Erin Winters - Director of Investor Relations Bill Austen - President and Chief Executive Officer Mike Clauer - Senior Vice President and Chief Financial Officer.

Debbie Jones - Deutsche Bank Molly Baum - Bank of America Merrill Lynch Edlain Rodriguez - UBS Salvator Tiano - Vertical Research Partners Daniel Rizzo - Jefferies Arun Viswanathan - RBC Capital Markets Bryan Burgmeier - Citi.

Good day and welcome to the Bemis Third 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..

Thank you. Good morning, everyone. Welcome to our third quarter 2018 conference call. Today is October 25, 2018. After today's call, a replay will be available on our website, bemis.com, under the Investor Relations section.

Joining me for this call today are Bemis Company's President and Chief Executive Officer, Bill Austen; our Senior Vice President and Chief Financial Officer, Mike Clauer; and our Vice President and Chief Accounting Officer, Jerry Krempa. Following Bill and Mike's comments on our business and outlook, we'll answer any questions you have.

However, in order to allow everyone the opportunity to participate, we do 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.

At this time, I'll direct you to our website, bemis.com, under the Investor Relations tab where you'll find our press release and supplemental schedules. On today's call, we will also discuss non-GAAP financial measures as we talk about performance.

Reconciliation 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 filing, including the most recently filed Form 10-K to review these factors. Now, I'll turn the call over to Bill..

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

I continue to be encouraged by our actions to improve operationally, to lay the foundation for long-term growth and to deliver our earning's commitments. The Agility mindset to fix, strengthen and grow Bemis continues to permeate our thinking and actions.

Our progress goes beyond creating an effective cost structure through the strength and grow aspects of Agility. We're building a strong foundation to position our business strategically to penetrate short run opportunities and drive value for the long-term.

During 2018 we have hired new sales reps who are incentivized to pursue and win our new business targets.

Established our core spec offering, to ensure we quickly and appropriately leverage our existing innovative product portfolio, completed robust customer account review to focus our sales efforts and uncover growth opportunities and develop and implement a broad range of operational and sales process improvements such as a simplified application process for new customers, a quick quoting procedure, a faster sample role delivery process and a shorter lead time offering.

Simply put, our approach aligns our people, assets, processes and products to serve the pockets of growth available in North America. Early customer feedback has been positive and we continue on pace to reach our target of $25 million of incremental short run business during 2018.

Over the long-term we'll continue to serve our solid base of long run business while adding in these identified short run opportunities. I'll turn the call over to Mike now to review the financials and then I'll come back to discuss our planned combination with Amcor..

Thanks Bill and good morning. Today I'll discuss the financial details of our segments in total company followed by comments on the balance of 2018. US packaging segment during the third quarter our US business performed in line with our expectations.

Sales dollars of $688.4 million were up, 2.4% compared to prior year reflecting higher selling prices partially offset by unit volume decline of 2%.

Approximately half this volume decline related to the infant care business at our Shelbyville, Tennessee facility that we exited this year and the remainder is simply a function of timing and a stronger than normal third quarter last year.

US packaging sales are within our expectations and include the pace toward our full year target of $25 million of incremental short run business. US packaging operating profit of $93.4 million was lower than the $99.6 million last year.

You will recall that during the third quarter last year profits benefited $4 million from the reversal [ph] expenses related to specific customers under an incentive.

US profits this third quarter reflects the benefits Agility and improving operations partially offset by freight cost, current year customer incentives and the impact of strong four year results on employee [indiscernible] performance again all within our expectations.

Turning to Latin America packaging, third quarter sales of $148.3 million were down 19.3% as compared to the prior year driven by a 23.7% decrease in currency.

Remaining organic growth of 4.4% was driven by increased selling prices in mix versus one year ago, offset by unit volumes down 15% driven primarily by the impact of some laundry detergent packaging volume in Brazil that is converting to another format.

