Amcor plc (AMCR) Q2 2009 Earnings Report, Transcript and Summary

Welcome to the Bemis Company second quarter 2009 earnings release conference call. This call is being recorded. For opening remarks and introductions, I will now turn the call over to the Vice President and Treasurer for Bemis Company, Ms. Melanie Miller. Ms. Miller, please go ahead.

Thank you. Today is July 17, 2009 and a replay of this call will be available on our website, www.bemis.com, under the Investor Relations section. Joining me for this call today are Bemis company's President and Chief Executive Officer, Henry Theisen; and our Senior Vice President and Chief Financial Officer, Gene Wulf. Today, Henry will begin with comments on the business, followed by Gene, who will provide additional details on financial results. 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 yourself to one question at a time with a related follow-up and then fall back into the queue for any additional questions. Before we begin, I would 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 costs and availability, industry competition, unexpected consumer buying trends and customer order patterns, our ability to pass along increased costs in our selling prices, costs and innovation risk associated with business combinations, changes in labor relations, interest rate fluctuations, and availability and cost of bank financing, 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, 2008. Now, I will turn the call over to Henry Theisen.

Thank you and good morning everyone. We are very pleased to announce earnings per share $0.50 for the second quarter, which is well above our guidance that was set a few months ago. We are enjoying strong order volume in the areas of our business, where we have been investing and we are realizing the benefits of our productivity improvements. Our business teams have been doing a great job of taking costs out and improving productivity in our operations. These efforts have been ongoing for some time. The rising raw material cost environment in the second half of 2008 masked these productivity improvements. As we have explained in the past, our business model accommodates raw material cost changes with customer contracts that automatically adjust selling prices at pre-defined points of time. In this model, there is a time lag between when the raw material cost changes and the corresponding change in selling price. Although we feel the quarter-to-quarter impact of changes in raw material costs and selling prices, in the long run these quarterly impacts offset and we are neutral. During the first six months of 2009, we enjoyed the impact of the lower raw material costs. In the second quarter, raw material cost increases were announced. But due to the timing of orders and shipments, we were able to maintain our cost benefit through the end of June. This is not expected to continue through the second half of the year, but we do expect to retain the increased margins associated with our cost management and productivity improvement efforts. Cash flow in the second quarter and in the first half of 2009 was also very strong. Our business teams have initiated programs to reduce working capital in 2009 and their efforts have been very successful. We will maintain this focus on cash flow and debt reduction going forward to ensure that our capital needs are met, our dividend program is supported, our pension plans are appropriately funded and we are achieving our planned debt reduction schedule. Looking forward, the economy is still challenging, but some eat-at-home categories continue to show growth, such as single-serve coffee, frozen food, pizza, bakery, cheese and liquid packaging. We saw a sequential volume improvement from the first quarter to the second quarter in 80% of the flexible packaging and pressure sensitive products that we sell. This is due to a combination of seasonally stronger sales occurring in the second quarter and also restocking at low volume levels in the end of 2008 and beginning of 2009. I am pleased to report that our European flexible packaging operation has reported high single-digit operating profit for the second quarter in a row. While they get some benefit from raw materials, they've also made substantial changes to operations with world class manufacturing program initiatives, and their sales mix has adjusted to include more packaging that uses proprietary bMET films and sealants. Our South American operations are doing well in local currency, and we are very pleased to have added four plants to our business with the June acquisition of Huhtamaki's South American rigid packaging operations. Huhtamaki had announced that they were getting out of the rigid business globally, which caused these assets to be available for sale. These plants are located in both Brazil and Argentina. We have rigid packaging plants in South America that are profitable making product such as tubs for edible fats, yoghurt cups and food service items. While, we do not plan to expand into rigid packaging in the rest of the world, we like our existing business and we are pleased to be able to add the Huhtamaki plants. This new business is a bolt-on to our existing rigid business expanding our reach into more rigid packaging for ice cream, personal care applications and additional food service items. Our medical device packaging business is steady and we're optimistic about volume growth in the remainder of 2009. We have great opportunities for growth in this particular category as new medical devices enter the market and the pharmaceutical industry continues to incorporate flexible packaging in place of rigid containers. In our Pressure Sensitive Materials business I am pleased with the steps that have been taken in both our North American and European operations to control costs in this weak economic environment. Our business teams have reacted quickly to take out cost in the face of substantial volume declines. Once the economies in both regions begin to recover, we will work to keep this lower cost structure in place to accelerate margin recovery. Lastly as you know, we announced last week that we are planning to acquire the Alcan Packaging Food Americas business from Rio Tinto. The total purchase price of $1.2 billion will be financed with $1 billion of debt and $200 million of equity. With this structure, we expect to maintain our investment grade credit rating and quickly use strong free cash flow to pay off debt and reduce interest expense. Once completed, we expect this acquisition to be accretive to earnings per share and produce strong cash flow. In total, we have a lot going on at Bemis and we have not taken our foot off the gas. Our guidance for the second half of this year is lower than the first half, but we do expect the benefits of lower raw material cost to fade and volumes overall to remain weak. The sequential volume increase from the first to the second quarters is encouraging. Now, I’ll turn the call over to Gene for specific comments on the financial results.

