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Bemis Hurt By Lower Volumes

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Bemis Company Inc. (BMS - Free Report) reported second quarter 2012 adjusted earnings of 54 cents per share, up 6% from the 51 cents in the year-ago quarter. The result surpassed the Zacks Consensus Estimate of 52 cents and was at the mid-point of management’s EPS guidance in the range of 51 cents - 57 cents. Decline in overall unit volumes affected the company’s financial performance during the quarter.

Including charges of 2 cents related to acquisitions and a charge of 12 cents pertaining to a facility consolidation activity in the reported quarter, EPS stood at 40 cents, down 22% from 51 cents in the year-ago quarter.

Net sales slid 4.2% year over year to $1.3 billion, in line with the Zacks Consensus Estimate. Acquisitions completed during the second half of 2011 had a positive impact of 1.5% but were offset by lower unit volume in the flexible packaging business segment and unfavorable currency translation.

Cost of products sold decreased 4.7% to $1.08 billion in the quarter. Gross profit declined 1.9% to $233 million. Selling, general and administrative expenses decreased 2% to $124 million. Adjusted operating income declined 2% to $99 million.

Segment Performance

Net sales from the Flexible Packaging segment amounted to $1.17 billion, down 4% year over year. Lower unit sales volumes and an unfavorable impact of currency translation of 4.8% mitigated the 1.7% benefit from acquisitions completed in the second half of fiscal 2011 and higher selling prices and improved sales mix.

However, adjusted segment operating profit increased 1.2% to $117.7 million from $116.3 million, thanks to benefits from cost reductions that somewhat offset the negative impact of lower unit sales volumes.

Net sales from the Pressure Sensitive Materials segment totaled $141.9 million, a decline of 6.3% from the year-ago quarter, due to lower volume as well as negative impact from currency translation of 5%. Segment operating profit was $10.9 million, a 7.6% drop from $11.8 million recorded a year ago due to the negative impact of currency translation.

Financial Update

As of June 30, 2012, Bemis had cash and cash equivalents of $113 million, up from $113 million as of March 31, 2012. Total debt of the company reduced marginally to $1.55 billion as of June 30,2012 compared with $1.57 billion as of March 31. 2012. The debt-to-capitalization ratio increased to 49.8% as of June 30, 2012 from 48.8% as of March 31, 2012..

Total cash flow from operating activities for the first half of fiscal 2012 increased to $143.3 million from $81.9 million in the first half of fiscal 2011. The company plans to utilize its cash flow to reduce its debt burden with a target to reduce the ratio of net debt to adjusted EBITDA to approximately 2.0 times.

2012 Outlook

Management expects adjusted EPS in the range of 51 cents to 57 cents for the third quarter of 2012. For 2012, EPS guidance has been lowered to a range of $2.00 and $2.10 due to lower volume expectation and weaker foreign currency exchange rates.

Capital expenditures are estimated at around $150 million, down from the prior projection of $175 million. The guidance includes expansion of Bemis’ capacity in China, the addition of high barrier capacity in Brazil and added capacity in order to support increased customer demand for products from Bemis’ barrier platform in North America.

Our Take

Weak volume, higher pension expense, a weakening European economic outlook remain major causes of concern. Bemis has expanded its facility consolidation program, which is now expected to result in $50 million of savings annually. 

Furthermore, a favorable raw material cost environment will somewhat lessen the negative effects of lower volume levels in 2012. Once volumes improve, Bemis’ relentless efforts for cutting costs will bear fruit. Shares of Bemis currently retain a Zacks #3 Rank (short-term Hold rating).

Neenah, Wisconsin-based Bemis Company is a major supplier of flexible packaging and pressure sensitive materials used by leading food, consumer products, healthcare and other companies worldwide. Bemis competes with the likes of Sealed Air Corporation (SEE - Free Report) and Avery Dennison Corporation (AVY - Free Report) .

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