Soaring resin prices, falling demand in sectors such as confectionery, along with almost US$40m costs related to plant closures and job cuts saw fourth quarter operating profits in flexible packaging slump by 37% at the end of what Bemis called a “challenging” year for the company.
The US-based giant reported that operating profits for it flexible operations plummeted to US$75m for the three months to the end of December 2011 compared to $119m in the same period a year earlier.
The main cause for this drop, said the firm, was the implantation of an “aggressive” cost-cutting exercise that had seen it close - or earmark for shutdown – five plants, and prune its production and administration staff across three continents.
It also cited weakening demand from the confectionery, bakery and snack sector as well as a fall in orders for its high barrier material.
The company’s full year operating profits dropped over 7%, while those for flexibles fell by just under 10% to $425m. However prices increases meant that full year sales jumped 10% to $5.32bn, with those in its flexible unit accounting for $4.75bn – a rise of 11%. T
Henry Theisen, company president and CEO, said significant economic headwinds over the last 12 months had been behind Bemis’ “unsatisfactory financial performance”.
Pinpointing its flexible packaging division, he added: “Operating performance in our flexible packaging business reflects the negative impact of higher raw material costs and lower unit sales volumes. We have taken aggressive action to reduce fixed costs by reducing administrative headcount and adjusting our factory workforce to meet our current business needs.”
He also highlighted dramatically high resin prices increases in the first half of the year that only dipped for commodity materials in H2, while specialty resin tariffs broadly remained at previous levels.
Contractual arrangements with some of its customers delayed the firm’s ability to pass on price increases, which hurt financial returns. The company plans to remedy this situation by the end of this year, added the Bemis boss.
High barrier demand dip
This was also coupled with falling demand over the last six months of 2011, particularly in high barrier packaging.
“Unit sales volumes softened in high barrier packaging for meat and cheese, dairy and liquids, specialty food products," he said. “This decrease was modest and we believe it was related to the consumer response to higher retail prices in the grocery stores.”
The CEO forecast some growth in high barrier applications in 2012, particularly in China and Brazil.
A drop in packaging sales volumes into the confectionery, snack and bakery markets during the second half of the year was put down to weaker consumer demand and the strategy to raise prices to boost its “sales mix to generate higher profits”.
Plant closures and 2012 Outlook
A company reduction programame, resulting in five plant closures in North America and staff reductions there, in Latin America and Europe cost the company $38.4m in Q4.
The cutbacks would continue up to early 2013 and were expected to leave Bemis facing a total bill of around US$83m - $55m of which would relate to plant closure costs, said chief financial officer Scott B Ullem.
But the upside was that they would yield annual savings of $40m. Although some of this benefit was likely to be seen this year, this would be more than offset by on-going write off costs of shuttering facilities.
Looking to 2012, Bemis said sales volumes would remain on a level with 2011, with higher retail costs continuing to dampen consumer demand in the first six months.