Amcor plc (AMCR) Q3 2017 Earnings Report, Transcript and Summary

Good day and welcome to the Bemis Third Quarter 2017 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.

Thank you. Good morning, everyone. Welcome to our third quarter 2017 conference call. Today is October 26, 2017. 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 will 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 question. 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 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 therefore 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 factors. Now, I'll turn the call over to Bill.

Thank you, Erin, and good morning everyone. Our earnings this quarter improved sequentially primarily on account improving operational performance in our U.S. business and variable cost reductions in Brazil. Mike will review the financials in more detail, but I will start by discussing the progress we are making to align our business and cost structure for long-term success, during September we announced the final details of our $65 million restructuring and cost savings plan. We are executing this plan to align our fixed manufacturing and administrative cost structures to the current environment and to position our business well for the long-term. Our comprehensive and through review of the business led to a decision to close four plants, reduce 500 administrative positions, consolidate office spaces and reduce a variety of other operational and administrative expenses. We have established and staffed an enterprise project management office, which reports to me to enhance accountability and ensure results are delivered on time, our restructuring and cost savings plan is front and center and we're focused on delivering its benefit, in addition to the actions we're taking to align our cost structure, we're also deeply involved in works to position our resources for the long-term strength and growth, internally we call this all-encompassing work, agility, I will turn it over to Mike to cover financials now and I will come back to share my perspective on how agility is moving Bemis forward.

Thanks, Bill, and good morning. Today I will start by discussing the financial details of the quarter followed by a review of our cost savings plan and then I will close with outlook. U.S. Packaging segment, compared to the prior year, third quarter revenue was up 2.2% driven by unit volume increases of 2%, primarily as a big middle category. The U.S. Packaging operating profit of $99.6 million this quarter was down from $108 million last year, due in part to the impact of previously negotiated contractual selling price reductions and partially offset by manufacturing efficiencies and the benefits of increased unit volumes. Our U.S. operations remained well during the third quarter with low waste and high throughput which was particularly beneficial given the nice volume growth that we pushed through our plants this quarter. As compared to the second quarter increased profits in the third quarter were due to strong operational, manufacturing efficiencies during the current quarter, stabilization at one of our facilities in Wisconsin and where we had ERP go live struggles during the second quarter and lower business incentives related to the customers unable to meet their commitments to new business volume. Turning to Global Packaging, compared to the prior year, third quarter sales were down 2.3%, currency impact was nominal until volumes were flat and mix continue to trend down to less expensive packaging alternatives in Latin America, regarding unit volumes, our business in Latin America saw a 7% decline in line with our expectations given the economic environment partially offset by net growth in Asia, Europe in healthcare. Global packaging operating profit of 24.6 million this quarter compared to last year's $36.2 million. Lower profit was driven by the continued challenging economic environment in Brazil that is putting pressure on unit volumes and mix of products sold. As compared to the second quarter, profits improved in global packaging as expected due primarily to the variable cost reduction and active in Brazil in response to economic environment. Now on to the consolidated Bemis results, operating cash flow was slightly less than my expectations during the third quarter at $99 million. As anticipated restructuring of small use of cash during the quarter about $3 million for the 2017 plan and another $3 million for the 2016 plan as we close out the final plants in Latin-America that we were initially over last year. Primarily working capital as a percentage of sales is 15.2% at September 30, slightly improved from 15.5% one year ago. During the third quarter we repurchased $1.2 million shares for a total of $54.9 million. We remain committed to maintaining a strong balance sheet and returning free cash flow to our shareholders. Briefly turning to our restructuring and cost savings plan, during September we announced final details of our 2017 plan and increased our targeted free tax savings to $65 million when fully implemented. We are a variety of projects underway; we are closing both plans for savings of approximately $17 million. We would perform at these facilities will be transferred to other Bemis locations. We are consolidating certain administrative offices in the U.S. and Latin America for savings of approximately $5 million. We are reducing a total of 500 administrative positions for savings of approximately $35 million. From a geographic perspective approximately three quarters to these positions are in the U.S. and remaining are primarily in Latin America. And finally, we are reducing other fixed operational administrative cost for savings of approximately $8 million. Examples include optimizing cost related to travel and external warehouses. Related to the 2017 plan, total pretax cost will be between 100 and 125 million of which $70 million to $80 million is cash. As to the cash approximately $10 million will impact 2017 about $40 million will impact 18 and reminder will fall into 2019. Turning to guidance, we are reducing the top end of our adjusted EPS range $2.35 to $2.40 from a previous $2.35 to $2.50 primarily an account of lower unit volumes in the U.S. and also on account of hurricane within its impact. As to the U.S. volumes during the fourth quarter, which make up about two-thirds of our guidance change. We have aligned ourselves to our cash flows expectations and their ability to scale up new business. As for the hurricane which makes up about one third of our guidance change. The primary impact of our U.S. of us related to global increases in raw material prices to be clear as we expect to establish past two mechanisms in the U.S. to work as normal and third quarter limit to volatility and earnings. However, in Latin America, specifically we will experience a raw material headwind during the fourth quarter due to the current economic environment, which has made past improve the increased input cost more challenging. And to a lesser degree on the hurricane impact, we anticipate fourth quarter earnings will be hurt by small amount from long production levels at our healthcare packaging facility in Puerto Rico due to the aftermath of the storms. While we are able to run production from generators that are planned. Our business downtown facility is in line with our customers from the region. So anticipate that the fourth quarter production levels at our Puerto Rico facility will be low. While our customer start through our own local needs. Our outlook does include the initial benefits associated with the restructuring and cost savings as well as minor benefits from the acquisition of Vadex that we plan to completed during the first quarter Turning to cash flow guidance, we are maintaining our guidance range of $400 million to $425 million and still anticipate working capital show improvement for the full year 2017. This outlook concludes approximately $30 million of cash expenditures relating to the restructuring plants, $20 million of this was for the 2016 plan to close four plants in Latin America and the remaining $10 million for initial steps taken in 2017 plan. Turning to CapEx guidance, we anticipate 2017 spend of $185 million to $200 million. We continue to evaluate further spending levels as part of our comprehensive business review. In summary, we made progress during the third quarter, we continue to take actions through restructuring and cost savings plan to align our business to the environment we are operating in to create a lean, nimble business that is well positioned for long-term. We will continue to use this platform to drive real change in the way our company acts and operates. With that, I will turn the call back to Bill.

