Bemis : 2018 Q4 Earnings Call Transcript

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EDITED TRANSCRIPT

BMS - Q4 2018 Bemis Company Inc Earnings Call

EVENT DATE/TIME: JANUARY 31, 2019 / 3:00PM GMT

OVERVIEW:

Co. reported 2018 results.

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CORPORATE PARTICIPANTS

Erin M. WintersBemis Company, Inc. - Director of IRJerry S. KrempaBemis Company, Inc. - VP & CAOMichael B. ClauerBemis Company, Inc. - Senior VP & CFO

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

CONFERENCE CALL PARTICIPANTS

Anojja Aditi ShahBMO Capital Markets Equity Research - Senior Associate

Arun Shankar ViswanathanRBC Capital Markets, LLC, Research Division - AnalystConnor Daniel RobbinsGoldman Sachs Group Inc., Research Division - Research AnalystDaniel Dalton RizzoJefferies LLC, Research Division - Equity Analyst

Kyle WhiteDeutsche Bank AG, Research Division - Research AssociateSalvator TianoVertical Research Partners, LLC - Analyst

PRESENTATION

Operator

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

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

Thank you. Good morning, everyone. Welcome to our fourth quarter 2018 conference call. Today is January 31, 2019. After today's call, a replay will be available on our website, bemis.com, under the Investor Relations section.

Joining me for this call today are Bemis Company's President and Chief Executive Officer, Bill Austen; our Senior Vice President and Chief Financial Officer, Mike Clauer; and our Vice President and Chief Accounting Officer, Jerry Krempa. Following Bill and Mike's prepared comments, we'll answer your questions related to our core business. We ask that you refrain from questions related to the pending merger with Amcor or our specific 2019 financial guidance.

(Operator Instructions) At this time, I'll direct you to our website, bemis.com, under the Investor Relations tab, where you'll find our press release and supplemental schedules.

On today's call, we'll also discuss non-GAAP financial measures as we talk about our performance. Reconciliations of these non-GAAP measures to GAAP measures that we consider most comparable can be found in the press release and supplemental schedules on our website.

And finally, a reminder that statements regarding future performance of the company made during this call are forward-looking and are subject to certain risks and uncertainties. Actual results may differ materially from historical, expected or projected results due to a variety of factors. Please refer to Bemis Company's regular SEC filings, including the most recently filed Form 10-K, to review these risk factors.

Now I'll turn the call over to Bill.

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

Thank you, Erin, and good morning, everyone. 2018 was a year of great progress for Bemis. Our financial performance improved, and we continued to enact change to position our business for long-term success. As compared to last year, many financial metrics moved in the right direction.

Adjusted earnings per share increased 17%, driven by solid year-on-year improvement across all business units and U.S. tax reform. Adjusted operating profit increased more than $25 million, driven by our Agility plan and improvements across all operating segments. Cash from operations increased more than $80 million, reflecting the discipline and accountability that continues to permeate throughout our organization. And adjusted return on invested capital increased over 100 basis points to 11.7%.

Our teams across the globe have done a great job of executing Agility, fixed through near-term profitability improvements and strengthen and grow through laying the foundation for long-term growth. I am proud of our teams and the focus, determination and drive they have demonstrated, particularly during the fourth quarter. Thank you to our leaders and colleagues across the globe who did not let our pending merger with Amcor be a distraction in 2018. You have worked safely, served our customers well and delivered on financial commitments, and you should feel proud of the improvements you continue to deliver.

I'll turn the call over to Mike now to discuss the financials, and then I'll come back to wrap up with a summary of our progress on the pending merger with Amcor as well as my view on how our core business is positioned for the future. We will then take your questions. As I'm sure you'll understand, we will only take questions related to 2018 performance and will not provide further comment related to the pending merger. Mike?

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

Thanks, Bill, and good morning. We delivered solid fourth quarter and full year results, in line with our most recent expectations. I will start by discussing the performance of our segments for the full year 2018.