Thank you, Henry, and good morning to everyone. First I’d like to point out that we have announced our second quarter earnings earlier than we would normally do this quarter. In fact, once we realized that the month of June had substantially outperformed our expectations and began to quantify this increase, we accelerated the closing process to prepare for the preannouncement. In doing so with lots of long hours we were able to accelerate our full second quarter earnings announcement today. Starting with the income statement, we recorded $0.47 per share on a GAAP basis for the second quarter. This includes $0.03 per share of charges associated primarily with acquisition related costs. Excluding those costs we would have reported $0.50 per share for the second quarter. This $0.50 per share result is comparable to our guidance of $0.35 to $0.43 per share for the second quarter. In our flexible packaging business, our major raw material is plastic resin including a wide variety of specialty resins. In this difficult economic environment resin price had been coming down during much of the first half of the year. We have contracts with many of our customers that specify for periodic price adjustments that defined trigger points. This creates a time lag between each publicly reported change in the resin cost and the timing for our selling prices to adjust, if applicable. During the second half of 2008, resin costs increased rapidly and our results were negatively impacted by the time lag between the cost increase and the related adjustment to selling price. In 2009, as raw material prices have come down, we experience the opposite effect and have benefited from the same time lag. Looking specifically at net sales first, we reported an 11.6% year-over-year decrease in consolidated net sales during the second quarter. Excluding the impact of currency, net sales would have decreased 4.9%. For flexible packaging net sales, second quarter net sales decreased 9.9% from the second quarter of 2008. Excluding the impact of currency, net sales were only 3.3% lower than last year. This decrease principally reflects lower volume offset partially by higher price mix. Looking at the categories and to which we sell our flexible packaging, and excluding the impact of currency, sales for meat and cheese and medical device packaging, representing about 37% of the total flexible packaging net sales was about equal to the levels of the second quarter of 2008. In each case, volume was flat to down modestly offset by a higher price mix compared to last year. Net sales increased for dairy and liquid products, dry foods and other miscellaneous food product categories, which represents about 22% of total flexible packaging net sales. In the case of dairy and liquid and dry foods, the increase in net sales was supported by strong volume increases. For other food categories, lower volume was more than offset by improved price and sales mix. Net sales for remaining food and consumer product categories like bakery, confectionary and snack, multi-pack, pet foods and treats, health and hygiene products decreased compared to the second quarter of 2008. These categories totaled about 30% of flexible packaging sales. For bakery products, the volume increased was offset by lower price and mix. In the remaining categories, lower sales were driven by lower sales volume within each category. The remaining flexible packaging sales to industrial and other non-food categories decreased from last year's levels, reflecting generally lower sales volumes. These markets would not be tied to food or medical device market demand and therefore are much more sensitive to economic conditions. In our pressure sensitive material business segment, net sales decreased by about 20% from the second quarter of 2008. Excluding the impact of currency, net sales decreased about 13%. Looking at specific product lines within this segment, our label product's category was down only about 4%, reflecting the net effect of lower sales volume partially offset by higher price and mix. These products were sold to label printers, and we found that sales to our North American customers have virtually stabilized. On the other hand, graphic product mix sales, which depend heavily on demand from advertising markets in Europe, decreased over 20% compared to the second quarter of 2008. Sales of technical products are also down dramatically reflecting the slowness in demand for our customer's product in the housing and automotive markets. Continuing through the income statement, Bemis' gross margin was 20.6% for the quarter, which is a full 3% above the 17.6% gross margin level of last year. As Henry discussed, this is driven by decreasing raw material cost levels combined with improved plan efficiencies and cost management initiatives. With regard to operating profit, flexible