Q4 2019 Earnings Call
Being recorded.
The speakers presentation, there will be questioning Natchez session.
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Thank you good morning, everyone welcome to very fourth fiscal quarter 2019 earnings call.
Throughout this call we refer to the fourth fiscal quarter.
Remember 2094.
Before we begin or call like you mentioned that on our website. We provided a slide presentation to help guide our discussion this morning.
For todays call replay will also be available on our website and very global Dot com under our Investor Relations section.
Joining me from the company I berries, Chief Executive Officer, Tom Salmon, Chief Financial Officer, Mark Myles.
<unk> comments today, well question answer session.
In order to allow everyone the opportunity to participate.
So you limit yourself to one question out of time, and then pull back into the queue for any follow up or additional question.
As referenced on slide two during this call will be discussing some non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation on the differences between the gap.
non-GAAP financial measures are available in originally investor presentation on our website.
Finally, a reminder that certain statements made today, maybe forward looking statements.
These statements are made based upon managements expectations and beliefs concerning future events impacting the company.
Therefore involve a number of uncertainties and risks, including but not limited to those described in our originally.
Report on Form 10-K , and other filings with the FTC.
Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward looking statements.
Now I'd like to turn the call over to Bury CEO Tom Salmon.
Thank you Doug did a good morning, everyone.
Our with our recent acquisition of RPC, which is truly transformational.
Made significant progress integration over the last five months and we're even more excited about the organic growth opportunity. We believe it will provide.
Now.
Well on our September quarterly results, then we'll provide an update on progress and momentum, we're having a driving profitable sustainable organic growth across the portfolio.
Finally, we will discuss our sustainability initiatives, which are leading the growth opportunities on why we believe we are uniquely position for the long term at the end Mark I'll be happy to answer any questions you may have.
On July 1st we completed our acquisition of RPC Group plc did a garage creation process is well underway with multi disciplined teams working together to identify incremental opportunities to create value for customers and shareholders.
Working diligently on this integration I'm pleased with the first quarter results that this team delivered as a legacy RPC business on a constant currency basis reported an 8% increase in operating EBITDA.
While sales in volumes were consistent with the prior year quarter.
Typically the legacy RBC business reported growth in food and personal care markets offset by softness in the European industrial markets.
Very good global plastics, and recycle packaging industry leaders, Surrey, thousands of customers with high quality innovative in protective solutions matched by the industry's most diversified unique an expansive manufacturing platform.
Furthermore, the acquisition has created one of the world's largest dispensing solution provider supporting health care and pharmaceutical customers worldwide die delivery capabilities.
The combination gives us the opportunity to leverage our combined know how to create significant value for our shareholders.
Through the shared approach and as we previously communicated we anticipate $150 million an annual cost synergies with approximately half of these synergies expected to be realized in fiscal 2020.
In order to effectively capture these synergies and to align us with our customers provide superior service and drive future growth opportunities.
We've realigned our businesses into for geographic and market focus divisions.
We remain highly impact pressed by the tremendous depth of talent and resources that joint Barry.
We're looking forward the option to strengthen our combined platform with a wealth of experience and expertise. This team has to offer.
Turning now to our overall financial result in highlights for the quarter on slide five.
In summary, both our results in organic growth progression were consistent with our expectations net sales and operating EBITDA were records for any quarterly period of 3 billion EUR $497 million respectively.
The quarter included a strong start in our newly formed consumer packaging International Division continued growth in our consumer packaging North American business, a sequential volume improvement from our health hygiene and specialty and engineered materials segments.
Our adjusted earnings per share was 90 cents in the quarter, we generated $480 million and free cash flow closing 2019, with an annual record of $764 million.
We're extremely happy and fortunate to have these consistent and dependable free cash flows which allow us the opportunity to invest in our businesses and provide maximum value for our shareholders.
Now looking at some of the details specifically by segment.
Our consumer packaging North American business reported volume growth in the quarter, 1% as we continue to focus on investment in growing markets, where we haven't vantage products and we're very encouraged by the momentum of this division delivering six consecutive quarters of positive volume growth.
Our health hygiene in specialty division saw sequential quarter over quarter volume improvement as anticipated and we continue to innovate deploying new capital for organic growth and focused on increasing our share of wallet with existing customers.
Very pleased the progress our team made in the quarter toward securing stronger pipeline of new business Awards, our investments made in China, and North America remain on track and will begin benefiting us in early 2020.