U.S. Packaging. Both sales and profit performance were in line with our expectations for the full year 2018. Sales were up 2.7% compared to the prior year, reflecting increased price and mix, partially offset by lower unit volume of 1%, which was related to the planned exit of infant care business at our Shelbyville, Tennessee facility. We more than met our target of an incremental $25 million of revenue from short-run business during 2018 and are well positioned to continue to penetrate the business in the future.

U.S. Packaging profit margins were in line with our expectations of being flattish compared to prior year. Operating profit dollars rose almost $8 million, reflecting the benefits of Agility and improved operations, partially offset by the impact of freight costs, customer incentives and employee pay-for-performance, a good rebuilding year in U.S. Packaging, in line with our expectations.

Turning to Latin America Packaging. Sales and profits were in line with our revised expectations for 2018. Organic sales, which exclude the impact of currency, were up 4.5% in 2018, reflecting increased price and mix, partially offset by unit volume decline of 9%, which was primarily driven by the laundry detergent packaging volume in Brazil that is converting to another packaging format.

Latin America's Packaging operating profit increased $9.8 million, excluding the impact of currency. We delivered 100 basis point of margin expansion, in line with the plan for the year. Nice net profit improvement driven by variable and fixed cost reductions implemented due to the challenging economic environment in Brazil. We will continue to focus on what we can control in this region, and we will be well positioned when the economy improves.

Turning to the Rest of World Packaging. We delivered a strong 2018. Organic sales were up 4.3% compared to the prior year, reflecting increased unit volumes of 3% and increased price and mix. Unit volumes were up quite strong in our health care packaging business and modest in our businesses in Asia and Europe during 2018. Excluding the impact of currency, Rest of World Packaging operating profit increased $18.9 million compared to last year. We delivered 200 basis points of margin expansion, driven primarily by the impact of strong volumes in health care packaging, which have good margins, and solid operational performance throughout the segment.

Turning to the rest of our P&L and consolidated results. Total company SG&A and R&D expenses were down compared to prior year, which is better than our expectations coming into 2018. We did a great job of maintaining strong cost controls throughout the year to help overcome the impact of headwinds such as rising interest rates, which drove interest expense up $10.3 million compared to 2017 and approximately $3 million more than our original expectations coming into 2018.

Our income tax rate in 2018 was in line with our most recent expectations of 23% when excluding the fourth quarter benefit related to the final refinements of the U.S. tax reform. Compared to the prior year, our 2018 income tax rate was lower primarily due to the impact of the lower U.S. tax rate tied to our earnings.

Operating cash flow was $461.5 million in 2018, an increase of $82 million compared to last year. Cash flow results would have been even higher were it not for restructuring-related costs, cash costs of $39 million in 2018 as compared to $24 million in 2019 -- '17. Additionally, we used $12 million in 2018 of cash related to the pending merger with Amcor. Even as reported, a nice improvement in cash flow, which includes the benefit of more profit and working capital improvements.

Specifically on working capital, payables improved as we did a great job of ensuring we optimize [various] terms allowed in our contracts, good discipline by our teams. Primary working capital as a percentage of sales was 13.4% at year-end 2018, improved from 14.6% 1 year ago and better than our target range of 14% to 16%.

Total company net debt-to-adjusted EBITDA was 2.2x at year-end 2018, down from our targeted range on account of no share repurchases due to the pending combination with Amcor. As we begin 2019, we are focused on delivering our internal operating plan and continue to find ways to drive value for the long term.

We are continuously improving operational effectiveness in our factories and our administrative functions. We are serving our customers better through improved quality of service, and we are leveraging the strong foundation we have built for long-term net growth bolstered by our Agility efforts to penetrate short-run opportunities in the U.S.

I will now turn the call back to Bill.

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

Thanks, Mike. As you all are aware, in August, we announced plans to merge with Amcor to create the global leader in consumer packaging. We believe combining these 2 companies will drive significant value for shareholders, create opportunities for employees and help us better serve our customers over the long term.