packaging operating profit was 13.9% of net sales for the second quarter of 2009, a substantial increase from the 10.9% of net sales in the second quarter of 2008. As I mentioned earlier in my comments, raw material cost decreased ahead of the path-through mechanisms. In addition, operational improvements in North America and Europe from our world class manufacturing and other cost improvement programs have contributed to this improvement in operating margin. Pressure Sensitive material operating profit as a percent of net sales was 2.2% for the second quarter of 2009. This compares to 5.5% for the same quarter of 2008, and reflects the lower unit volumes experienced in this segment this year. Selling, general and administrative expenses were about $89 million, which is about the same dollar level as the first quarter as well as last year. Research and development expenses are also consistent with last year and last quarter. Other costs and income reflect a few items that should be identified and affect comparability. We have recorded $4.7 million of acquisition related professional fees during the second quarter. These fees relate both to our completed Huhtamaki South American rigid plastic acquisition and the Alcan Packaging Food America acquisition effort. Also, interest income and fiscal incentives has decreased by about $4.1 million, when compared to 2008. Cash balances have declined since last year, because in fourth quarter 2008, we transferred to the US about $62 million in the form of dividends from various international locations. In addition, we used cash in Brazil to pay for the acquisition that we made in early June. Interest expense is lower than last year reflecting both lower debt balances, as well as substantially lower interest rates. Lastly, as we explained in the first quarter, we have reclassified non-controlling interest to a position below net income in the income statement and is now presented net of tax. As such, our tax rate has adjusted to reflect this and is 36.7% in the second quarter, which is slightly above the first quarter in last year, reflecting the change in geographic sales mix. Our debt to total capitalization is down to 26.3% this quarter reflecting our strong cash flow and debt repayment. However, obviously this will change once the Alcan Packaging Food America transaction closes. Assuming the transaction closes by the end of 2009, we currently expect debt to total capitalization to be in the high 40s at year end. During the second quarter of 2009, cash flow from operations totaled about $119 million, substantially higher than any quarter of 2008. In 2009, we are focused on managing working capital levels, which has helped release cash from the balance sheet during the first six months of this year. We are also spending less on capital than we did in 2008. For the second quarter of 2009, we invested in $23.1 million of capital expenditures compared to $30.2 million in the second quarter of 2008. For the total year, we anticipate net cash provided by operating activities before cash related to hedging contributions, acquisition activities and severance to be in the $425 million to $475 million range. For the total year, we continue to expect total capital expenditures to be in the $100 million to $110 million range. With regard to liquidity, we have $425 million credit facility available to support our commercial paper program at the end of the second quarter with about $258 million of commercial paper and industrial revenue bonds issued against it. Excluding the planed financing associated with the acquisition of the Alcan Packaging Food Americas business, we expect this credit facility to be sufficient for our cash needs in the future. We maintain, the fine benefit pension plans in North America and Europe. We made a tax deductible voluntary contribution of $30 million to our US pension plans during the second quarter of 2009. Finally, with regard to guidance, it is important to note that we have a lot of going on in this year, much of which we are unable to predict with confidence due to the timing of the closing of our proposed acquisition. As a result, our guidance excludes any estimates for acquisition related costs, financing charges associated with the acquisition or severance. We narrow and raise the upper end of our guidance for the year from the range of $1.50 to $1.70 per share to a range of $1.68 to $1.75 per share. This change accommodates the outperformance of our operations during the first half of the year. We remain cautiously optimistic about the second half of 2009. In addition, our guidance for the third quarter is $0.38 to $.43 per share reflecting the continued uncertainty of the global economic environment, the choppiness of product demand and uncertainty of resin pricing for next six months. Now, we will open up the call for your questions.