Thanks Mike. Agility, it involves moving quickly and easily. I would view it as a mindset. During the last couple of months, we've spent time analyzing and urgently pursuing all options for improvement. For the properly considered many perspectives, our financial results well profitable and strong cash flow, they are not satisfactory nor do they meet our expectations. Our customers, they have told us that we are an innovation leader and problem solver. We provide them with value-added products to help them succeed and they support the steps that we are taking to enhance our quality and service and provide them more fit-for-purpose solutions. Our employees and leaders, they recently completed an employee engagement survey. The result, they want to win, they want to be more competitive, they want to serve our customers better and most significant in my mind employees overwhelming indicated that they are willing to give extra effort to help our company succeed. I applaud our employees for being engaged and taking actions. We recognize that our business model requires enhancement and change. We have stated that prolong approach to agility thus strengthen and grow. High level, fix involves near term profitability improvements and strengthening growth creates the foundation for continued success of the company specifically with regard to fixing our business, our cost savings plan clearly defines a fast forward in terms of appropriately aligning our cost structure. We are executing on this plan with clear direction and speed. With regard to strengthening our business, our approach involves simplifying and better managing our product portfolio and organizational structure rebalancing our R&D efforts to focus on manufacturing improvements such as waste reduction and leveraging the investments we've made in new converting equipment. With regard to growing our business, we are developing plans to more deliberately pursue the pockets of growth in our market such as small to midsize customers and consumer and industrial applications to be clear, we highly value our existing base of large CPG customers, which creates the backbone for our business. These customers provide us large volumes and will always be part of our mix. However, as consumer preferences are shifted, the work we are doing to deliberately align portions of our production asset base and our people around small to midsize customers and non-food applications will allow us to more deeply penetrate some pockets of growth that historically our business model has not focused on. I don't anticipate growth from this overnight, but the plan we are developing positioned Bemis very well for the long-term. As I reflect over the last couple of years, we've driven change and made progress. We take out more than $125 million or working capital and implemented the right processes to hold it. We've established the framework to return free cash flow to shareholders resulting in over $700 million of value return through dividends and share repurchase. We completed and implanted two strategic acquisitions [indiscernible] and we welcome new leaders to our Latin American healthcare and U.S. businesses we've driven change and we will continue to drive change in the future. We are taking actions to improve our cost structure and align our business strategically to be successful in a changing environment. The entire management team and I are confident that our efforts and actions will provide improvement. We have great people, great customers and great products from which they build future success. We determine in a sense and committed to transforming our business and positioning Bemis to provide a sound investment for our shareholders over the long-term. With that, I'll turn the call over for questions.

Thank you. [Operator Instructions] And we'll take our first question from Brian Maguire with Goldman Sachs.

Hi, Good morning, guys.

Hi, Brian.

A couple of questions on favorite topic Latin America, we were a little surprised on the comments about not being able to pass through some of the resin movements. And as I thought most of that was kind of contractually driven. Just wondering if that's not the case, and maybe it's more market-driven and less contractual than I thought, or is it a case where you're actually just having trouble enforcing the contracts due to the environment down there?

