“This quarter’s performance demonstrates the success of our strategy to improve sales mix and strengthen our return metrics,” said Henry Theisen, Bemis Company’s chairman and CEO. “We improved our gross margin to the highest level since 2009. Our U.S. Packaging segment maintained its healthy 2013 operating margin in spite of lower unit sales volume and higher than expected costs related to the transition of production equipment from recently closed facilities. Excluding currency translation, our Global Packaging segment achieved a 20% increase in operating profit driven by improved price/mix in our Latin American operations and improved unit volumes in our European flexible packaging operations.
“Performance in our Pressure Sensitive Materials segment has stabilized at operating margin levels consistent with last year,” added Theisen. “Our adjusted guidance for 2013 reflects the negative impact of currency translation, the lack of anticipated sales growth in the second half of the year and the higher production equipment transition costs that are expected to end during the fourth quarter.”
Net sales decreased by 2.3% to $1.3 billion, reflecting the net benefit of improved price/mix over generally lower unit sales volumes, which was more than offset by the negative impact of currency translation and the reduction of certain low margin sales in conjunction with the facility consolidation program.
Gross profit as a percentage of net sales improved to 19.7% compared to 19.2% in the third quarter of 2012. Cash flow from operations totaled $160 million, an 8.9% improvement from the third quarter of last year.
On July 1, 2013, Bemis acquired Foshan New Changsheng Plastics Films Co., LTD (NCS), a specialty film manufacturer located in Foshan, China. NCS is a supplier to Bemis' food packaging plant in Dongguan, China and other specialty film product customers. The acquisition is expected to be neutral to Bemis' earnings results for 2013. Incremental net sales from NCS are expected to be approximately $60 million annually, and the acquisition of this film platform is expected to provide cost and logistics benefits to support Bemis' broader Asia-Pacific growth strategy.
For the third quarter of 2013, U.S. Packaging net sales of $750.7 million represented a decrease of 3.1% compared to the same period of 2012, primarily reflecting the impact of the sale of the Clysar plant during the second quarter of 2013. Since early 2012, Bemis' facility consolidation program has resulted in the closure of six U.S. Packaging segment manufacturing facilities. Most of the production at these facilities was relocated to the remaining manufacturing locations, while other low margin production was discontinued. Excluding the impact of production that was discontinued as part of the facility consolidation program, as well as the sale of the Clysar facility, net sales increased modestly during the third quarter reflecting an increase in price and mix substantially offset by lower unit sales volume compared to the third quarter of 2012.
U.S. Packaging segment operating profit for the third quarter of 2013 was $81.8 million, or 10.9% of net sales, compared to $96.0 million, or 12.4% of net sales, in 2012. Facility consolidation program costs negatively impacted results during each period. Operating profit during the third quarter of 2013 was negatively impacted by lower unit sales volume, partially offset by the benefit of a higher proportion of sales of value-added products.
For the third quarter of 2013, Global Packaging net sales of $370.8 million decreased 1.8% compared to the third quarter of 2012. The impact of currency translation reduced net sales by 5.7% compared to the previous year primarily reflecting the weaker Brazilian currency. The acquisition of NCS during the third quarter of 2013 increased net sales by 4.8%. In addition, production that was discontinued in conjunction with the facility consolidation reduced net sales by 3.0%. Excluding the impact of currency, acquisitions, and the facility consolidation program, net sales increased by approximately 2.1% driven primarily by improved price and mix.
Global Packaging segment operating profit for the third quarter was $28.3 million, or 7.6% of net sales, compared to $14.3 million, or 3.8% of net sales, for the same period in 2012. Increased operating profit reflects the favorable impact of improved price/mix during the third quarter of 2013.
Pressure Sensitive Materials net sales totaled $137.0 million for the third quarter, a 1.2% increase from the same period in 2012.
Third quarter operating profit was $7.9 million, or 5.8% of net sales, compared to $7.7 million, or 5.7% of net sales, for the third quarter of 2012.
Commenting on the outlook for the fourth quarter, Theisen stated, “Our outlook for 2013 unit sales volume has been revised down modestly given the fact that we have not seen the volume uptick that we had expected in the second half of the year. In addition, profit is negatively impacted by weakness in the Brazilian currency and increased costs associated with mechanical and electrical issues encountered during the transition of production equipment from plants closed as part of the facility consolidation. We are investing in our value-added growth opportunities and executing our strategy to deliver value to our shareholders with improved performance and strong cash flow.”
Bemis’ recent facility consolidation activities included the closure of nine manufacturing locations and was designed to improve efficiencies and reduce fixed costs. As of June 30, 2013, all nine locations were closed. The remaining consolidation activities, including the start-up of transferred production and relocated equipment, are expected to be completed during the fourth quarter of 2013. Once completed, this facility consolidation program is expected to save approximately $50 million in annualized costs.