(Operator Instructions). We will take our first question from Ghansham Punjabi.

Hey Henry, could you elaborate little bit on the European flexible packaging business. What was the delta there relative to expectations, was it volumes, was it cost take out et cetera, just trying to get some flavor there?

The European business is improving really for the last say four quarters and has done a really nice job in this year. The two main reasons are the world class manufacturing efforts we put in place. A lot of those improvements if you remember, the European businesses came with other acquisitions. We got a piece of Clysar business from DuPont. We got a plant when we did Paramount. We ended up with a plant from UPM. And in putting together the world class manufacturing, we've got these initiatives going across the plants, we got the plants working together with each other and so we have been able to gain some advantages there. The other is, goes back to the investments we made in the past and the plan we had to upgrade the value added part of our businesses over there. We put in seven-layer materials, we put in technologies around polyester, and then we are starting to see the benefits of those value add sales which go with higher margins, because they offer solutions for our customers. So it's really a split between those two things and it's an ongoing growing program.

And as my follow up was the resin tailwind as substantial in Europe as it was in the states?

Yeah. I think it was.

We will take out next question from George Staphos of Bank of America.

George, I don't know if we have that readily available. Just because of the volumes of sales we have in North America, the principal improvement would have been in North America in terms of dollar value.

Okay. So, it would be fair to say that both South America and Europe were up each, maybe a couple of million dollars in EBIT?

Well, Europe certainly improved from last year. As we talked about a year ago second quarter or so of '08. Flexible packing, Europe was still experiencing mid single-digit operating profit, and they have really improved that up well into the high single-digit. So there is an improvement on roughly $350 million of flexible. On the other side if you are looking at total Bemis, and you've got the half of pressure sensitive out there in Europe that is really having a hard time, because of the exposure to the advertising markets with the graphic product. So, we don't really have it split up at all by region of the world. But like Gene said, we are pretty North American-centric with regard to our sales and our volumes, so it's a fair way to look at it.

I understand. That's helpful, Melanie. The other question I had was, roughly speaking again, how much of the EBIT improvement do you think was related to the lag on resin pricing, which doesn't recur over the back half of the year? Thanks.

George, we are estimating that somewhere between one-half and two-thirds of it is related to the material impact.

Okay.

Probably closer to the one-half than the two-thirds.

We'll take our next question from Claudia Hueston from JPMorgan.

Wanted to just follow-up a little bit on the cost reduction plan in Europe and obviously the nice progress you've made there. Just how much room do you think there is to go? I mean, are you pretty much done with that initiative? And then as we look at some of your cost initiatives on a global basis, where you say you are in terms of rolling those out?

I think the cost initiatives that we have never stop. You tackle one area and then another becomes available to you, and I think this is a continuous program that we have that's going to go on for years, and it's going to deliver approximately the same savings it has delivered this year, it will deliver next year and the year after that, and the year after that.

And can you just point out …

I know this is not a one-shot program, we're trying to capture a certain savings and you have a 12-month timeframe. This is a continuous program that keeps, as you take things off the topic keep adding new programs on the bottom and new opportunities.

Okay. Is it possible to quantify the savings that you've got in year-to-date from the cost management program?

I think this varies so much from the individual business units we have in the individual continents. We don't actually keep a score sheet that adds up to the nearest penny.

Okay.

I would look at it as our goal and our cost initiatives is to match the inflation that we have due to wages, energy, other costs associated with the business other than raw materials.

We'll take our next question from Chris Manuel of KeyBanc Capital Markets.

Can you help us a little bit with, Gene you mentioned in part of your prepared comments that you had accelerated closing the books early in June as June was coming into be a pretty strong month. Can you help us with, what do you think drove the improvement from what was it. From a volume perspective, it appears as though, the volume trajectory hasn't changed much, was it more of or has it? Maybe that's part one of the question. Part two is, what was behind it other than the materials, was it your savings programs that are ramping up that will be sustained for the rest of the year or was it impacted volumes begin to improve?

Well, I'm going to take that from Gene for a second. The cost improvement programs in the past, we really haven't changed. They were just mired and hidden by the drastic increases in raw materials that I think will be going up for the last five years. With the raw materials going down, you finally got a chance to see the effect of these programs actually appear in the bottom line. But, the part about volumes on that, I really want to stress this is, we see good growth and good margin and good improvement in our business in those core areas that we've invested in the past. They are delivering new products for single-service coffee or pizzas, our PET platform, for shaved and meats, our programs along those lines that take into account our technologies and our material size. Those are the programs that are driving really the increased margins and increased profitabilities across our product lines.

I’ll just add Chris that, as we had anticipated the quarter to work out, we expected that the first part of the quarter would be stronger than the second part of the quarter. And, it became pretty apparent for us that when we got towards June that volumes and pricing that we were anticipating might change did not and that's what caused us to accelerate our reporting process.

Okay. So, it is more that the price stayed sticky or longer, is that…?

