Q3 2020 Earnings Call
Welcome to Emcores Q3 year to date for so.
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After the speakers presentation will be a question and answer session to ask a question during the cessation session you'll need to press star one on your telephone if you car any further assistance. Please press star Zero I would now like to have the converts over to your speaker today mystery see what had thank you. Please go ahead ma'am.
Thank you operator and welcome.
Third quarter earnings call joining the call today's nor do they have chief Executive officer, and Mako kept them into Chief Financial Officer. At this time will directly to our website <unk> dot com under the Investor section, where you'll find a press release, some presentation, which will be discussed on the call today.
Also discuss non-GAAP financial measures as we talk about performance against combines comparative information reconciliations of these non-GAAP measures can be found in the press release and presentation on our website well someone reminds you that statements regarding future performance of the company made during this call afforded looking is subject to certain risks and uncertainties.
Actual results may differ from historical expected predicted results due to a variety of factors. Please refer to encode it's easy filings, including a statement on form 10-K, and take you to review these factors with that I'll turn over to them.
Thanks, Tracy and thanks, everyone for joining us to discuss Emcores year to date results. Joining me on the line as Tracy mentioned is microcosm, unaware Emcores Chief Financial Officer, and we'll begin with some prepared remarks, and then open the line for Q1 I.
Well start with safety, we start every meeting with safety and and always have and obviously the topic takes on a different meeting in today's environment.
Our goal is no injuries and we're making good progress. This this year. So far this fiscal year, we've got 8% fewer injuries in the first nine months of the year and more than half of our sites around the world have been injury free for at least 12 months.
We're really pleased with that progress at a time with so much distraction in new ways of working.
To accommodate physical distances et cetera, I never more important than today and our employees are really rhythm to the occasion and remain vigilant.
Moving on now to the key messages we have for the call today. It's obvious these are unprecedented times for everyone and lots of challenges that no one's had to deal with before.
And against that backdrop, it's important to make clear that EMCORE is absolutely not immune, but we are relatively well position and we've been demonstrating resilient.
So that's the first key message today and there are a number reasons for that which I'll come back to you in a minute, but it really starts with the.
The commitment of our 50000 employees around the world and their dedication and resilience through this period has been amazing and we can't thank them enough.
The second key message is that our financial results have been strong through nine months and for the second consecutive quarter. We've increased our outlook for the 2020 financial year, we now expect dps growth of 11% to 12% and will generate over a billion dollars or free cash flow. This year, we've had good organic growth momentum building.
In the businesses and we've also benefited from faster delivery of synergies from the acquisition of Bemis last year.
We're coming up on the one year anniversary or that deal, which was an all stock transaction the largest right emcores history and by all measures its been exceeding our expectations.
So far so that's the third point.
Fourth we have clear line of sight to controllable drivers of shareholder returns in the near term.
Defensive organic growth.
Further cost synergies to come a compelling dividend and also the benefits from having bought back over 3% of our shares outstanding So far this year.
And lastly longer term I will remain well positioned to generate continued value for shareholders at all macroeconomic conditions.
Slide five relates specifically to covert 19, and with almost 50000 employees and 250 factories around the world in over 40 countries, a global pandemic creates a global challenge for a company like ours.
And the work to manage through it has been massive as you can imagine so early on we established three guiding principles.
It starts with keeping our employees healthy everything we do starts with safety anyway. So this would be the natural starting point for us.
I would take many extra steps now frequent more frequent cleaning and disinfection of our facilities and equipment, obviously increased physical distancing restricted travel et cetera protective masks lots of work from home arrangements as well and again our employees have been incredibly adaptive.
Our jobs, we've introduced new measures to help keep them safe and healthy.
Contributing to the communities in which we operate has also been guiding principle. We're fortunate we've been able to keep our people employed and our operations running so we can help those around us who have been less fortunate.
There are hundreds of examples marotta EMCORE of great initiatives really at the local level, which range from producing face masks face fields to.
Donating packaging for hand, sanitizer or some supporting community food banks in health care agencies, just lots are really good passionate work by the teams around the world and of course since we make packaging for food and health care products, we've got to keep our plants running so we can continue to supply our customers and doing that's required extensive planning obviously too.
Prevent any issues, but then also to deal with them in an efficient way should they arise and we've been doing just that so again, we've not been immune here, but we've managed well so far with minimal disruptions.
Yeah, I mentioned at the outset that amkors relatively well position and demonstrating resilience and I want to come back to that for a few minutes starting with slide six.
One reason, we remain in a relatively good position today and why it's so important that we keep our plants running is because they of course, making primary packaging for consumer staples.
That's really all that we do with essentially who we are we're making packaging for defensive consumer segments like food beverages medical and pharmaceutical products products that people need all the time, obviously, including now.
These supply chains have been recognized as essential by governments and health care authorities around the world and that essential designation extends to amcor and provides us with the license to continue operating.