Yes, Brian, a good question. Just to give you an overview of LATAM. Volume down 10%, Q2 down 7%, Q3 which was in line with what we had expected and anticipated and we had planned for, hurricane impact, very significant in early October, particularly in resin -- one material that we use for our rigid business where we have a very high share content of customers' portfolio. It's a very strange, if you will, resin environment there on this particular resin in that there is primarily one supplier only. They push through a very large increase. And while we do have contractual pass-throughs, it's the amount of increase in an environment, yes, where there is inflation, but the inflation rate has come down significantly. And the market demand, the consumer pull for products, as you can see, is down, but still better than it was in Q2. So there's just a huge pushback from the customer base in taking this large increase in raw material. We and the team down there are every day in front of the customers pushing forward on this price increase, and these price increases. But it's particularly regarding one resin that used in our rigid business. But the environment has not changed. Inflation is -- yes, it has come down some, so it makes it that much more difficult to push that through.

And so it sounds like this might be a little different than the normal sort of just lagged impact that you have which would maybe a one-quarter impact that's going to extend into 2018 if this particular resin price stays at these levels, and you continue to get customer pushback? Or are you maybe expecting the resin -- this particular resin price to fall in end of this year or early '18?

Hi, Brian, this is Mike. Well about half of our contracts in Latin America are on contractual pass-throughs, the other aren't. What we're attempting to do is not only pass through early on contracts as an exception, and once it recovers we would give them back that price. And then on the rest of the business we are going after price increases. It's just, as Bill mentioned, it's just a little bit more challenging. But I think it's important to remember that we are also trying to get price increases outside of the normal pass-through.

And we'll take our next question from Scott Gaffner with Barclays.

Thanks. Good morning Bill, good morning Mike.

Good morning.

I just wanted to -- Mike, you said something in your prepared remarks, and I just want to make sure I heard it correctly. And I thought it had something to do with U.S. volumes and the contribution margin from the volume -- or the volume leverage in the quarter. Obviously the margins are still down. And a lot of that is because of pricing, I think, from the actions you took at the beginning of the year. So if I look at EBITDA margins in U.S. Packaging it looks like they were down about 60 BIPS year-over-year. What's the year-over-year impact of pricing, and did I hear that right on the volume leverage?

The volume leverage was a comment, Scott, more having to do with manufacturing. That as they start operating better and they get the volume in, we just see enhanced profits in the business. But your comment is absolutely correct that we still have some pressures year-over-year from the contractual reduction in selling price.

Okay. When you lower those prices you did your pricing analysis. I think part of it was to generate some new business as well. And Bill, you mentioned some of that having come through. Is that -- are those two related or are they just similar comments that you mentioned today?

Yes, Scott. As Mike mentioned in his remarks, we had 2% volume growth in Q3. Some of that was from the contractual commitments that we received from customers. And if you look at what -- the drop in volume in Q4, it's because some of those customers that contractually committed to volume increases are not able to get that business to us in Q4, so our volume is down in Q4 for that reason. As well as the seasonality of a normal Q4 is always lower, where volumes are softer and weaker. And it also has to do with -- we're talking and aligning with our customers around what their Q4 volumes are going to look like. And that's all a function of where the holidays fall, what plants they're going to shut down, what plants they're going to run. So we don't get some of that contractual commitment in Q4 that we had anticipated. So some of it is just customers realigning their production schedules, others are we have not received some of the contractual commitments of volume that they had committed to.

[Operator Instructions] And we'll take our next question from Chris Manuel with Wells Fargo.

Good morning guys. Thanks for taking the question. I just wanted to back up a little bit to cover the restructuring and the different elements, the plans to help me calibrate some stuff. What's a base we start from? So I appreciate that you're going to have --you talk about $65 million of EBITDA. When I look -- I'm sorry, $65 million of profit improvement. And kind of if I start from -- start from EBITDA or Op income, when I look at 2016, you did about $600 million of EBITDA. If I look at trailing three quarters from when you started the process, 1Q or 2Q of '16 through 1Q it's about $600 million. I'm guessing that's the base. But could you maybe kind of give me a sense, Bill, Mike, where we're starting from.

Look, Scott, what we did is we kind of took a hard look at Q1 of '17 and annualized it, which we're probably in the zip code of what you just commented on.

Okay, so 130 -- it's Chris, by the way. That kind of puts me about $550 million as the base if I annualize 1Q -- I mean, I'm just -- I'm not trying to be difficult, but it's an important element to understand success that we have a sense of where we start finish from.