That's probably good way to say it or the benefit of the lower raw material prices stayed sticky or longer than we thought it would.

Okay. Then my follow-up question is does that continue into your third quarter for a bit or at July 1, where we effectively back at cost price balance per say, that spread was back to balance?

I think we are back in balance now that we’ve gone through the first half of the year. We are very, very closed to balance. There might be some residual inventory to ship, but basically I think you have to look at it is our cost with raw materials is in balance with our selling prices.

We’ll take our next question from Mark Wilde from Deutsche Bank

I wanted to follow-up on Chris’ question about this June strength. If you could give us some sense just by segment, little more color on where that showed up?

Where that really shows up is with this weaker economy, there is less restaurant business, there is more eating at home. It goes even like at some specialty things that are really helping us out as people don’t want to give up the quality, but they still want, they really can’t afford to pay for it. A good example will be a Starbucks Coffee. It costs you $4 or $5. Nowadays, we have these single-service coffee that might cost you $0.50. So, you stay at home and you brew yourself to specialty cup coffee that saving a substantial amount of money, but it's a new product and new initiative for us. Pizzas would be another way you look at it, instead of going out to a Pizza Hut you buy a special high premium pizza that you make for yourself at home. I think what is really strange in June, are we seeing in people won’t go to the restaurants or won’t go out to eat or they won’t go out to a Pizza Hut, but they want that special treatment. So, they go out and buy these units that really are in upgrade in quality and value, only they make it at home. That’s where we’re seeing our best growth.

Okay. So, cyclically, you're not really seeing anything yet that would tell us this whole pantry destocking that we seem to have gone through for the prior two or three quarters that that’s really shifted at this point?

No, I think it's just stable for the first half of the year. There’s really no reason to think it's going to change drastically for the second half. That’s what we are seeing.

Okay. You guys have always been good at kind of moving your customers to higher value added new products. Is there any sign that the recession has changed the behavior, particularly the packaged food companies on that count in terms of looking for new products?

No, not at all. I think all of our packaged food companies and consumer product companies recognize that the package is a differentiator. If you got two products from two different customers, the package sometimes, the graphics, the convenience features, all of those things will make a particular person pick that package over another. So they continue to look for ways to set themselves apart from their competition.

We will take our next question from Al Kabili from Macquarie.

Hi. Good morning, guys. I just wanted to also follow up on the June strength. Is there a way you could just give us a sense of June volumes year-over-year relative to the quarter average?

No, I don't really have that available here right now. It was probably more of a mix issue for us than it was a volume issue, because as you heard me talk about volumes, you know volumes are still mediocre overall. They aren't robust in total, but what we found is the product lines that are more profitable for us, the extended shelf life products were much more profitable and did very well in the later part of the quarter.

Okay, understood. And then I guess also just wanted to follow-up on fresh case. Where are we with that now? Any updates on where we sit with the FDA?

I think the FDA and the US government is one of the most frustrating things that can be. We are waiting for the final documentation to allow us to go out and market our product, and I can't give you a timeframe when that will happen.

We will issue a press release when we get the official letter.

Right. Okay. Fair enough. I know the last time, I think you submit your questions in December. They asked our responses in December, have you got additional questions from them since then, or are we just waiting?

No. We have not received any questions or any reason to believe that is not going to occur. They are very happy with the data that they have, and they've told us that there is nothing else that they need from us.

We will take our next question from Joseph Naya of UBS.

Good morning. Just I was wondering if you guys could share with us, what your outlook is in terms of resin and how that might play through on the enterprise cost equation going forward. It seemed you know, maybe we are moving back to little bit more stable from resin environment. Just wondering if that kind of matches up with your thinking?

That just match up. We look at our second half of this year in a stable situation. We really don't expect to see much change in the overall price of our raw materials.

Okay. Have you seen any sort of an uptick in your particular mix of resins here lately, just kind of following to, I guess the broader commodity markets or?

Well, there have been some increases in the first half of the year in Polyethylene. There were two increases in the first half. There are some announcements out there. The export market has been rather strong in shipping some of these materials. But, later in the year you ought to start seeing some things coming out from the Middle East. There really is no strong demand. Some of the resin companies are slowing down some of their capacity. It just looks like a time it's going to be rather flat through the second half of the year.

So, you should be able to more than likely keep up pretty well with changes in prices going forward?