Almost all the products, we package are for home consumption or Houston medical facilities or sold through retail very little of our packaging is for on premise consumption or for sales through the foodservice channel.
And turning to slide seven the primary packaging that Amkor makes for food and health care products has always played several important roles to protect consumers and ensure food safety.
Preserve products extend shelf life.
And to promote brands and those things will always be important but right now in the in the current environment certain needs are especially important for consumers and companies around the world hygiene would be the most obvious one.
And every aspect of our lives now hygiene has become much more front and center is beverage I'm about to drink out of this beverage containers that clean is this medical product sterile.
Should I buy the least let us from the open been or the package. Let us. These are the questions that people have on their minds now convenience is another one.
We're eating at home now more obviously I don't have any more time than they used to have probably less so how can we make cooking and food preparation easier can we just pop this product in them in the microphone.
And then automation, if you're running a factory right now.
You're asking about automation not just about cost, but also about worker safety and whether or not theres, a packaging solution that could make the production process less labor intensive.
It's way too early to project, how many of these needs will evolve or what priority there'll be given overtime, but it is clear that long term demand for food and health care packaging will continue.
And that demand will be there globally.
Yeah. This slide eight indicates emcores, president and all the major developed and emerging markets around the world and so in this challenging time, we benefited from our scale, but also our geographic breadth and diversification.
Scale provides many advantages at times like this starting with the ability to ensure we have access to raw materials and other supplies, but also making sure we have redundancy in our supply chain and our production network.
Production has disrupted in one region, there's the opportunity to source from another.
And of course being diversified geographically means in this instance, while one region may be struggling like China was earlier this year other regions I've been less impacted.
And especially during the pandemic being so global it's also meant that we've been able to share learnings as different parts of the world have suffered through the pandemic at different times.
So we've learned from the experiences in Asia and Europe now as we've dealt with the outbreak at a later dates in the Americas.
And lastly, turning to slide nine.
Of course also relatively.
Well positioned by virtue of our strong financial situation.
The market positions, we have in the scale in a defensive consumer segments. We supply I have led to consistently strong cash flow, which in turn has enabled consistent financial performance in shareholder returns and that's continuing this year.
We also have a strong balance sheet, we're committed to an investment grade credit rating and we've always maintained lower leverage at the most of our industry peers.
So with consistent cash flow and a solid balance sheet, we continue to have plenty of cash to reinvest in the business.
As well as to distribute to shareholders.
And while our dividends always been compelling, it's especially compelling right now relative to the alternatives that investors might consider.
So of course, certainly not immune from the impacts of Cobot 19, and we've not been spared by any means but were relatively well positioned to navigate the challenges and I'll touch briefly on slides 10, and what we've seen over the last few months.
We try to run the company for the long term and we focused on one year at a time. So we normally discuss results on a year to date basis.
But clearly it's unusual crime and we appreciate the need in the interest.
Some more insights on recent trading activity.
And so that's what we've got here on slide 10 key message on the on the slide here is thus far we've seen no material impact on our financial results that we could directly attribute to cope with 19.
Where global company with balanced exposure across North America, Europe, and the emerging markets and.
And we've seen plenty of puts and takes on volumes, especially across regions and categories, but ultimately sales in the third quarter were in line with the long term averages that we've seen in the business.
And there have been no real cost impacts.
So no real material impacts on the financials for the company so far and the results for the third quarter were inline with our expectations.
Now slide 10 lays out what we've seen using volume growth for the third quarter and you see the positives and negatives across the global portfolio.
Overall volume growth for Amkor was about 2% in the quarter at 1% in our flexible segment, 5% in rigid packaging and we had good volume growth in North America for beverage packaging as well as flexible pipe flexible packaging where.
In Flexibles North American represents about one third of ourselves in that segment.
Another third of sales in the Flexibles segment is in Europe and volumes increased by about 1% in the quarter and then the other third in the flexible segment would be.
In Latin America, Asia, and specialty cartons, and those sales for the quarter were down low to mid single digits.
By end market health care.
Continues to grow well around the world, It's obviously, a pickup in home care and protein packaging.
[music].
Good good quarter.
The other hand anything that does go through the convenience channel.
Our on premise of which is very small part of our portfolio was a bit softer.
More recently in April we didn't see many changes, but Latin American volumes and all of our businesses in that region were very soft.
And beverage packaging volumes in North America were also weaker given that package is often sold through the convenience channel.
So other than in the most obvious cases, it's quite difficult to quantify with any degree of precision exactly what the cobot impact on those volumes has been but all up at about 2% volume growth. The results were consistent with what our longer term averages.
So the key takeaway here is that we remain relatively well positioned and resilient and let me pass the call over to Michael to discuss the financials in more detail.
Thanks, Ron Good morning, and good evening everyone.
So beginning with a summary of our results on slide 12, the businesses delivered strong year to date earnings growth, which reflects a healthy balance of synergies and organic growth.