It'd put you at 550…

Okay, so $550 million is the basis. Okay, thank you. Second question is, it looks like -- and you talked about some of the softness and things in Brazil some of the regions down there, but you commented other regions were up, Europe, Asia, I'm guessing Mexico as well, and even did an acquisition over in Europe. Can you maybe give us a sense of what you are seeing in other regions, is the issues that you're having don't seem to be related within those regions, and performance there seems to be good. Maybe can you give us as sense as to how customer adoption volumes and things are tracking in some of the other regions, even anecdotally?

Sure, Chris. This is Bill. But let's start with the healthcare business. Healthcare is performing well. The issue that we're having in healthcare right now is the Puerto Rico environment. And if you're not familiar with our business in Puerto Rico it's a three-building site that one of the third buildings, which is a thermoforming facility, was completely destroyed. The other two buildings are fine. The employees came back to work. Fortunately all of our employees are in good shape. They immediately started showing up. We can run those other two buildings on generator, which we are doing. We are providing November, December volumes to customers in Puerto Rico that are giving us demand triggers. So healthcare continues to perform well, they've performed well through this downturn. And we have moved the thermoforming equipments already out of Puerto Rico back to the United States, but can fulfill orders to customers with that equipment from the U.S., so doing well in the healthcare business. Bemis Europe; though economic environment, okay, there is some growth. But there has been raw material increases particularly in nylon that impacts -- that's the high content in our product base -- in our product mix in Europe. So we're pushing through the nylon increases as fast as we can, and in a stable environment, but it is extremely competitive in Europe. We're seeing nice growth in the U.K., Spain, and Italy. And we've gotten some new wins in high barrier materials as well as high barrier shrink films. If you look at the CapEx that we've put into Europe over the past 12 to 18 months, we've installed a new press, that new press is up and running in one of our facilities in the U.K., very nice improvement coming out of that asset. If you move on to Asia Pacific third quarter revenue was up mid high single-digits, good growth in China, Malaysia and Australia and Z1 launched some new products into the electronics market for new projection films in Asia Pacific. We talked about Latin America and we primarily talked about Brazil, but if we talk about some of the other areas like Argentina and Mexico, Mexico had got probably the most stable environment right now and we are doing well in transforming the business from what would be commodity type products to more higher value products be it one of the seven layer assets we installed in Mexico over the last 12 months. If you go to Argentina, Argentina's economy is now doing better than it has been in the past. Inflation is still high, the CapEx investments that we made a few years ago 12 to 18 months ago in Argentina are now starting to drive productivity and as you look at that economy now becoming open, we made the right moves by putting in newer more productive assets in that region taking out the older assets when it was a close market, we were able to serve customers with very old asset but now that is an open market, competition comes in from everywhere and we product kind of got ahead of that with the asset recapitalization program we put into Argentina. We talked about Brazil already, from a - if you just think back on where Brazil was let's say two years ago through plant consolidation efforts that we put into Brazil, we used to have four rigid facilities in Brazil, we now have three and we can crack that volume through those three facilities, so as the economy starts to turn and we see volume increases, we will be very well positioned to generate improving profitability in that region with a rigid business. If you look at one of our film businesses down there primarily shrink films, we used to have two facilities manufacturing shrink film, we now have one. The second facility will be completely closed out by the end of December of this year, so as the economy begins to turn we will be very well positioned from a productivity perspective to increase our margins in that region because we taken that fixed cost out. So that's kind of a walk around the world Chris. That's where we are, things a moving ahead but the company is totally focused on this agility project and how we are taking cost out in the near term and how we are positioning ourselves for the long-term.

We will take our next question from Mark Wilde with BMO Capital.

Good morning, Bill. Good morning Mike.

Good morning Mark.

Hi, Mark.

Well, I just want to come back to this fourth quarter volume weakness in North America. As I listen to you guys over the last year or so, it sounded like you made that tradeoff late last year early this year, where you gave up some price to pickup incremental volume for some of those customers. We don't like we were seeing some of that in the third quarter. Now you are seeing we are going to be flat to negative in the fourth quarter. You view this as like a one quarter event, is there still these volume commitments rolling in and it's just the matter of timing or if some of this business just not going to materialize?

Mark, these contracts are in place. Okay, we anticipate receiving this volume but some customers have not been able to let's say transition out or whatever reason that might exist from some of their existing supplier. We are receiving some of the volumes. We are not transitioning all of it yet across all the customer base but we -- these contracts are in place and it's going to roll forward.

Can you help us just think about sort of what we should expect Bill as we move through next year in terms of cadencing on this because I think a lot of us had assumed that we start to see some momentum here in the second half of the year and is that momentum would actually pickup as we move through next year?

Mark, we will be talking about that on January call as we give '18 guidance.

And we will take our next question from Anthony Pettinari with Citi.

