, you can think about the fruit slurries, you can think about the alcoholic drinks, you can think about soups and sauces that used to be in cans that are now in flexible -- that conversion is going on and a lot of what we are going to be putting into capacity is to support that kind of a conversion.

We'll take a follow-up from our Mark Wilde with Deutsche Bank.

Just along those same lines, Henry, I mean, I think we can all see kind of the growth in pouches and things like that and I think historically, you guys have done a great job of continually selling kind of higher value added, more sophisticated packaging. But it just seems like what we're seeing right now is very static, very soft volumes and I just wondered whether it's gotten harder to -- for you to really capitalize on more sophisticated packaging, on your technical know-how?

No, I think it's very similar to what it has been in the past. I mean, some of the things I had pointed out, we're in the leader in those areas. We're the leader in our medical device packaging areas. We're leading the changeover in this baby food category. We're leading the changeover in the alcoholic beverages. I think it's very much similar. I just think it gets kind of masked in some of the multi-pack didn't sell as well, bread, bakeries, towel and tissue. Some of those areas kind of masked the good growth we have. And the fact that you see our gross margins increasing verifies that those value-added products are coming to the Bemis Company.

And we have no further questions in the queue at this time.

Thank you very much for joining us today. This ends our call for the third quarter.

That concludes today's conference. Thank you for your participation.