Sales are in line with the prior period, excluding unfavorable FX and raw material pass through impacts.
Year to date EBIT was up 7% in constant currency terms.
With growth in both segments contributing to the double digit EBIT growth led by the ample growth in third quarter.
Net income an EPS grew up by 13% and 14% respectively.
And free cash flow of 360 million within line without expect with expectations and similarly significantly higher Mafia.
The strong cash flows have enabled us to return more than $1 billion to shareholders through three year to date quarterly dividend payments and share repurchases.
And the board remains committed to sustainable and compelling dividend declaring a quarterly dividend of 11.5, you as cents per share to be paid in June.
Moving to the flexible segment on slide 13.
Year to date, so as a 0.7% lower than the prior period in constant currency terms and excluding a negative impact related to the pass through of low raw material costs.
This reflects solid low single digit volume growth in Flexibles, Europe, and North America across a range of high value healthcare food and home care products.
The offset by weaker demand in China, and India through the third quarter.
We had previously highlighted business and periodic specific challenges in the Flexibles Latin America and specialty coatings business.
And we're encouraged to say the sequential volume improvements we anticipated during the March quarter.
Yeah, the tight adjusted EBIT grew 11% on constant currency terms and margin expansion of 150 basis points reflects growing synergy benefits as we move through the year and strong cost performance.
So overall, we're really pleased with the why the Flexibles business is performing.
And especially so given we've been able to leverage the unique position created through the Bemis acquisition covered on slide 14.
First there is momentum in the acquired base business, which is evident in the strong year to date results in North America.
Second the integration is mostly complete.
And the teams have come together incredibly well to operate as one and support our customers through the kinds of crisis.
And as Ron mentioned, the timing of synergy benefits is ahead of expectations and we are on track to deliver 80 million in fiscal 2020, and a 180 million body into this slide 22.
Turning to rigid packaging on slide 15 inline with expectations adjusted EBIT grew 4% in the March quarter with growth in both North America and Latin America.
On a year to date basis earnings were lower given the unusually strong comparison in the first huh.
Overall year to date styles, 0.2% hot in the prior period in constant currency time, after excluding a 3.6% unfavorable impact from passing on lower raw material costs.
Which reflects volume growth, partially offset by unfavorable price mix.
In North America beverage volumes, 1.7% high with 5% growth and also contain volumes.
The overall North American nonalcoholic beverage market continues to grow at a modest right in line with long term trends.
And importantly, as you say on the slide consumption MPT format has remained stable after taking into account quarterly seasonality.
In Latin America grow volumes grew 3.4%.
It's worth noting that volumes in both regions have slowed noticeably through the month of April impacted by lower demand through convenience store and on the guy channels as people are restricted from moving around during lockdowns.
During the month volumes in North America would down around 5% to 7% compared with last year and in Latin America would down around 12%.
Well the trajectory from here is difficult to predict.
We have assumed volumes will remain soft through the balance of the June quarter.
And this has been taken into account in our revised full year outlook, which I'll come back to shortly.
Turning to cash flow on slide 16.
Year to date adjusted free cash flow of 367 million increase significantly compared with last year.
This is consistent with expected seasonality given cash generation is always why did seasonally to our fourth quarter. When EBITDA is the strongest and when we see working capital benefits peak.
Most importantly, we remain on track to deliver more than $1 billion across the current financial year.
We've continued to focus on working capital.
We measured progress through the working capital was styles Russia.
On this measure over the last nine months, we've released equivalent of more than 90 million of cash on an annualized run right through a 70 basis point reduction in Russia.
In this current environment, we've taken a prudent approach to non essential expenditure. However, the overall strength and reliability of cash generation for our business means we remain in a position to invest.
And to maintain a strong an investment grade balance sheet as shown on slide 17.
We have an investment grade credit rating and our balance sheet metric a strong including leverage at 3.1 times at the end of the third quarter.
This is where we expected it to be given quarterly seasonality of cash flows and is in line with last years 3.1 times.
That's has consistently being the case over many years, we expect leverage will fall in the fourth quarter with if like 20 estimated to close it around 2.8 times.
We have less than 2% about drawn debt facilities maturing within the next 12 months.
We also have ample liquidity of 1.9 billion should the native rod.
The key message here is as strong balance sheet and cash flow means we have flexibility to meet the needs of our business and to continue our legacy of paying a compelling dividend while maintaining a strong.
Balance sheet and investment grade credit rating.
Turning to slide I'd say in the highlights of our outlook for the financial year, ending June 32020 as Sean.
We expect heightened levels of uncertainty and volatility will continue in the broader environment and this means there are additional challenges with regard to admit estimating future results.
However, the businesses delivered strong year to date results, we have visibility through the month of April and have assumed that we and our business partners are able to continue operating plants with minimal disruption.