Insider engineered materials Division, we also saw sequential quarter over quarter volume improvement as expected and we made progress on boarding our new business pipeline discussed in previous calls.
We're allocating capital this business to reduce cost and continued growing our specialty products, we anticipate investing over $150 million to be allocated over the next three years toward growth in next generation products.
These new products are more sustainable and use less RASM, while providing equal to or greater performance characteristics.
Fiscal 2019 was a busy year for us in our sustainability journey.
Just to highlight a few initiatives.
On slide six you'll see that we became a founding member of the lines and plastics waste, we laid out very impact 2025 strategy and find a new plastics economy global commitment to eliminate plastics pollution and source.
And just recently, we announced we join topic in the production use a circular polymers from count recycling. We're excited about the potential account for recycling, which we believe compliments mechanic recycling and allows Barry to cover harder to recycle materials and keep them in the circular economy.
And finally before I turn the call to Mark will review, our financial results in more detail I want to reiterate our focus on driving profitable and sustainable organic growth and our expectation of delivering positive sales volumes in all segments in the back half 2020.
I would like to highlight our commitment to maintaining a strong balance sheet and the we are well positioned to continue our historical track record of growing our free cash flow and delivering on these commitments just as we've done every single year as a publicly traded company.
Right more detailed his remarks, and then I'll come back to discuss our strategy and sustainability efforts and then open the call for questions Mark.
Thank you Tom and good morning, everyone I'd like to refer everyone to slide nine now or seven now excuse me as Tom referenced fourth quarter reported sales were up 47% to just over $3 million nearly 50% increase included revenue from the acquisition of RPC, which closed at the beginning of the quarter along with continued.
Strength, and our North American consumer packaging business.
The positives were partially offset by lower selling prices due to the contractual pass through of resin costs.
Anticipated volume headwinds in our engineered materials and health hygiene and specialty segments.
Let's say almost feel for life business and an unfavorable currency impact.
From an earnings perspective, the September quarter, operating EBITDA increased by 44% $497 million.
The increase included contributions in the RPC acquisition, partially offset by unfavorable price costs in both our engineered materials and health hygiene and specialty segments.
After accounting for the annualized impact acquired unsold businesses.
Adjusted EBITDA totaled $2.215 billion for fiscal 2019.
Before turning the segment results, please turn to slide eight.
As Tom highlighted briefly we reorganized our segments to better align with our customers provide improved service drive future growth and facilitate cost efficiencies.
A new structure organizers, our business and a four geographic and market focus divisions.
The new consumer packaging International segment is primarily comprised of Rpcs International business.
Berries legacy consumer packaging Division has been remain consumer packaging North America and also includes Rpcs North American written business.
Engineered materials and health hygiene and specialties remain the same with a few pieces of business move to and from the newly formed consumer packaging International segment.
Now looking at the result of each operating segment with the prior year results restated to match the current structure starting on slide nine.
For the quarter, our consumer packaging International Division delivered sales of $1.1 billion, an operating EBITDA was $173 million again. This division is primarily RPC international businesses and as Tom referenced earlier had a solid start with growth in food and personal care markets also.
By softness in the European industrial markets.
We are encouraged by the earnings improvement in the quarter and progress with the integration.
Next on slide 10 sales in our consumer packaging North American Division were $744 million in the quarter, which was 15% higher than that September 2018 quarter. As a result on the business realignment from RBC and a 1% organic volume growth as the business has continued.
Executing its long term strategy focused on advantaged products and targeted markets.
These contributions were partially offset by lower selling prices from the contractual pass through of lower resin costs.
Operating EBITDA for our consumer packaging North American Division on the order was $137 million compared to $101 million in the prior quarter.
The 36 person increase was primarily driven by the business realignment smart PC.
Continued organic volume growth.
Connectivity improvements along with favorable price cost from the recovery of prior year inflation.
Turning to slide 11, our health hygiene and specialties division delivered sales of $570 million in the quarter compared to $680 million in the prior year quarter.
The decrease was primarily attributed to the contractual pass through of where resin prices lower organic volumes and an unfavorable currency impact.
The sales volume decline was primarily result of the customer product transition and hygiene that we reference on prior earnings calls.
Volumes in the segment sequentially improved as we continue to secure incremental demand toward our commitment to generate positive organic volume growth starting in fiscal Q3 2020.
Operating EBITDA decreased by $23 million from prior year quarter, when adjusted for the sale for the seal for life business and on a constant currency basis.
This decrease was primarily a result unfavorable price cost spread along with a customer product transition.