Hi, this is actually Brian Maguire speaking in for Anthony. I was thinking over the last five years Bemis anticipated slowly the progress on the corporate expense line and that Bemis explore up once again today. I was just wondering, if you have any thoughts on that trajectory to begin the model 2018, a little more detail and as you are restructuring a program certificate?

This is Michael. Agility and the class take also not only going to affect U.S. in global, but they will have impact on the corporate and allocated line that you are making reference to. So I would expect to hold the ramp and to see continued decline.

Thanks. That is helpful. And then, in terms of 4Q with U.S. packaging margins, margins hold up pretty well in the quarter and then 4Q you are going to have lower volumes but you are going to have restructuring savings, do you have any primary thoughts on how margins could shape up the fourth quarter with a segment.

As Bill mentioned earlier, Q4 is one of our - it's probably our lowest volume quarter. So kind of year-over-year perspective margins we will just naturally decline. I think some of the improvements we saw in the quarter related to manufacturing efficiencies will hold however, you have to think through sequentially the volume down. We will take out cooling labor as we normally do to respond to that but we still have a big fix class that just gets under observed during that quarter in tradition.

We will take our next question from Ghansham Panjabi with Baird.

Hi, guys good morning.

Good morning Ghansham.

Good morning Bill. So first off Bill on your comments you also target smaller full customer and also some of the non-food categories. How are you specifically changing your manufacturing footprints to be able to adopt towards this in light of the bank closures that you are observing at current?

Yes, Ghansham. We talked over the last couple of years about the investments that we put into this north American and know the businesses as well, most recently Europe to recapitalize some of the older presses, laminators with us that we have in the business that don't necessarily, did not have the ability for quick change, shorter run, higher speed, lower waste tied to that as though that what we've been putting into the business over the last few years with our asset recapitalization program, it now making the deliberate move, the deliberate shift in the way and what business we schedule and plan on most pieces of equipment. So as we move to the smaller and shorter, smaller to midsize customers, their volumes are not necessarily as large and as long of a run or a campaign or a press or on a laminator. So we need to deliberately move the shorter run business from these smaller to midsize customers on for that equipment. We have $0.5 billion of this business today already. Okay, we have $500 million of what we would call shorter run quicker change type of business from smaller customers. So it's not that we don't do this already, the key here is it's a deliberate shift in not just how you run the asset but in how you staff it, plan it and crew it and get the mindset of the both to actually run that business. Just think about getting in and getting it off quickly.

Okay. Then as a follow-up if you kind of step back and think about the supply chain and customer consolidation that we have seen over the years in food and consumer products. How do you sort of feel about your scale at current relative to that dynamic, do you see the need for further consolidation and flexible patching and also how do you think about your capabilities at currently to be able to drive some of that consolidation? Thanks so much.

Ghansham, this is Mike. We are evaluating as we do this shift because Bill mentioned, it's not a shift in how we operate the shift and how we go to market and as Bill mentioned we got $0.5 billion of business already. We are going to be a lot more deliberate and changing to go-to-market side and this switch is a simplified product offering a sales force that approach its customers a lot differently and I would say that we would not - I would not ignore the fact that we might need to acquire some of these capabilities in the U.S.

We will take our next question from Edlain Rodriguez with UBS.

Thank you. Good morning guys. Just one follow-up on that trying to penetrate the smaller customers, is the sales force I mean does it need to be incentivized differently from what's going on right now and also like how long do you think this process will take? Are we talking about that one year, two years or longer than that?

Yes, good question. We have thought about this and we have brought on some of these different type of sales people and yes the incentive plans are different and they are differently than someone who might be on national account. So yes, that is true. And as we looked at it you know it's a 12 to 18 month process to bring people in and start to see progress. We've already brought people in we've already seen progress in these amongst these accounts, these small to mid-size accounts which we would call our regional type accounts. And you may not sell directly through the account but you sell it through a third party which is a co-packer channel and we have quite a bit of good business coming through the co-packer channel already and quite a few SKUs within this co-packer channel which will be private label and that's where a lot of the small to mid-size accounts reside. So it is a different philosophy it is a different approach and we are already in motion on it.

Okay, thank you.

We take our next question from Arun Vishwanathan with RBC Capital Markets.

The question on US packaging to start off, you know the improvement that you saw sequentially was that -- would you say that any of that is related to any stabilization and center of the aisle or do you think -- deteriorating?

I don't have any data to support whether it's being on the aisle but it is -- we saw volume increases in what we recall the big middle part of the portfolio which some of it would be the [technical difficulty].