Taking these factors into account, we're confident the business will deliver increased EPS growth ranging constant currency terms of 11% to 12%.
And be able to delever over 1 billion in free cash flow before dividend and cash integration costs.
So in summary, we believe we are on track to close out a strong first year. Following the famous acquisition and returned significant capital back to shareholders.
So with that ill hand back on a year on.
Sure.
Thanks, Michael just turning to slide 20, and looking beyond the end of fiscal year 2020 at a time with lots of uncertainty and volatility. We continue to have good clear visibility to controllable sources of shareholder value in the near term and we've touched on each of these are ready, but we expect continued defensive organic growth for our food and health care packaging.
Additional cost synergies from the Bemis acquisition will deliver 80 million by the end of this year and expect another 100 million over the next two years.
Continued payment of a compelling dividend, especially in this low interest rate environment and EPS benefit of having bought back over 3% of our shares this year.
And longer term Emcores capital allocation framework has not changed and as we saw earlier over the last five or six years. The model for shareholder value creation has delivered an average of 12% per year of combined EPS growth and dividend yield and that will be higher this year.
Before we close off for opening remarks today I want to touch briefly on our best long term organic growth opportunity, which is around sustainability.
And sustainability as it relates to consumer packaging touches on a number of things that have become increasingly important to consumers around the world, including waste and pollution and greenhouse gas emissions and global warming all important issues that aren't going to go away. Despite the immediate focus right now uncovered and so two points to emphasize today.
The first point as slide 21 makes clear is that when it comes to these consumer needs and sustainability concerns. We believe the answer is responsible packaging not know packaging were misinformed packaging.
And responsible packaging requires a total system solution first smart design that takes into account environmental impacts through the product lifecycle and that means packaging thats recyclable reusable or compostable.
Made from recycled materials and using less material in the first place.
Second the rate waste management infrastructure needs to be in place, whether that's recycling or composting facilities or returnable systems.
And finally consumer participation is critical to properly dispose of packaging in an appropriate way.
And the second sustainability point today is on slide 22, EMCORE is uniquely positioned to make a difference here and capture the opportunity and we're fully committed and continuing to invest this is not a new topic for us we've been fully committed for several years now and we first made our aspirations public two and half years ago with our 2025 pledge.
And again in August last year, we committed to invest $50 million to accelerate our sustainability agenda. So while we're dealing with the pandemic like everyone else sustainability has and will continue to be in focus for EMCOR.
And just to close often summarized on slide 23, clearly volatile times challenging times, everyone Amkor is not immune or any different but we are well positioned and demonstrating resilience.
We've delivered strong results so far this year and we've increased guidance for the second time.
The Bemis acquisition is ahead of our first your expectations.
We have clear visibility to shareholder returns in the near and longer term.
And of course, one more thank you to any of our employees who might be listening in today.
So with that operator, we'd like to open up the call two questions.
As a reminder to ask a question you will need to press Star then the number one on your telephone to withdraw your question press the pound Keith Please standby it will become part of the Q and a roster.
And your first question comes from the line of Ghansham Punjabi with Baird.
Hey, guys.
Good day to you and you have to everybody is doing well.
I guess first off Ron for the regions had benefited from a cobot related volume increase if you will.
Wonderful starting to normalize as we're now in May and consumers have basically had time to cycle past. The initial pantry loading would demand starting to mirror closer to consumption trends and then related to that Bemis on legacy exposure basis has a decent amount of exposure towards Mead just given the meaningful production disruptions in the was is that a risk or what would it.
Hi margin category for the industry.
Yeah, I'll, let maybe I'll take the first the second one first if I can meet business in North America is a big important part, but it's about 20% of the north American flexible cells.
So as it as a proportion of amcor its.
Yes.
So low single digit percentage.
And we really havent seen significant disruption in that segment, we've had some ebbs and flows in volume, but no real shutdowns. Despite the challenges that have been well documented.
And that continues one of the things that Israel advantage for us in that segment or will be longer term is is the film technology in that business really lends itself to more automated.
Packing processes and more automation in those facilities going forward. Some of those plants are quite labor intensive as you've seen.
And so we think in the in the medium to longer term, that's going to bode well for for growth, but in the here and now no major disruptions and generally.
Generally robust volume.
First part of your question was about trends look I mean, I think the key message from US today is we didnt see much overall across the whole business.
That seems to have been impacted by cobot, we obviously see some areas where things grew better than we might expect 4% volume growth in North America is a couple of percentage points higher than we'd expect.
But not not astronomical in a in a business like Europe, which is just as big.
We saw volume growth of 1%, which is again sort of normal and then obviously in China.
In January and February we had had a decline India was shut in March. So this really puts and takes on April as continued largely in the flexible space along the same lines I think as Michael alluded to originals.
Volumes have slowed a bit and everything in Latin America has slowed in April but generally speaking if we look across the entire portfolio.