Yes, I would expect that barring any kind of a strange hurricane or season or something like that.

We'll take our next question from David Woodyatt of Keeley Asset Management.

The comment that the pending acquisition will be accretive to GAAP earnings. Could you comment on whether there's going to any meaningful amount of non-cash expenses like amortization of intangibles?

Certainly, there will be amortization of intangibles around technology and intellectual property. For US GAAP, we've got to value contracts and customers, things like that, so there will be amounts for that. We're working on that right now. It's not finalized, going through evaluation models.

We'll talk our next question from George Staphos Bank of America.

Hey Henry, I just want to go back through some of your higher end, more value-added markets where you are saying, you are seeing good volume, good customer acceptance and good margins. In most of these markets, I know it's hard to generalize, would you say that you are really only one of two or one of three players who can reduce the substrates in the packages where those market at this juncture, or are they a bit more competitive than they are at least more fragmented than that?

Hey Henry, I just want to go back through some of your higher end, more value-added markets where you are saying, you are seeing good volume, good customer acceptance and good margins. In most of these markets, I know it's hard to generalize, would you say that you are really only one of two or one of three players who can reduce the substrates in the packages where those market at this juncture, or are they a bit more competitive than they are at least more fragmented than that?

There's still a lot of competition out in the marketplace and everyday we fight to keep our business and to win new business. So, I don't think it's restricted at all. It's a very competitive industry.

There are lots of ways to solve the packaging problem too. And we'll have a unique solution that we think provides unique properties for that package and another competitor can come out with a different style that would compete with it.

Okay. I guess, maybe trying to take a different swag at it, would you say that the number of competitors, who can produce what you produce in those markets, is up by a factor of 50% or double when you get into some of the more commodity-oriented markets that you compete in, say like bread bags?

Okay. I guess, maybe trying to take a different swag at it, would you say that the number of competitors, who can produce what you produce in those markets, is up by a factor of 50% or double when you get into some of the more commodity-oriented markets that you compete in, say like bread bags?

Well, 50% is a big number, but yeah there have been new competitors that have come in the market in the last five years as startups. So there is competition for product lines like bread bags for example. A lot of smaller competitors out there have added seven layer film lines that the resin companies and machinery companies teach them how to run different kinds and different gauges of film. So getting into our business, it's capable for a small competitor come in and take a technology and start to whittle away at our business.

We'll go next to Mike Hamilton from RBC Capital.

I was wondering you did nice job of segmenting out your other income in the quarter, and I know it's a lot of moving parts there. How are you thinking about impacts 3Q?

In looking at other income, I think you're going to continue to see for ongoing kinds of thing. Interest income will be down, because we've taken a lot of cash out of our international operations so that interest income is down. Some of the fiscal incentives are starting to go away and that’s starting to go down a little bit. What would show up for acquisition related cost that will continue into the third quarter as we deal with valuations and final contracts that we signed, all that kind of stuff, but from ongoing operations the two key items would be interest income and fiscal incentives and I expect those to be declining going forward.

We’ll next to Tim Burns from Cranial Capital.

Couple of questions, and I didn’t quite hear this. It sounded in PSM area that the roll label business was stabilizing, is that what I heard?

I think that’s a good word for it. It’s down from last year, but it’s through the second quarter stayed at that level.

Okay, good. Well, that’s good thing. It’s big part of your business, right?

Well, it's not that big part of the business, but it’s a good thing.

Okay, we’ll take it. Just wanted to double check that. And Henry, this fits into I guess, what’s been going on with the flexible packaging division in Europe, which is many times we think that you introduce a new technology and the world changes overnight. It’s like trying to teach the Dalai Lama and his followers that Soup at Hand by Campbell's Soup is the only way to go. So, I guess, my question to you is, is there anything you’ve learned from the experience of bringing your nylon multilayer technology to Europe, where they are pretty sophisticated already?

Yes, if there is anything it’s getting people to change. I mean they have to change their attitudes and their values and start to work together.

Tim, I’ve spent a lot of time in Europe in the last year, year-and-a-half and, I think there is kind of herd mentality over there too. You have to have a first adopter before other people want to follow, where as in the United States people want to be first and they want to have exclusivity. So, it’s the inverse of what we have here.