I'm sorry. So then on the margin side there was a nice recovery in US packaging as well. I think earlier you had said that it would take a little bit longer to get back to that 15% level. So to understand what you guys think if margins are stabilized back here in the normal levels and is that kind of what you're expecting for next year and then similarly on global you're below your targets there so how does that play out in the future? Thanks.

As I said a little earlier just as it relates to Q4 sequentially with the volume way down margins will decline from Q3 sequentially but should continue to show some improvements over the prior years adjusted for some of them we talked about with the pricing decisions that were made last year. I think the 65 million cost take out is going to show a continued improvements in our margin profiles in both US packaging and global as we go into next year.

Let's take our next question from Debbie Jones with Duetsche Bank.

Hi, thanks for taking the questions. This is actually Kyle White going in for Debbie. I wanted to go back to Latin America sounded like bonds got a little better considering last quarter has a large drop off at the end, just want to know if that's true is it and are you seeing any type of increase in optimism in terms of economic environment there as we're heading into 2018.

Yes, good call out. Q2 volumes there were down 10, Q3 was down 7 but that was in line with what we had expected. So yes, we did see a little bit of an improvement there. Is there optimism in Brazil is your question; there is some optimism around the fact that business leaders down there are believing that the politics and the economy are becoming bifurcated where they used to be tied they now feel that they see a separation of the two, which is good. They don't see a large pick up as they go into 2018, they see stability and they see probably more so in 2019, things improving as the election of the new president takes place in October of 2018. But they do see that there is some stabilization there isn't a lot of growth. But there is a breath of stability. But I wouldn't necessarily say people are jumping up and down with optimism.

Thank you for that and then next question is just on -- understanding that you guys probably don't comment on the market speculation, but I'm just curious your thoughts on the concept of potentially merging with another large packaging company in terms of the strategic opportunity for Bemis or do you think that's more of a distraction from your cost reduction efforts and the EBITDA statement you can generate from that?

Yes, we wouldn't speculate on whatever rumors might be out there as no one else would either, but as we said and I said in my prepared remarks, agility is front and center for Bemis Company. We are focused down through the organization on executing this cost out plans and driving profitable growth and profitability improvements through this effort.

We'll take our next question from Adam Josephson with Keybanc.

Mike, good morning.

Hey, Adam.

Mike, just one for you and then one for Bill might be you bought stock and [indiscernible] you're not in 2Q the average share price wasn't much different in 3Q versus 2Q so just wanted to know about why the time of these buy backs?

Well to be honest with you part of the Q2 was the fact that we were working through the restructuring program and I was trying to get my arms around what my potential cash needs were going to be. Once we kind of finalized that it put me in a position to put another repurchase plan in place.

Okay and Bill, just one of the savings programs I know if you go back to last year obviously you've announced restructuring program in Latin America you were going to get annualized savings of $16 million from that I think by 2018 and just give me the down turn in Brazil it's been hard to see those savings this year. And then similarly if you go back to the beginning of 2012 the company announced a major restructuring program it was hard to see the savings from that because of volume, pressure, price pressure, rise in inflation etcetera so -- how would you have us assess the success of lack thereof of this latest program given that with the previous two programs we have not seen any EBITDA improvement from those savings efforts?

Right, let's look at Latin America. Latin America we received we did what we were going to do on the synergies we did what we said we were going to do with plans closures on time actually pulled some over my head as that economy turns and consumption moves back into the market place again and market demand is there we will get increased benefits out of Latin America. Let's talk about what we're doing in US pack in the United States and across the entire company with agility, what difference as we've actually put in an organizational structure around an enterprise wide project management offers. We have work streams down through the company across the globe that is tracked weekly. We measure them, we monitor them, we get -- we have project management offices in each of the P&Ls that will respond back. We have leaders in charge, we have teams in place and we measure and monitor it as on a go forward basis that's a much different approach than we have ever had at Bemis Company before. We're trying to put in the rigor and the intensity so that we will get these savings.

We'll take our next question from Laura Talbot with Credit Suisse.

I just wanted to come back to the smaller mid size -- to reconcile that what seems to be slightly more complex organization in terms of same force production etcetera with a downsizing a lot and streamlining of capacity. You can put some color on how can you sort of combine the two be it more complex and yet it got to be simpler?

Actually, Laura it's a good question. but if you look at the -- we have a very good cross section of a product portfolio that we don't have to apply different steps we don't have to apply technology leaders, we don't have to create something new. We can take a step we have and bring it to a small to mid-size customer to provide them with a packaging solution. So it's less complex from that perspective. We do this today across the US landscape, we have regional accounts we have small accounts we sell to co-packers already. We have product going into Amazon, Whole Foods, Joe's, all the great value target brands all of these -- what we would think of as private labels we sell into that today using the spec portfolios that we have created for the larger CPG customers. So it's not as complex as you might think its selling what you have and using a stiff purpose solution to attack a small to midsize customer and solve their problem with a fit-for-purpose solution.