There's not a much does not much material change.
Okay. That's helpful. And then so just related to that Ron on the EPS increase of let's say two cents right at the midpoint. Excluding FX can you help bridge that as a bridge that for us year over year, I mean lower interest costs.
It looks like it will some to roughly half of that is the rest from just better volumes than you thought initially or is it also due to lower raw material cost.
Yes, well you've got it I mean, there's interest less tax interest and tax net is about half and then the rest is just the good organic performance of the business, we've seen momentum building in the base business throughout the year.
We saw this in February and raised our guidance then and we've continued to see it through the third quarter.
Volume as a part, but we've had really good margin performance generally in the businesses. If you look in Flexibles.
We've got like 150 basis points of EBIT margin expansion.
Some of that synergy related but some of it is just good performance in the base business as well and the mix has been healthy, but with good health care sales and and some other segments. So it's a combination.
And sorry, the raw material piece that incremental benefit.
Okay. So much so far look where raws go from here with oil hitting the loads. It hit in late March and April we'll see but in the third quarter. We had few million dollars have benefited similar to the first half where we saw about four or 5 million per quarter, we're at about that pace in the third quarter as well.
Terrific. Thanks, so much.
Okay.
Your next question comes the line of Larry Gambler with credit Suisse.
Thanks, guys.
Help everybody doing well.
My question just 10 is about.
Cash flow wrong.
[music].
Looks like given the nine months cash flow for 70, and your guidance of over 1 billion, it's got to rein cash in the fourth quarter.
Just wanted to get talk too.
Whether both wages and flexibles.
Generates significant cash net fourth quarter and.
Talk to that cash seasonality.
Yes.
Mark.
Yes, yes, I'll take this on Larry.
Thanks for the question, Yes look we're really pleased to fill the cash flow is.
Year to date, it's meaningfully better than the prior year.
And it's in line with expectations based on the usual seasonality.
And looking ahead of prior year, there's a couple of areas on that we've had obviously about high ratings, which is which is a positive and also really good working capital performance as I mentioned in my notes you know we look at the.
The working capital sales ratio and Thats reduced from 10.7%.
At June 32 around 10% now, which is a meaningful improvement across the year to date.
And we're right on track to deliver the 1 billion in cash why we talk about some before dividends and typically our quota for is always the strongest cash flow quota.
That's for few reasons firstly.
Q4 is our highest earnings quota for the year typically your 100 million better EBITDA in Q4 than any of the other three quarters. So clearly the that adds to the so the cash flow.
Inventory cycle.
We tend to build inventory leading into the peak season, particularly in Rigids.
In Q and then in Q4 when it some of you know we draw that down so we benefit from that.
We're going to see continued benefits from the working capital sales, Russia, particularly coming out of the famous acquisitions that we've seen.
Some benefit there and then obviously as we as we head into year end, we have a strong focus on on working capital and.
Insulate with stronger rally than some of the on a quarter. So overall, we feel good about the position and.
It.
Comes generally across the board.
Okay, just to follow ons largest.
Q4 being largest on EBIT quarter.
The year with.
The volume weakness you're seeing in rigid.
Is there any concern about sort of negative operating leverage.
Perhaps.
Chewing into that.
Those earnings and cash flow.
So as you said in the comment.
Sorry.
Yes, as we as we said in the.
The comment side, we've seen some softness in regions volumes in April.
We factored that into that guidance.
For the full year.
And that's also factored into the cash flow guidance. So so.
We feel good about whaler at obviously.
If it has some.
Some other variability in that with that we've we've also talked about that.
We are right now we feel okay with where we're at.
Okay, great. Thanks, guys appreciate it.
Right.
And your next question comes from the line of brick Campbell Crawford with Jpmorgan.
Yeah. Good morning, Thanks for taking my question just them.
Maybe first on Rigids restructuring just that a couple of comments if you could just rank way you're up on that cost that program and land, we should start to see benefits Andreas.
Yes, we were still going through that Weve benefited I think about 15, 10 or $15 million. So far there is another five to 10 to go which will come next year. There's a couple of more plans to close which.
Will happen after the high season at the end of the North American summer, so you'll see benefits in 2021.
From the final.
Plant closures in that program, which was announced couple of years ago.
Okay Understood then Ed just on flexible.
The 10-Q four quarters for the.
And for the March quarter, it looks like price mix was a bit of an issue that 4% headwind to EBIT just that could you got three day one.
Issue was with price mix for that business.
Yeah, it's mostly mix I think it's.
It's probably because we've got some weaker sales in Latin America, as we flagged and in especially cartons those of the businesses where sales has been weaker I think mix.
Tends to be lots of different things I think we'll probably get back to you on that one Burke because the business is growing nicely in some of the better segments around healthcare and meet.
The offset will be in Latin America, and in and in specialty carbons.
Okay understood I'll follow up on.
And your next question comes the line of Brian Maguire with Goldman Sachs.
