Neutral on Bemis (AVY) (BMS) (SEE) (SON)

Looking at Bemis’ second quarter numbers, EPS increased 6% to 54 cents, surpassing the Zacks Consensus Estimate but net sales declined 4.2% year over year to $1.3 billion, in line with the Zacks Consensus Estimate. Unit volumes in the Flexible Packaging segment declined, affecting the company’s financial performance during the quarter.

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

Acquisitions completed during the second half of 2011 aided results in the quarter. Bemis has successfully grown through acquisitions. Last year, the company acquired Mayor Packaging in China, which gives the company a high-barrier footprint focused on the growing food packaging market in the region. Bemis also bought Shield Pack in North America, which will provide the company access to the high-barrier bulk liquid market with more expansion opportunities. Both are nascent markets for Bemis.

In 2012, Bemis plans to expand the newly acquired facility in China to meet the growing demand from current customers and accommodate the increasing opportunities for its business in that region. In North America, the company is investing in its high-barrier thermoformable sheets for barrier cups and trays.

Bemis has embarked on an aggressive cost reduction program by reducing headcount, closing nine facilities and shifting production to other facilities. This is expected to yield annualized cost savings of around $50 million beginning 2013. The total program cost is expected to be $141 million.

Of the nine total locations identified, four were already closed by the end of June and the company plans to close the remaining by the end of the year. Savings from these restructuring efforts should help mitigate the weakness in volumes and raw material cost inflation.

Bemis generates significant and consistent free cash flow, which places it well to pay a sizable and increasing dividend. Bemis upped its quarterly dividend by 4.2% to 25 cents per share, marking the 29th consecutive year that the company has hiked its dividend. Bemis has been consistently paying dividend since 1922 and has been in S&P’s list of Dividend Aristocrats since 2008. The restructuring initiatives will also help in generating significant cash flow going forward.

Resin cost, the largest input cost to Bemis’ Flexible Packaging Segment, which impacted results last year, have been relatively moderate during the first half of 2012 and is expected to remain so for the second half of this year, leading to margin expansion.

On the flipside, economic conditions are negatively impacting volumes as consumers cut back on their spending. Volume for the second half of the year will be flat compared to the first half due to sluggish US packaged food demand. Overall volume in 2012 is expected to decline by about 2% to 3% from 2011 levels.

Bemis derives approximately 21% of its business from South America and an 11% from Europe. Currency fluctuations, particularly in Euro or Real put the company’s revenues at risk. Bemis’ volume in Brazil has been weak mainly due to the slowdown in domestic economy and also due to slowdown in exports.

The volatility in the Brazilian Real had a dampening effect on Bemis’ exports from that country. Given the scenario in Europe, volume growth in the region will remain muted for some time.

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