Okay. So if we think about the plug outs, it's going to be somewhat lower margins there -- business if you can confirm that. And then second point, how big of your wallet is today, and what you're thinking about this probably three years out? How big an exposure would you take small to midsize customers?

The profile of -- we have half-a-billion dollars roughly in this space today, Laura, in North America. And we margin profile is higher than it would be for some of the larger accounts. So it's good business. Our model in the past has not really focused on it because we wanted these long runners, large volumes to run across the asset base. This is good business. We're going after it. We're going to attack it. So we'll take a good 12 to 18 months to start to gain more traction. But there's a lot of work being done behind it. And it's a function of getting more sales people on the street, and brining the business in.

We'll take our next question from George Staphos with Bank of America Merrill Lynch.

Hi, everyone, good morning. Thanks for taking my questions. Bill, I want to ask a question around the contracts in North America. And look, we all know there's no such thing really as a take-or-pay contract in the packaging business. But on the one hand you have these contractual commitments, that's how you termed it, that supposedly your customers would have abided by. And I'm still not clear what it was that has not allowed them to hold up their end of the bargain. Doesn't sound like it's just their own volume at retail, it sounds like they're not able to extract themselves from their contracts. And if you could provide some color there that'd be great. And then I had a follow-on, and then I've got a couple of other questions, want to cut back in queue as well.

George.

Hi, Mike. How are you?

Good. When a lot of these contracts were renewed last year part of the pricing would've tied to delivering new good. And the new goods were very specifically designed -- they're not innovation, it's nothing new, it sits with other suppliers. And we had laid out timelines with our customers. Our customers in some cases just underestimated how quickly they could do the ship. They did tie the contracts expiring with other suppliers. So I'm just going to leave you with that -- this is not that they're not trying and they're not reneging on their agreements. It's just that the pace of how quickly it's shipping to us. Another way to think about it is real simple, I have example. This year they're supposed to give us one, next year two, and then the third year three. They just are struggling getting one, but the contract still holds to next year is two.

Okay, fair enough. Now the other question I had, it was my interpretation, maybe incorrectly so, that the new contracts and the pricing resets were all around more high barrier product. If that was true, maybe I'm off in terms of the premise of that part of the question. I'm curious why the volume pickup that you saw in the third quarter was seemingly more in the big middle as opposed to some of the higher end. Has the higher end volume been showing up as you would've expected, maybe aside from these contractual issues? Thank you.

George, this is Bill. It's for a cross section of products, some high barrier, some big middle. Some of the high barrier has shifted. Some of the big middle has shifted over to us. It's a mixed bag across the portfolio.

We'll take our next question from Jason Freuchtel with SunTrust.

Hi, good morning.

Hi, Jason.

What is the primary change in the competitive environment the last couple of quarters that have motivated Bemis to really attempt to expand in the smaller niche consumer product companies segment? Has it been driven by a view that the large consumer product companies are languishing and may not recover or is it that you're just now becoming more opportunistic for growth?

Jason, this is Bill. It's a combination of both. Some of it larger CPG companies are losing share to some of these smaller to midsize companies. We've done a lot of work on this. And if you look at over the last few years, the share that has shifted from -- I would say, large CPGs to the middle to small price customers, about $21 billion, and that's business that we have fit-for-purpose solutions for; we have to go get it. And it's really nothing around the competitive nature of our business. Our business is competitive. It will always be competitive. But there's pockets of growth that exist for solutions we already have in the portfolio that we need to go and get.

Okay. And then I guess my second question. Have you experienced any initial reactions from your current customer base in regards to restructuring initiatives? Have they expressed any concerns about the production or delivery of their products as you consolidate your footprint?

No, we have not.

We'll take our next question from Chip Dillon with Vertical Research.

Hi, guys. This is Salvator Tiano filling in for Chip. How are you?

Good. How are you?

Great. So just clarify a couple of things on the Brazilian and U.S. contracts. So, firstly in the U.S., you're giving these price concessions. And as you said, some of the customers have trouble shifting volumes in Q4. So how should we think about the pricing, first of all, specifically, both in Q4 for them, and going forward, every time they fail to shift the required volumes, should we see kind of potentially lower volumes and an uptick in price versus our existing assumptions?

I think the way to look about it, and this is not a general statement about all new goods. Some of the price downs were tied not to the total portfolio, but however to get a portion of it they had to deliver the new goods.

Yes.

So that's how you think about it. But once you remember next -- as we come into '18 those contracts are still in place, and as they deliver the new goods, which I fully expect them to do it, those same incentives will go back into play to benefit the customers, but we do get the new volume.