Hi, Good morning, guys, who are a good good afternoon, depending on where you are.
Just wanted to follow up on that last question on pricing trends in general I.
I think you in the prepared remarks, you mentioned that price mix is a little bit negative and rigids.
And with the volumes it seems like some regions volumes are growing a little bit faster now than in other regions.
On a segment basis. It seems like the trend is consistent like you said with a long term trends, but seeing some divergence between segments. So just wondering how that's affecting mix and then if you could just kind of comment on overall industry pricing in the current environment, our people being aggressive trying to pass through some of the deflationary benefits or.
And just any changes in competitive behavior, you can you can ascertain.
Yes look thanks on the last one no changes in competitive behavior, I mean, I think the whole supply chain is focused on just keeping our plants running whether you're in upstream.
Materials to the supplier or downstream customer or retailer I think what we've seen is reprioritization hi in a number different dimensions towards just sustaining operations.
So no change in competitive dynamic and certainly no change in pricing I don't think theres any real commercial discussions happening.
Our supply chain right now anyway.
And as far as Mexico is I mean, I think it's a 90 day period. So theres a lot of moving parts I would say in Flexibles, you see that makes benefits flowing through in the margin expansion.
We are doing really well in health care. This year have been for several periods now medical and pharmaceutical packaging growing well protein packaging, which is flagged earlier. Despite some of the pressure on issues in the U.S., which had been more recent that business continues to grow well. So generally speaking the mix has been positive.
Okay and just on on the margins in Flexibles. It looked like the EBIT margin stepped down a little bit from Twoq you. Despite I would guess little bit more bemis synergy capture there just wondering if there's anything.
Would drive some.
Differences in the margins between Twoq and Threeq, you and what sort of the outlook for for margins in that business in nine the rest of the year.
Brian quite frankly, we wouldn't really look at the margins on a quarter to quarter basis, we'd be thinking about the full year.
I think on a year to date basis, the margins have stepped up quite substantially and we'd expect that to continue.
Okay, and just last one for me.
Just wondering if you're.
That you're working capital and cash flow just wondering if in this environment, you're seeing customers look to extend their payment terms or.
Supplier is asking for payment a little bit quicker. If it's just trade terms are something to be concerned about and if you think you can kind of hold the line on those.
Yes, I can take that one Brian look I mean, we haven't seen any near term stress from our customers. He would like us that typically get well placed from an essential products.
Perspective to deal with the situational archiving and.
Having said that we really continue to stay focused on our working capital management, which includes a customer collections and supply terms. So so we haven't really seen too much on that front right now.
Okay. Thanks very much.
And your next question comes from the line of John Patel with Macquarie.
Oh, good morning, guys how are you.
Hey, John.
Just had a couple of questions I'm, just just firstly on obviously hard at bridget's witnessing not in April and mockery extending into mine to you for.
You've listed your your overall guidance for the year in eight years terms on it does imply outperformance in flexibles on acute.
Sort of provided some 30 tavi, but essentially is that outperformance coming from the big developed markets in Flexibles, North American and European you've called out healthcare was will just trying to understand way that where the occupies the off cities Villacrez as Richard.
Yes look rigids is.
It is softer in April as we flagged I mean, its functioning well I think it's a week by week story in volumes when you're talking about consumer a convenience channel business, which is where the weaknesses in North America and Latin America is really related to the pandemic in Flexibles. We've had good momentum in North America good momentum in.
In Europe.
Building throughout the year.
The Asia business weathered the storm early in late January and February, but as built momentum as well. So we expect them to have a good.
Fourth quarter.
The cartons business also has built some momentum after it after a tough Q2 in particular.
And so really at least Latin America in Flexibles as the question Mark, but generally speaking across the rest of the segment, we have seen and continue to see good momentum.
And just picking up on on Latin American Flexibles, obviously, you've indicated payments as a hit if so is your expectation to divide rule, but where does linehan now stand drawn in terms of what was the disappointing stock with symbols of auction.
Yes look that business notwithstanding the last couple of weeks and that pandemic impacts has been building momentum as well and so weve sequentially improved profit in that business in each quarter I think we.
Flagged at the end of fiscal 19, our fiscal fourth quarter, the business actually had a modest loss.
We started to make money again.
By July and August mattered had profit in the first quarter second quarter, even more so third quarter was better again.
So despite the softness that we're currently seeing that business has generated incrementally more profit in each quarter.
And so on the right track, there and I think operationally and from a cost perspective.
The steps that we took in July and August last year, and the head count reductions.
Put us in a good position.
I think the customer relationships have been solidified and we had seen some better volume trends and better comps on sales period over period in January and February than we'd seen in the first half of the year and even March.
So now I think we're dealing with.
Maybe the last major region in the World to go through the pandemic and that's where the softness is coming from now, but generally speaking we would say that businesses.