Next on slide 12 sales for engineered materials division was $628 million from the quarter compared to $673 million in the prior year quarter.
The decrease was primarily attributed to pass through of lower resin prices are lower organic volumes, partially offset by volume for holiday on acquisition.
Organic volumes were consistent with our expectation as we sequentially improved volumes and begin the qualification process a recent business wins.
Operating EBITDA in our engineered materials division was $101 million compared to $122 million in the prior year quarter.
Generally as a result of unfavorable price cost spread and putting that some product sold and higher manufacturing costs.
These increased manufacturing costs were primarily driven by cost to onboard our robust growth pipeline as well as negative overhead leverage resulting from the lower organic volumes.
Slide 13 provides a summary of our income statement for our fourth quarter.
Overall operating income was $398 million in the quarter compared to $194 million from the prior year quarter, primarily attributed to the improved operating EBITDA just discussed as well as a gain on sale of our COO for life business in July partially offset by expenses associated with completing the acquisition of RBC.
The quarter.
Our net income in the quarter was $229 million of 72% compared to the prior year quarter of $133 million and our adjusted earnings per share was consistent at 90 cents.
Next on Slide 14, the company generated a quarterly record of $630 million of cash flow from operations on a quarter compared to $448 million in September 2018 quarter.
Net capital expenditures in the quarter were $128 million as we incurred spending on cost reduction initiatives.
As well as growth related projects.
Our free cash flow for fiscal 2019 of $764 million represents a cash flow yield of nearly 15% using our quarter end market capitalization.
What's the substantial free cash flow and the proceeds from the SFL sale. We made early principal payments on our term loan to over $550 million in the quarter and issued a partial redemption on $100 million of our 6% second priority senior secured notes after year end.
We anticipate further reducing our overall debt and we'll pursue additional opportunities to reduce our interest costs by refinancing some of our existing debt. In addition to operating our capital structure more efficiently with opportunities from the recent RPC acquisition.
We remain committed to maintaining a strong balance sheet and are consistently increasing dependable and improving free cash flow.
Thus the opportunity to further improve our strong balance sheet as we have demonstrated historically.
We are reaffirming our fiscal year 2020 free cash flow financial guidance and assumptions shown on slide 15.
We are targeting fiscal 2020 free cash flow of $800 million, which includes $1.400 billion of cash flow from operations, partially offset by capital expenditures of $600 million.
This guidance also includes the use of cash from working capital and other restructuring related costs related to the RPC acquisition of $90 million, along with cash taxes of $160 million and cash interest of $500 million.
We continue to feel confident with our projected volume inflection in mid 2020.
Looking beyond fiscal 2020, including realization of synergies and excluding cost associated with the integration of the RPC acquisition, our normalized free cash flow would be more than $900 million, which represents a free cash flow you have over 17% using our quarter end market capitalization.
This concludes my financial review and now I will turn it back to Tom.
Thank you Mark our September quarter delivered inline with our expectation and I'm very pleased the progress in integration of RPC with the business generating solid financial results.
This transformative acquisition gives us a world class product innovation engine, which enjoyed leading positions in higher value added closures dispensing systems medical devices and healthcare packaging.
We have and will continue to commit resources to create profitable and sustainable organic growth across these markets.
Currently rpcs presence in emerging markets complement various growth objectives in multiple industry segments.
Strategic Merit long term benefits and financial impact this combination represent an incredible opportunity for Barry.
Customers suppliers employees and shareholders.
Phoenix will leverage our combined know how material science supply chain product development manufacturing technologies and sustainable solutions gives us certainty that the combination will benefit Barry for years to comp.
We remain confident and our total cost synergy target of $150 million with half or $75 million expect to be realized in fiscal year 2020.
We continue to work diligently across all of our businesses to grow organically and have been able to demonstrate organic volume growth by providing advantage products and targeted markets as evidenced in our consumer packaging North America segment, which has grown positive bond for the past six quarters.
We remain confident in our projections of volume inflection for our engineered materials and health hygiene specialty division in fiscal 2020, our record level of cat expected capital expenditures in fiscal 2020 $600 million is further evidence of our commitment and focused on organic growth, while maintaining our low cost position in the markets. We serve drive further value for Barry.
Okay.
Now specifically what are we doing to drive growth each of our segments.
With our consumer packaging international, but we're excited about potential of the new dispensing portfolio with unique airless pump technologies in specialty valves.
