Bemis (BMS) Q1 2011 Earnings Call April 28, 2011 10:00 am ET Executives Melanie Miller - Vice President of Investor Relations and Treasurer Scott Ullem - Chief Financial Officer and Vice President Henry Theisen - Chief Executive Officer, President and Independent Director Analysts Sara Magers - Wells Fargo Securities, LLC Ghansham Panjabi - Robert W. Baird & Co. Incorporated Albert Kabili - Macquarie Research Alex Ovshey - Goldman Sachs Group Inc. Philip Ng - Jefferies & Company, Inc. Michael Hamilton - RBC Wealth Management, Inc. George Staphos Christopher Manuel - KeyBanc Capital Markets Inc. Timothy Thein - Citigroup Inc Presentation Operator
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Now I'll turn the call over to Henry Theisen.Henry Theisen Good morning, everyone. This was a challenging quarter for Bemis, and we are disappointed to have missed the low end of our first quarter EPS guidance by $0.03. Our guidance for the first quarter incorporated our expectation of increasing raw material costs for the first half of 2011. However, with the escalation of unrest in the Middle East and supply issues in the chemical industry, raw material costs increased dramatically during the first quarter, particularly the cost of the specialty resins Bemis relies on for our high barrier Flexible Packaging products. In our Flexible Packaging business segment, we use a variety of raw material inputs, including polyethylene, nylon, polyester, polypropylene and many others. Our customer contracts provide for us to adjust selling prices in response to raw material cost changes, but there is a time lag between the raw material cost changes and the scheduled selling price adjustments. Currently, the contract price adjustment lag times vary from one month to 6 months. However, the lag time for polyethylene-based packaging is shorter and will be longer for complex multilayer products that incorporate more specialty resins. During the first quarter of 2011, we experienced more dramatic raw material increases than we expected. The cost of polyethylene, polyester polypropylene and nylon increased in excess of 15% and even above 30%, in some cases. While most of this impact will be recognized during the second quarter, there was still a measurable impact on first quarter gross margins. At this point, we recognize the additional cost increases that we will be experiencing in the second quarter. Clearly, our selling prices will adjust to reflect these higher input costs, and we will continue to reduce material costs with material substitutions and efficiency improvements. We have well-established continuous improvement initiatives throughout Bemis that are focused on plant efficiencies, and I am confident these projects will continue to deliver value as we move forward.
Looking out through the rest of the year, Flexible Packaging volumes are expected to be relatively flat with last year as our customers have begin to express some concern about the impact of food price inflation on consumer buying patterns. At Bemis, we expect to see volume growth throughout the year due to the pipeline of new products that we are introducing. Our rigid barrier platform, coupled with our Peel Reseal technology, is giving us new market access and expanding packaging formats in existing markets. Examples of some of these are creamer cups, frozen pizza and condiments. Bemis is gaining growth in these market categories because our products offer convenient features, reduce material content and extend shelf life.Let me illustrate some examples of our innovation. Our new frozen pizza package eliminates the need for an outside carton, therefore, reducing packaging content by 30% compared to previous frozen pizza formats. The opportunity to use less material is critical to our customers' sustainability goals and helps control package costs in this environment of escalating raw material costs. This new package uses our polyester platform and incorporates our EZ Peel feature for consumer convenience. This is just one example of how Bemis is providing our customers with packaging solutions that deliver affordable sustainability benefits. Another example of our contributions to the sustainability needs of our customers is exhibited in the creamer cup business where our rigid barrier technology has reduced the material content by 20% and provides an improved barrier to extend product shelf life. Read the rest of this transcript for free on seekingalpha.com