Has progressed throughout the year in line, maybe even a bit ahead of expectations.
Thank you and just the last one just to clarify response from an early question just in terms of Flexibles you haven't seen Oh, you wouldn't characterize say paying a significant pull forward of demand in the quota. So there's going to be an evening out there you sort of see these trends in terms of at that time consumption being sort of engineering.
Well, if we look at the whole segment, we had we had pretty modest growth of 1%.
Across the board and we we spelled out on the slide there is some of the puts and takes I think one or 2% buying growth is what you'd expect to see in this business.
And in the first half we had some some challenges in Latin American and cartons in particular, which had a bit softer than that but generally speaking one or 2% is what you'd expect and that's that's sort of where we're at.
Okay. Thank you.
Thanks, John.
And your next question comes your line of Richard Johnson with Jefferies.
Richard.
Any any.
Oh, Hey are getting here now.
Yes.
Apologies.
The terribly kind of flat if you calling him as a shot I just want a reference slide eight.
And off.
A question in general about emerging markets I'll now you touched on that.
Individually cross approval or at times through the presentation.
But it looks like proportionately eons dropped quite materially through the year and.
I just want to check is that an erratic you've got to Australia, New Zealand Didnt say thought if I adjust to that out it would have come back even more so question Randy can you talk.
I will give a bit will kind of about E and in general on you talked about China, and India, but I'm trying to get a sense of where else the weakness is being.
Yes look the for answer the first question is no the emerging markets portfolio or percentage of sales to emerging markets has not changed through the year with BMS. We are waiting towards the EMS went down a few percentage points I think maybe two or three percentage points overall.
But that hasn't changed.
Generally speaking.
Look I think we've talked enough about Latin America Asia has been relatively robust this year save for.
The late January February period in China, where things, obviously quite soft although.
Bounce back quite quickly in March India in March was shot essentially so we had a very soft month in India, but to that point for the first eight months of the year, we had very strong growth in India and the rest of southeast Asia.
And then eastern Europe has been.
Softer in cartons, but pretty robust in food and personal care in the flexible side.
So it's a mixed bag like it always is across the EMS, but there's still a substantial part of the business and still an area, where we expect to get disproportionate growth going forward.
Okay. Thanks, So just to clarify is that.
Just with 3 billion on that as a proportion of 13 thats, 23% at significantly lower than what was that just rounding.
If I take Australia, New Zealand that it does that even said and so you started the year 27% in.
Ian but perhaps you can take us with line I just want to.
Take it offline Richard that percentage in the EMS is in the high 20%.
Twenties okay.
Latin American water in the Czech Okay, and then just and then just a couple and then just I just want to go back to John's question around Flexibles and Europe can I just double check that you haven't lost any share there the conns given the trading backdrop I wouldn't to be an unusual that you've done plenty more than what what changes, which is perhaps more lumpy sand volleyball.
No I think in the quarter you have to remember that the Europe was pretty hard hit by this pandemic in many countries.
In the beginning of March and so we had probably as much of an impact in yes, probably the end of February early March in parts of Europe as we had in Asia. So.
So yes, you had some stronger sales towards the end of the quarter, but in the middle of the quarter, there in France, and Spain and Italy.
Parts of Germany, even Switzerland, we saw pretty dramatic slowdown for weaker to.
Got it that's helpful. Thanks, and just finally, so my CFO, Michael your interest guidance dropped by nearly 20% through the yes, I'm trying to understand what the by moving parts off because that's that's a pretty big change Street the nine months.
Well, we showed at the start of the we're expecting interest rates to increase.
Particularly through the U.S.
And obviously that didnt happen and.
More recently.
Finally, the the more recent.
Production in guidance with put through is really on the back of the U.S. one month libel I mean, it's dropped from.
As from nearly 2% in in.
A month will too so.
If you think of that asset portfolio in the fixed and flooding rights and weigh on mix of currencies.
It's pretty easy to understand.
At the interest cost is going to come down.
Got it thanks, that's it from me good luck.
Thanks.
And your next question comes the line of Mark Wilde with bank of Montreal.
Good evening Ron.
And Mark.
I wondered Ron just started out that 4% volume and in North American Flexibles is one of the strongest numbers I can recall and years for BMS or even the any of the peers.
Any kind of particular things you would point to their behind that growth.
Paul what Mark I think it's what youve, what you've seen on.
All over the TV in the media, it's been well documented I think the us consumer tends to pantry load like no one else.
And so sales were particularly strong in March I think.
The business actually had reasonable sales in the first half. So we would have been in a low single digits.
Which is probably building on building a bit of momentum over where the business had been the last several years. So we probably started from a bit higher base and then picked up a few few more points couple of more points of growth in the third quarter.
Really across the board healthcare or we keep coming back to but healthcare has been strong.
Throughout the year.
But in the protein segment in home care.
In.
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Packaged beverages food.
Powdered beverages et cetera.