Global dispensing solutions, the key area of focus for Barry and complements nicely with our closures products.
Our pharma business growth potential is also a key hires of our acquisition and positioned very growing global healthcare packaging market player.
RPC brought niche and specialty healthcare products, including innovative respiratory devices, among others and we're exploring greater penetration in this space with new strategic investments.
And within our consumer packaging, North American business, our value proposition and recent success around connectivity sustainability and cost innovation has led the innovative packaging solutions, which address unmet needs.
The division is making excellent progress replicating the successful strategy across multiple sub segments. As we continue to increase the percentage of advantage products within our portfolio.
Our pipeline of growth opportunities, which includes.
Diagnostics infection control containers charters is patchy markets and we expect to continue generating pot organic volume growth in this space.
With our engineered materials division were focused on lightweighting numerous products, while providing similar or enhance physical properties enabled by recently completed alternative material qualifications.
An example of a recent innovation relates to our pack Expo award winning onto a product line, which recently won the 2019 Technology Excellence Award.
This barrier film offers all the functionality and performance on traditional barrier films, while remaining polyethylene recycle stream compatible design has excellent moisture and auction barrier that can go through the store drop off PE recycle stream.
As I stated earlier, we made from we made progress toward our objective of regaining lost share with our local and regional distribution accounts during the quarter and remain committed to sequential improvement toward our continued objective a positive organic growth.
Within our health hygiene and specialties Division, our previously announced investments in China in a state of the our technology for premium hygiene and air filtration applications, along with our North American investment in our proprietary spotlight technology for the watch market all remain on target.
These capital expenditures reinforce our commitment to investing in growth regions and segments to further strengthen our leadership position and provide additional momentum for sustainable growth in these global markets.
In line with these investments customer demands for premium quality and differentiation have continued to escalate as consumer preferences and features and attributes are beginning to outweigh the lower prices for lesser products.
In addition, we are well positioned with our asset base and product solutions related to discretion and comfort, which was augmented by our co pay acquisition.
Build on our leading market share positions in the faster growing and continents and premium hygiene segments.
We continue to pivot our resources in the more attractive markets as just mentioned along with biopharmaceutical and specialty applications, while working diligently to increase our share of wallet with existing global health care and hygiene customers.
Most recently, we entered into a long term agreement with large biopharmaceutical customer to produce and advanced solution product, which will supply flexible clean packaging to support this growing industry.
We believe that we will see continued improvement in our comparative organic volumes and expect to achieve year over year growth in the second half of fiscal 2020.
Lastly, let me take a moment to discuss sustainability the growth opportunity provides barry as the global sustainability leader, we must take a proactive approach in providing environmentally friendly solutions educating customers and providing design innovation all to aid in the collection in support of a circular economy for plastics.
As you can see my prior comments one of our key organic growth opportunities for Berry comes from the increasing consumer demand for more sustainable or environmentally friendly packaging.
Barry we continue to believe the possibilities and use the plastics are endless in fact over the years customers and consumers alike have become a pop into the advantage the plastic packaging weight versatility durability convenience barrier properties, allowing fresh would it be fresh longer and cost effectiveness.
Now all of us, having additional expectation and thats, where the packaging to have an accountable end of life solution that retains the value of the packaging material and prevented from becoming ways.
We believe the way to focus on these growing requirements, particularly around waste is through sustainable packing Barry is uniquely positioned globally to lead the way in this evolution.
As an industry leader, we have the scale and resource to innovate and develop new product as desired.
We are collaborating with our customers and our stakeholders and have taken any initiative to educate particularly around the topics of recycling and what delivering more sustainable packaging means.
Turning a moment to what we're doing internally around product development.
Which includes a broad range of alternative and solutions focused on recycling sustainability and raw materials.
In the area of recycling sustainability within our consumer patch International segment, three specific market, leading businesses allow us to meet our customers increasing need for products to incorporate recycled material first.
We're one of the UK, leading recyclers rigid plastics packaging, providing high specification materials for both industrial and consumer packaging markets and we continue expand our processing capacity in support of growing customer demand.
Second we also have the leading position in the UK recycling of agricultural industrial films. This business has a true closed loop, where we've converted over 65000 tons material. This past year and third we also have the leading European position waste management storage solutions, providing market, leading products and services to the waste collection.
Industry.
In the area raw materials, each year, our product you less and less material to redesign and technology improvements.
Buried leading position in success and Lightweighting has been a strong core differentiator for decades and just this year, we saw several product lines lightweighted by more than 15%.