To a lesser extent, unit volumes were impacted by one customer's conversion to a smaller size packaging format which impact volumes but not profit. And also by some fine tuning portfolio at a couple plants where he had some high-mix, low margin products that we decided to exit.

Latin America operating profit of $8 million increased from $7.3 million last year.

Currency translation hurt profits by $1.7 million and the implementation of high inflation accounting in our business in Argentina hurt profits by another $1.4 million leaving an operational improvement of $3.8 million during the third quarter which was driven by planned variable and fixed cost reductions implemented into the challenging economic environment in Brazil.

Partially offset by the volume impact, market impact of our customer is converting laundry detergent to another packaging format. We'd continue to focus on what we can control in this region.

The environment for our business in Brazil stay wise [ph] and we'll continue to deliver our planned cost reductions initiated one year ago, given the economic environment in Brazil. Our business will be well positioned as the economic improves. Turning to the rest of the world packaging. Our rest of world business delivered another strong quarter.

Third quarter sales of $189.7 million were up 6% compared to the prior year. Currency translation decrease sales by 0.8%, the acquisition of Evadix increased sales 1.2%. Organic growth of 5.6% reflects increased unit volumes of 4% and increased pricing mix. [Indiscernible] global healthcare packaging business continued.

Rest of world packaging operating profit increased to $22.2 million compared to $17.3 million prior to third quarter. This improvement was driven primarily by the impact of strong volumes in healthcare packaging and solid operating performance throughout the segment. Now onto consolidated Bemis results.

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

Total company research and development expense was $9.3 million down slightly from the prior year and in line with our expectations. Other operating income was $4.4 million down from $7.8 million last year. During the prior year there was some unique items dragging benefits such as the trueup of accruals related to a prior divestiture.

Current year results are in line with a more normal trends in this category. Interest expense was $18.9 million compared to $16.7 million last year due primarily to increased rates. Income tax for the third quarter was 23% as compared to 32.2% for the year driven primarily by lower rates due to US tax reform.

Operating cash flow $142 million this quarter increased from $99 million to prior year. Restructuring and other transaction cash cost were $16 million this year and $6 million one year ago. Primary working capital as a percentage of sales was 14.6% at September 30th improved from 15.2% one year ago and within our target range of 14% to 16%.

Total company net debt to adjusted EBITDA was 2.4 times at September 30, 2018. Turning to 2018 guidance, we maintained a midpoint of 280 was shared with our updated 2018 adjusted EPS range of $2.77 to $2.82 as compared to our guidance in June, we do have headwinds from currencies in Brazil and Argentina.

The [indiscernible] business is Brazil that is now confirmed as transitioned to the new format for the entire second half of the year and the impact of [indiscernible] share repurchase has limited by the pending merger with Amcor.

However we did, a good job of upcoming new segments in Q3 and expect to continue with strong operational performance particularly in the US as we have plans on way to strongly [indiscernible] control cost during outage shutdowns.

Our current guidance range contains many of the same assumptions we share at the beginning of the year, we continue to expect both Latin America and Rest of the World packaging to deliver 100 basis points profit improvement for the year.

We continue to expect Agility benefits of $35 million in both top and bottom of our range and we continue to expect headwinds from reinstating paper performance in customer incentives. Where we are in the range will depend in few factors. Currency in the macroeconomic environment in Brazil and Argentina.

Input cost set straight and our ability to offset them and our ability to tightly manage cost and operational performance during the seasonally slow fourth quarter. Turning to cash flow, we're maintaining a full year cash from operations guidance in the range of $410 million to $430 million.

Total expected restructuring and other transaction cost included in our 2018 guidance are $60 million of which approximately $12 million is related to the announced merger of Amcor.

Our teams are doing a great job of pushing [indiscernible] cash flow during the fourth quarter which will help us overcome otherwise would have been cash flow headwind versus our July guidance. We continue to expect capital expenditures in the range of $150 million to $160 million for 2018.