Got you. Just last question I guess it could be construed as risky, but I think its general enough to talk about. With the acquisition you will be picking up a substrate that’s used around the world that Bemis isn’t necessarily a known expert, and that’s foil and people always say foil, who cares, but foil is a huge flexible packaging substrate around the world. How will you guys manage nylon versus polyester versus foil versus even I think there is still some paper in the portfolio. Is that something you thought about I mean because clearly you bring a lot to the table now you can’t miss getting a sale, but you obviously want to extract optimum value for Bemis shareholders.

Bemis Company does run a substantial amount of foil. It sells in the condiment business. Remember the old brick packs in the coffee business. So, we have quite a lot of experience in foil ourselves. And some foil we even use in the medical packaging arena. I think this is going to complement our technologies in foil and how we handle foil. I think we’ll also offer some opportunities combine it with some other materials and offer some specialty sealants. It will offer some opportunities to grow into retort and other areas and pet food. I think it's very complementary to our core technology base.

We will take our next question from Al Kabili from Macquarie.

Just wanted to follow-up on the great cash flow outlook and it look like working cap is a big part of the improvement and wanted to get your sense Henry or Gene on, is the working capital improvement primarily just driven by lower resin prices and volumes, or is there something else that you are doing in the business that's driving some of that?

Well, it is lower volumes. There is also lower pricing impact to it. But quite frankly, we have put a huge effort within and throughout the Bemis Company this year to improve our working capital. And I think all three of those are factors, but I think the principal factor is the drive for our business units to take working capital out of their business.

Okay. And then Henry, I guess maybe it's hard to do in this kind of a forum, but I just want to get your sense for your larger customers. How is the receptivity been to the Alcan announcement?

You know what, we really haven't, because it's in Hart-Scott-Rodino we really haven't had conversations with our customers other than just to inform them that the transaction was announced. Really haven't had much comment to listen, we really can't comment until we hopefully get government approval in the near future.

(Operator Instructions) We will go next to George Staphos of Bank of America.

Just a couple of follow-on. Maybe generally a greater question for Gene. In terms of cash flow, Gene, what else should we expect in terms of pension fund in the rest of the year, does that $30 million tie geography to remind us, and what would you have us bake in for severance for the rest of this year?

Well, for the pension side this will be the only contribution of any significance that we make. If there is anything in Europe, it would be minor to the consolidation of Bemis Company. As to the second question for severance, we aren't anticipating any severance issues, but if there is a change in the economy or a change in one of the markets, our goal is to react to it and be responsive to the change in demand. So, I don't want to say that there won't be, but we are not anticipating any.

Okay. And then the next question, Henry you're doing a great job again in the markets that you've targeted, whether its polyester, your PET platform, et cetera, you seem to have even though we can't quite see all the data, move pricing and mix up in those businesses, as you're also saying they remain competitive. So, as we go forward the next couple of quarters in the next several years, how do you keep moving your customers up the price mix chain and really the return chain, even as you have competition, snapping at your heels, and how do you do it while preserving cash flow?

I think the main reason you do that is through new programs, new R&D, new products. I think the core that allows us to do it is, we are a material science company, and I think that's one thing that we have that separates us from most of our competition is we're able to go to the base core resins and through blends, co-extrusions and various things that material science will allow us to solve problems and provide solutions that other people can't do. And that's our core way to grow our businesses through our technology.

Remember also George, our customers are trying to differentiate themselves with packaging. So often times our customers will come to us with their new ideas about how they want to value up the package in order to entice consumers to buy their package over someone else's.

Our next question comes from Chris Manuel from KeyBanc Capital Markets.

Just one big picture question, as we step back as you digest this transaction, what's the thought process like? For example with the label business beginning to stabilize, as you look across the different product offerings you had obviously, you are taking a much deeper dive into the flexible packaging and component. How do you think about the whole portfolio here going forward with add, deletes, things of that nature and how strategically that label business would fit in at this juncture, or could fit in going forward?

Well, we do so substantial amount of multi-pack films or wraps around 24 bottles of water for instance or whatever. And almost all of those individual bottles, cans or whatever that we would use for a multi-pack business would have a label on the individual. So, in fact kind of complementary for our customers.

Okay. Thank you.

(Operator Instructions). And at this time, there are no further questions. I would like to turn it back over to Ms. Melanie Miller.

Thank you very much, operator, and thank you everyone for joining us today, and on again such short notice and I hope you all have a wonderful weekend.

That does conclude today's call. Thank you for your participation.