For shareholders, the benefits are clear: value creation from the $180 million of identified cost synergies that neither company could achieve on a stand-alone basis; additional potential revenue synergies from leveraging our respective products to each other's networks; and for Bemis shareholders, a dividend that will nearly double in the first year post close as compared to Bemis' historically strong dividend. Since the announcement in August, we have made progress in all work streams related to the combination. Our integration planning teams comprised of leaders from both Bemis and Amcor are well underway, developing the plans to bring together the best of both companies.

The global integration planning team has made great progress in developing the playbooks which establish global time lines and key integration steps to be executed post closing by the regional teams. The regional teams kicked off their December and continue to refine their execution plans. All involved are focused on ensuring that once the transaction closes, the integration is as seamless as possible and that the new company is well positioned to deliver its financial commitments.

Our regulatory work stream has also made great progress, of note, with the exception of the United States, where we announced last week that the government shutdown slightly delayed our time line. All of the jurisdictions are on pace to the range of our original time line and outcome expectations. We received approvals in several regions to date, including China, and the remaining jurisdictions are progressing.

As shared last week, we anticipate the transaction close during the second quarter of 2019. Until the transaction closes, we will continue to operate as an independent company and remain focused on working safely, serving our customers and delivering our operating plans. We remain excited for the next chapter in our evolution.

Turning to the outlook related to the core business. While we are not giving explicit guidance for 2019, there are several areas where we can reaffirm our views for the future. Agility remains a key driver. From [the fixed] perspective, our teams remain committed to delivering the remaining $26 million of cost savings as part of our original $65 million plan. It is important to remember that the $180 million of synergy related to the merger with Amcor is above and beyond the programs that either company previously had underway. From an Agility strengthen and grow perspective, we continue to expect long-term benefit from our work toward penetrating short-run business in the U.S.

Taking a look around the globe. In our U.S. business, we anticipate modest top line growth and bottom line growth in 2019 as the benefits of Agility continue to flow. In our Latin America business, we anticipate 2019 organic revenue and profit to be roughly in line with 2018. We will hold the gains we made from the myriad of cost-outs in 2018, and we have assumed an economic environment that does not meaningfully change in the coming year.

In the Rest of World business, we anticipate top line and bottom line growth to continue, driven primarily by our global health care packaging business. Although keep in mind that we will begin -- we will be up against some tough comps given that 2018 was so strong.

In closing, I'm proud of our people that have performed and positioned the business for continued success. Through Agility and the hard work of our teams across the globe, we are well positioned for the future. We will continue to build on our strong foundation of an outstanding customer base, a committed and talented workforce, a comprehensive and innovative product portfolio, a strong asset base and good positions in the markets we serve.

With that, I'll turn the call over to questions. Please respect that we intend to answer questions on our base business, not those related to the pending merger with Amcor or specifics of the 2019 financial plans. Thank you.

QUESTIONS AND ANSWERS

Operator

(Operator Instructions) And we'll take our first question from Debbie Jones with Deutsche Bank.

Kyle White- Deutsche Bank AG, Research Division - Research Associate

It's actually Kyle White filling in for Debbie. I believe you said you expect a modest top line growth in U.S. Packaging. I wasn't sure if you expect a modest volume growth in that segment as well. And if you could just provide some trends there by end market such as protein liquids versus some of the more consumer-oriented center-of-the-store products, that'd be helpful.

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

Yes, sure. Yes, we would expect modest top line volume as well -- from the top line growth that corresponds to volume as well. And if you look at where we finished up on trends in 2018, we had -- we continue to see high single-digit growth rates in liquid in 2018. Now that may not continue at high single-digit growth rates into '19. That might be a bit more modest. But we had low single-digit growth in protein. We'll continue to see that with some of the new product launches that we've had. And we've had the same low single-digit growth rates in the center-of-the-store categories, as you described them, and we'll continue to see that as we go forward. A lot of this is being driven from sustainability and new packaging formats that our R&D teams continue to launch and trial with customers from a recyclability and a sustainability perspective. So there's a lot in the queue in those areas, and that will drive those modest low-single to mid-single-digit growth rates in 2019.