We continue to expect our GAAP tax rate at approximately 23% for 2018. As we head into the fourth quarter we're focused on delivering our operating plan and continuing to find ways to drive value and position our business successfully for the long-term. I will now turn the call back to Bill..

Thanks Mike. We had a good quarter in line with expectations. In early August, we announced to plan to combine with Amcor to create the global leader in consumer packaging which I will speak to next.

But first, with that announcement as the backdrop I would sincerely like to thank our global leadership team for its diligence in keeping our regional and functional teams focused on the objectives required to deliver our operating plan. Great job by leadership and great job by all of the teams around the world.

Let's remain focused on delivering the year. Turning to the combination. These two organizations will drive significant value for shareholders. Employees, customers and the environment over the long-term.

Bemis shareholders will have the opportunity to benefits from a significantly increased dividend and the value creation driven from not only the $180 million of cost synergies identified as part of the transaction but also additional potential revenue synergies.

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

For Bemis this is the next exciting chapter in our evolution and our employees will carry forward the Bemis legacy as they showcase their skill and passion for providing inspired packaging solutions as part of the global leader and consumer packaging that is being created through this transaction.

Until the transaction closes we will continue to operate as an independent company and will remain focused on serving our customers and delivering our operating plans. We are making progress to improve Bemis today and for the future.

We are delivering our plans, which include 100 basis point improvement in operating profit in both Latin America and healthcare packaging. We are finding ways to continuously improve operating effectiveness and efficiency in our factories, in our administrative functions.

We're serving our customers better through improved quality and service and we're laying a strong foundation for long-term net growth bolstered by Agility efforts to penetrate short run opportunities. I'm proud of our business.

We have an outstanding customer base of committed and talented workforce, a comprehensive and innovative product portfolio, a strong asset base and good positions in the markets we serve. We're confident and focused as we position our business for the future. With that I'll turn the call over for questions..

[Operator Instructions] and our first question comes from Ghansham Panjabi from Baird..

Operator, we can't hear anything..

Mr. Panjabi, your line is now live..

This is Matt [indiscernible] sitting in for Ghansham, how are you doing today?.

We're doing well Matt, how are you?.

Good, so what end markets are growing within your US packaging business and which end markets could represent a potential headwind in the years to come and then, can you elaborate on what specific factors are driving growth or maybe some of the headwinds that you could expect?.

Okay let's talk first about what's driving growth right now. You recall our whole Agility program that we put in place on the strengthening grow portion of Agility.

The fixed portion of it helps us get our fixed and variable cost down and it has aided us in doing that significantly but now when we looked at the growth portion, we focused on short run business and that was primarily business that in the past we had not attacked because it was at smaller to middle sized customers.

We weren't set up for it, we're now set up for it through some of the recapitalization efforts we've gone through and we've just this year when we undertook this work stream through Agility we've on boarded 26 new customers in the small to mid-sized category, we established a target at the beginning of the year to achieve $25 million of growth in 2018 through this category of small to mid-sized customers and we're on track to achieve that right now.

And it's in the categories where we have leadership positions. So let's talk about me, talk about cheese [ph], talk about liquid.

Those are the categories where we're really focused and have a right to win and we've brought business in those categories as well as some non-food customers and non-food categories that we in the past had not traditionally played in..

Great, that's helpful. And then maybe one quick question on the cost side. How do you feel that Bemis's position to operate within a cost environment that appears biased to the upside and what actions have to take to counter some of the persistent inflation that we're seeing both in terms of raw materials and then also other costs freight, labor etc..

We look at the rising raw materials as that's part of our normal pass through to customers. So we don't necessarily focus on what happens with rising raw materials, we focus on how our PAFs, Price Adjustment Formulas pass that rising raw materials through to the customer base.

Your question is really focus more so on the productivity efficiency effectiveness side of the equation and through Agility as I mentioned already, we worked hard to get our fixed and variable cost down, which is really lean efforts, quality efforts, service efforts and also plan consolidation efforts that was allowed to, we allowed to get ourselves there through the recapitalization of older assets to new equipment.