Okay. So it's based on new volume to be allocated to you. So I'm guessing that if you don't get it eventually you will essentially assign higher prices, right next year?

That is correct.

Okay. To clarify also the situation in Brazil with the contractual pass-throughs, you mentioned you have the contracts in place but it's kind of little bit hard to actually enforce the price increases. And one of the main reasons was that inflation in the country is going down. And just help us understand a little bit why -- resin inflation is kind of a very discrete item especially in packaging, and Brazil has a very high labor inflation, for example. So how or why are you getting push-backs by inflation in Brazil generally moving lower when you have a very specific item affecting plastic packaging companies that is increasing your cost? Shouldn't that be essentially -- your prices should go up regardless of what happens to other inflation items in the country?

The short of this is that our customer base doesn't see that they can push it on to the consumer any longer because inflation is coming down. When inflation was at higher levels it was easier for our customer base to push inflation plus through to the marketplace. We have about 50% of the business under contract in Brazil, and we are pushing these price increases to contracted customers as well as non-contracted customers across the customer base. So it's just getting harder and harder. There's a point of fatigue within the customer base. So, inflation fatigue, if you will and pushing price increases upon them. So it's just getting harder and harder.

We'll take our next question from Mark Wilde with BMO Capital.

Yes. Bill, I'd like to just kind of come back on sort of potential avenues for growth here in North America. One would be kind of the topic of pouches, how big your pouch business is, and how much growth you see there. And then the other would be just as we're seeing kind of more of the grocery market move to direct-to-the-consumer marketing, what's your suite of products or the play into that?

Yes, great question, Mark. We would look at - there is a pouch, the pouches are in different area actually get dry goods and you've got liquid goods. So in liquid, our business is really growing quite nicely and that's all primarily wrapped around pouches that's doing very well and that is not just on social, but that's through the ecommerce channel as well because -- and George don't necessarily make it easy to ship the ecommerce. So the pouch business, the liquid business is doing well. If you look at our portfolio of what start to call it private label kinds of things business that has come up just within the last 12 months or so, we've got a very broad number of SKUs that are going to Amazon, Joe's all the -- as I said earlier Target -- and this we work with Amazon, we've been working with their packaging engineers to help them see ways to do business differently via ecommerce and what the packaging solution needs to be, liquid detergent, dry goods, you are talking about Renola, powdered detergent. There is a shift taking place in Latin America going away from the low molded bottles and cardboard boxes to standup pouches for powered detergent, it does play to one of our strength and that's part of this whole evolution towards middle to small size customers where we can help them get into a pouch or into a flexible I should say quicker because we already have the fit-for-purpose solution. They are the big guys; we can bring it to the small guys.

And how big is that business for you right now and how rapidly you see that overall pouch business growing for you?

Mark, I don't have the specific around, specifically pouches, I don't have that data for you.

We shall mostly will stock and then…

It gets converted to a pouch.

We will take our next question from George Staphos with Bank of America Merrill Lynch.

Hi, thanks for my follow-up. Well, I want to talk about the new customer opportunity the smaller mid size customers you are saying are $0.5 billion so in size right now and I forget one of the other, I almost asked a similar question. I just want to dig into a little bit more typically if you are offering more of a standardized product portfolio, it sounds like you are offering fewer SKUs, you are selling to co-packers that's typically given our experience tougher not more margin accretive business. So if you could help me understand why you think that's the case especially since you have to optimize some of your production to fit that quicker change over more frequently changed over business and when you answer. When we think about the margin that really it's higher margin, but there will be higher margin when you ultimately do the retooling Bill. And then, I have a follow-up?

No, Ghansham, it's still Mark. Sorry, sorry.

No worries.

Answered many names, so - it's higher margin today. Okay, its good features that higher margins in our portfolio today. So that's the extrapolation that we take as we go forward.

Okay. And the other question and not to be honest same issue if we think about the pricing reset and the volume that you ultimately will win that has been coming in, in 2017. Have we more or less seen the negative effect of the pricing reset as we sit here today recognizing there will be perhaps some further just from what we would see on this side of the phone, lower margins as that volume comes in or is there a potential for pricing to further just lower even beyond the contractual triggers if you will? Thank you guys and good luck in the quarter.

George, we've so first of all I think what happened in 2016 was an unusual year and I think we proactively protected a lot of business but in return we got some new business. We always are going to see pricing pressures in the market and we have historically offset that with productivity initiatives, of course take out initiatives and packaging and et cetera. So I'm hopeful that the big risk that we saw coming into this year, was that normal and what we will see is the improvements going forward.

There are no further questions. Ms. Winters, I would like to turn the call back to you for any additional or closing remarks.

Thank you. Thank you everyone for joining us today. This concludes conference call.