We had pretty good growth across the board.
Okay and.
Would you say that this is like just better growth from kind of a lot of yield.
Benchmark brands that that Bemis had focused on historically or you also getting any benefit from this effort they'd had over last few years to try to diversify their customer base and get down with some of the smaller faster growing brands.
Look I think they're doing the business has done a really good job in that space side, I'd say that the growth in the quarter and probably the growth throughout this fiscal year since we've owned the business has been.
Equal parts growth with larger customers and in the healthcare space as well as.
Good traction with the smaller customers as well as as it is with our rigid packaging business, where we also have and have had for number of years concerted effort to.
To tap into that smaller enter the market. So it's across the board.
Okay.
Let me.
Kind of.
Lessons or kind of.
Clues that you take from what you've seen in China and elsewhere in Asia in terms of what you might expect in terms of.
Recovery in Europe, and now in North America from the Covance situation.
Well the biggest lessons that we were able to benefit from an Asia, where just how to deal with the situation operationally.
So in China, obviously in February we had disruptions in the number of sites.
We learned pretty quickly about the protocols to get sites up and running and protect sites.
Everything from how to set up printing line, the insurer physical distancing to how to process hundreds of employees through temperature checks and PB all of that we learned through the 11 plants, we have in China in the experience. They went through in an earlier part of the quarter and those lessons then were bill.
Don in Europe, and carry through to North America, and Latin America. So operationally would be would be the big lessons learned from a consumer perspective, you know the consumers are quite different.
Generally speaking, though our business is very defensive and its exposed to the same segments in China as it is elsewhere in the world. Its food, it's personal care, it's pharmaceutical and medical packaging and those segments just tend to be quite.
Resilient and defensive so.
It's been more on the operational side, where we benefited from the learnings.
Okay last one for me is.
Possible to get some sense of what the tobacco volumes are doing kind of year over year.
Look the industry itself declines two or 3% a year and some of the customers do a great job of of laying all that out and I think.
They would say that the global the global demand in units declines, 2% to 3% a year and then you have.
Short term periods, where either theres inventory builds, which which which provide an offset or you might have an excise tax in a major market, which.
Which builds on that.
Declined.
Our volumes would look similar.
From that perspective, and then the offset for the packaging is outside of North America in particular, the complexity. The packaging is quite extensive and so there's a there's a mix.
And complexity offset that drives the sales.
At a bit higher rate than the volumes.
Okay, very good and I'll turn it over good luck in the last quarter the year.
Thanks.
And your next question comes from the line of Nacin Riley would you be yes.
Uh-huh Gents just a couple of questions for me personally Ron did you say that you'd seen no significant change in cost so that'll be manufacturing costs, so otherwise sorry, Bob.
During third quarter by the end excite is that sustainable through the fourth quarter.
I'm, just wondering ratcheted increase sort of hygiene standards specialties, and saying I guess is yes.
When all said, Dave Lawler travel costs and whatnot. So just trying to mitigate a picture of yes.
Now lets thats exactly right I mean, no no material cost changes that impacted our financial performance, one way or the other or that we expect to in the fourth quarter.
There's definitely puts and takes there obviously, there's there's increased costs around cleaning and disinfecting and.
Extra PPD I things like that.
We have not seen yet any substantial increases in any inputs.
Or freight or anything like that so that those are bigger cost items and we haven't seen.
Any real material change and those items.
And then there are offsets as you said, there's generally no no travel no one of them for is traveling at the moment and you just have generally less expense.
In that side of things, so puts and takes but no material cost change.
Okay understood and finally, just on your R&D plans I'm just wondering the ships were seeing in consumer behavior.
I rethink on some of that R&D investment I guess I'm also wondering if the ship to on the online channel in particular, just grad, some packaging redesign conversations with the customers.
Yeah look it's a really good question our view internally in the discussions we've had with our customers is that the things that we had been prioritizing before this pandemic are still the things that are going to be important when we get to the other side of it so particularly around sustainability.
Bearing in mind that our investments in that in that space are just.
Core to what we're doing we're making packaging.
To make that packaging recyclable is going to satisfy a need that we're all confident is going to be there on the other side of.
The situation that we're in now on E Commerce.
Clearly, there's a lot of sales of of grocery and and food products going through E Commerce right now unless the online channel.
We.
At the moment supply the same sort of packaging for the most part for that channel as we do.
Through regular retail.
Overtime gradually our customers are developing omnichannel packaging or E commerce specific packaging, but those things take take time and that will continue I, if anything we'd expect that to accelerate but in the here and now that's not.
Impacting.
Our R&D agenda for the next let's say quarter or too.
Okay. Thanks for that.
And that is last question, we do have time for I'll now turn it back over.
To the speaker to end the call.
Okay, operator, well it looks like there are no further questions again, we thank everybody for joining us different hours in different parts of the world and we'll end the call there. Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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