So it's day-to-day blocking and tackling that allows us to stay ahead of this rising cost environment and that's what we've seen all throughout this year..

Thank you and our next question comes from Debbie Jones of Deutsche Bank. Please go ahead..

Two questions from m, and first though actually you did actually [indiscernible] on Agility, [indiscernible] in line with, I think what we were expecting. I just got a little confused by the laundry decline.

I understood it to be more of a shift to another format that in some way you would see a bit of benefit from, can you just clarify what that is?.

Yes sure Deb. We measured that category in tons, the format that we were in prior is a much heavier weighted by weight, pounds or kilogram how do you want to look at it, then the format that has been shifted to, so when we measure in tons. Obviously the same amount of packaging in a lot less weight, so volume by ton goes down.

The other piece there on the volume in Latin America. Due to the economic situation in Latin America one of our large customers moved away from a large format ice cream container through a smaller format ice cream container. Ice cream is still selling, but we also measure that in tons.

So going from a larger to a smaller you obviously lose tons in the calculation and lastly, a piece there as Mike mentioned in his script was we exited some very high mix extremely low margin business and when you actually calculated it through production it was breakeven at best.

It was actually candy trays, if you think about Valentine's Day, inside of a candy box. So you get all different shapes and sizes and high mix, low margin in a rigid factory is not something that is suitable for manufacturers.

So we walked away from some of that business, but on expectation in total for the volume that we - thinking about in Latin America and we're more so focused on profit and how do we make profit in that region because it is a region of very high inflation.

Our teams are diligently pushing inflation through so that we're not left holding the inflation within our P&L. through Agility we've created a tremendous amount of leverage in that operating model in Latin America and we push volume through and push inflation through we are focused on profit..

Okay, thanks for that clarification. Second question on the sustainability subject.

This is nothing new, but the two things that I feel like we're hearing a lot about is, CPG's wanting to use more recycled material number one and then also wanting to have a package that is recycled off and one thing that's confusing to me is, it doesn't seem to me that there is enough infrastructure to actually provide a lot of recycled material in the plastic side, can you comment on that? And I mean more so, if this were to increase going forward and then two; where is Bemis in terms of being able to help customers to use virgin material that then could be recycled..

Sure, let me - let's talk to the first part of that. First the actual collection process. So if you just compare US with Europe. Europe is very much further ahead in that area.

If you go to communities in Europe you will see bins where people take different pieces and components of plastic packaging and or paper packaging and or glass and or anything else for that matter and the communities are behind it. In the United States, we don't have that drive and that push just yet, it will take a while.

But we have created a material that is being trialed at many CPG's today that we call Encore and it is a completely recyclable plastic material that we created ourselves through certain types of processing. This is now a completely recyclable package.

On it, is how to recycle code and if you were to go to that website, how to recycle, you would be able to in your area for instance if you put in your zip code. It would tell you where you could take that material to be - to get into the recycle stream, that's one aspect.

The other aspect some of the things that we're doing in our factories to recycle in-process waste, so that we can reuse is back into our virgin materials and combine that with multi-layer structures, is what we're doing internally.

Externally again we have a lot of customers that are asking us to trial and look at, they're asking to trial our Encore material as well as where could they use Encore as part of their portfolio..

Thank you and our next question comes from George Staphos with Bank of America Merrill Lynch. Please go ahead..

Hi, this is actually Molly Baum sitting in for George. First question on just the rest of the world segment.

You cited growth in healthcare packaging, but could you by chance kind of breakdown what you performance was in that segment by geography and where you were seeing growth and where you potentially saw some slowdown relative to either expectations or to what we saw in 2Q. Thank you..

Yes, sure. So we look at rest of the world, we look at Asia, Europe and healthcare packaging. So Asia and Europe are quite small winding our portfolio and in Asia, we were flat. But recall last year our third quarter in Asia was significant, we had double-digit growth in Asia 3Q last year. Europe, low single-digit growth in Q3.

In our healthcare we had mid single-digit growth in our healthcare business and that's really been created hats off to the healthcare guys, they have a very robust new product pipeline which you need to have in that business because it's a three to five-year incubation period for a customer to take a new package through validation and qualification.

So you need to have a very long pipeline of new projects coming to the market and our global team in healthcare has got that robust pipeline that allows them to grow at better than market rates. The market for our type of healthcare packaging is growing in about 4% and we're exceeding that rate because of the pipeline..

Okay, thank you that's very helpful and then my second question, just a follow-up on Matt's question about the US packaging segment. Last quarter you talked about how 19 out of the top 25 CPG accounts that you're working with you had seen positive growth with them.

Can you talk about kind of what the trends were for the larger run businesses in the CPG accounts that you were seeing 3Q? Thank you. That's it from me..

Yes, I'll just break it down a little bit into segment. So in the protein segment and I'm talking meat and dairy if you will. We saw nice growth in both of those categories as well as in the liquid category.

We continue see good growth because several years ago, we put in some assets to get focused on that and we have a team that is truly out there driving growth in liquid. And where we would see the categories weakness would be, let's call it the center of the store kinds of categories, what we call, general consumer, grocery consumer and industrial.

However on the industrial side through the some of the new sales team that we brought on board to attack small and mid-sized customers. We're on boarding some new industrial type customers and non-food customers which we're helping in that category..

Thank you and our next question comes from Edlain Rodriguez of UBS. Please go ahead..

Bill, one quick question and then for 2018, you have that goal of achieving $25 million in short run businesses and you're on track for that. As we look forward into like 2019, 2020 like does that number increase significantly like leaps and bounds or is it going to be like at a more moderate pace..

We're not going to share at this point any 2019 targets. But if you just think through it though, the role forward of that business that will continue to grow and we're not stopping.

I mean we've hired these sales people to go out and attack that segment of the market and they're going to continue do that and we've incentivized them to do that as well. So as they get further on board, if they continue to gain more momentum.

They figure out how best to - we get finer at what are the good targets to go after, we're going to see that category continue to grow..

Okay and one quick one on Latin America. As you fine tune those low margin products, you're walking away from them.

Like how much of that is left to be done?.

We're in a pretty good place right now. This piece that we got rid of, which is just really high-mix, low margin, you're changing dyes out, you're changing resins over. It just didn't make sense.

So we just exited and but we're in a really good place when we look at the portfolio of customers, the portfolio of products and what we're continuing to sell going forward..

Thank you. Our next question comes from Salvator Tiano from Analyst. Please go ahead..

Hi guys Salvator from Vertical Research. So my first question would be on the US packaging volumes. We did see some volumes declined in [indiscernible] and we've talked about everything that's going well in the US.

But this 1% I guess decline that was not [indiscernible] business where did it come from, was it some customer losses, just lower volumes and existing customers and what kind of end markets were here to be aimed..

We don't look at anyone quarter as being a trend let's call it, right. Last year's Q3 we were up 2%, so from the perspective of US CPG landscape that's quite significant volume increase. So year-over-year basis down one, I'm not that doesn't excite or get us excited.

What we're really looking at, we've hired 14 new people, we've added capabilities in our commercial area to how do we get “quicker”. The account reviews that we've put in place to identify where we can go and attack the market. A quick turn sample role process that has gone from many, many weeks down to five days.

A core spec program that allows the new sales team to go out with a good, better, best specification to sell to the client base and we've on boarded 25 new customers in this middle to short run type of business.

So I look at and say the process is on track, it's moving the business forward and we're going to exceed the $25 million of target that we set for ourselves at the beginning of the year in this category. I don't necessary look at the one down and say okay, something's gone wrong..

Sure. And just my second question, you noted that some of the margin softness in US was due to some paper performance and some customer incentives in Q3. So firstly is it possible to quantify by same manner usage $4 million a year ago where [indiscernible] what was the impact in 3Q first of all.

And secondly can you elaborate on the way these accruals work in terms of was it for new businesses generated in 3Q or was it for successes that you had in 1Q and 3Q and judge the accrue the results right now..

First of all, I'll talk about incentive for customer first. Basically at the beginning of the year you've got a program put in place and based on how they're performing you accrue the incentive throughout the year and so it's year-to-date, so as an example every quarter is going to have some incentive in it based on how, the business is trending.

So last year, we reversed that for one specific customer that had been accrued through the second quarter that reversed in third quarter. The one would assume that, those accruals are now in place. They're in place every quarter this year for that specific customer. As for Playford performance again it's an annual target.

Last year with their performance essentially we had very little Playford performance expense to the accrual as we went through the year. So this year targets were reset. I think we achieved our full year internal objectives. People who earned short-term incentive..

Thank you. Our next question comes from Daniel Rizzo of Jefferies. Please go ahead..

You mentioned $25 million the small to mid-cap sales are coming from the new sales folks.

I was wondering if it's all coming from them or view like kind of repositioned, your existing sales team to kind of focus on this market as well or is it just addition, which is it?.

No, it's a combination of both Dan. Its combination of new folks that we've on boarded but it's now the fact that we've set up the processes internal, so that some of this shorter run business comes from our existing accounts as well. So it's not just coming from the new guys, it's coming new people I should say.

It's coming from the entire sales force. But the focus of the new sales force is to go after these regional smaller accounts..

Will you be hiring more new sales force to do the same?.

We're feeling good about what we've got onboard right now and depending on how we continue to be successful and at that rate. You know we'll determine whether we need more..

[Operator Instructions] and our next question comes from Arun Viswanathan from RBC Capital Markets. Please go ahead..

Just wanted to ask about medical packaging. It seems like you had some strong success there. What's your outlook for that business kind of going into next year and are there any possibilities to get larger? There I know you're going to Amcor transaction, but thoughts on expansion in that market..

We have a very good healthcare business globally. We run it globally for the reason of being effective, working with customers more closely, driving specification around the world for that type of package through that single source of customer. We continue to see this as a very nice space for us and it will be a good space for us for years to come.

It droves better than GDP and we focus on it with innovation and technology, so that we create as I mentioned earlier that strong robust pipeline..

And on Latin America, I guess obviously - you've discussed the trade down into different products in the past and now you're seeing that conversion. Do you expect sales would moderate and are at least flat now I guess next year or you think headwinds will continue from a volume perspective? Thanks..

The customer we talk to, all think that things will moderate or stabilize that's probably better way to put it, once they get through this election, this coming weekend. Obviously there will be some volatility post-election. But as the new government comes into place they feel that things will stabilize within that region.

We again as I've said many times through Agility we have taken our fixed and variable cost down in that region significantly and created tremendous amount of leverage in our P&L, so that as volumes come back and continue to, as would continue to increase. We will continue to leverage the P&L and get fall through..

Thank you. Our next question comes from Anthony Pettinari from Citi. Please go ahead..

Hi, this is actually Bryan Burgmeier sitting in for Anthony. On the $12 million in cash cost related to Amcor that you called out. Could you clarify what offsets you're able to find in order to maintain guidance from cash operations? Sorry about this [indiscernible]..

Our Q3 was a little better than we expected and we're very focused on delivering and generating cash flow in Q4. I wouldn't say there is any specific thing that offsets it..

Okay understood.

And then on Latin America, is it possible to say what volumes would have been if you exclude the customer shifts that you pulled out?.

I don't have that number on top of my head, sorry..

Okay, thanks..

One way to think about it Brian is that, the minus 15 let's 10 is related to folding box and then the remainder is related to the mix, topic Bill talked about as well as the customer changing format. So that explains the full 15, which would get you to flat..

Thank you. And it appears we have no additional questions at this time..

Thank you. This concludes our conference call..

Thank you all for your attention. This concludes our conference call. All participants can now disconnect..