We are well positioned to help customers, we recycle PCR based and reuse will packaging solutions.
Inside both our consumer packaging segments, PCR content is growing and more and more various purple equity products, such as wine bottles body wash and industrial containers are reaching 100 per cycle, 100% recycle content.
Additionally, within engineered materials, we've made strategic partnerships to provide closed loop solutions for products, serving E Commerce channel.
In health hygiene specialties by the end of 2021 skewed by the end of 2021, we expect 90% of our hygiene portfolio will have bio based materials available to serve our customers. The bottom line is that plastics had become an indispensable part of all of our lives and we must work together to take the necessary steps.
To drive sustainability throughout the Beijing.
Finally, Barry will continue to take the steps necessary to remain a leader in the markets, where we participate through relentless focus on building the strengthen our competitive advantages to ultimately maximize shareholder value management very continued to be laser focused on finding ways to extract more value for our shareholders by reinvesting in our leading low cost position leveraging our research.
Sources around the businesses with the greatest opportunity to grow and create value for our customers all while doing our part to protect our environment.
Im confident that the people of Barry will continue to drive positive result, and achieve our goals and mission of always advance to protect what's important.
Thank you for your continued interest in Barry and this time, Mark and I'd be happy to answer your questions.
As a reminder to ask this question you will need to press Star then the number one on your telephone once again to start one on your telephone. So we try to question first Bancorp.
Your first question comes from the line of Anthony Pettinari of Citi. Your line is open.
Good morning.
Or nominee.
Tom you talked about the volume recovery in engineered materials and I guess, there's a component of that that you can control the product qualification issue that impacted you earlier. This year, maybe there's component you can't control in terms of weakness in industrial markets. If we just zoom in on the product qualification issue can you give us an update on how that volume recovery is going.
Going relative to your expectations, maybe 306 months ago, and the kind of the cadence of volume recovery for the next couple of quarters there.
Yes, Andy we bought up the other pipeline about 30% has been qualified and as part of our current run rate. So we've got another two thirds to go for the remainder of 2020 and you'll see that began to be onboarded here now in our Q1 Q2 benefiting us in the back half 2020.
Okay. That's helpful and then in HHS you referenced the China in U.S. capacity, that's driving the expectations for volume growth in the back half of 2020, just wondering if you could give an update on the timeline for that capacity ramping and getting sold into the market and then can you just remind us when you lap that customer loss that you.
Our first earlier.
Certainly the customer lapping happens in conjunction with our Q3 pivot to growth for HHS.
But China investments in should we just had a review yesterday those projects remain on track.
We are qualifying the machines running right now so we're running plastics through the line qualify materials and consistent with our expectations. The team has done a terrific job building a pipeline for that asset clearly, it's it's one of a kind of the growth dynamic remained very strong for this.
Product line supporting feminine care premium hygiene space the support from our end customers.
Has been very positive given us a lot of confidence that that will deliver as expected on time as we've outlined.
Okay. That's very helpful I'll turn it over.
Thank you. Your next question comes from the line of dashing than W. Baird. Your line is open.
Hey, guys good morning.
I guess first off can you just give us more color at volumes by sub segment for RPC, Tom you mentioned growth in categories, such as food and personal care.
Can you sort of quantified the volume growth and also how big is the industrial end market RBC with specific end market.
Goals.
Qualifies industrial within that and can you just kind of quantify the volume decline specific to RBC industrial.
Sure the.
Listen when we when we first did our due diligence RPC. We were very attracted to the fact that have had a portfolio.
Very similar to what we had and Barry North America, 70% of the portfolio and RPC as consumer non discretionary products, such as food and beverage healthcare personal care. The remaining 30% of the markets tied into things like building construction waste management distribution and other specialty segments.
We clearly would tell you know the RPC business. We believe can we will be a low single digit growth business and while there are certainly can be factors in Europe that are more macro oriented somewhat out of our control. We still feel that this business will be low single digit growth.
For our company going forward.
Okay, and then just you know in terms of EBITDA cadence for fiscal year 20, I mean, there's a lot going on with RPC that synergies, but also the volume inflections and M&A, Jason as I mean, how would you help us think it's about how to think about EBITDA from first half second half or however, you want us to think about it. Thanks.
Sure Good morning Ghansham.
What I would say our historical pattern of EBITDA RPC doesn't change as Tom said its products and market similar to marry so.
We started off the for the year. The December quarter is typically our weakest quarter, followed by March and then typically June as are our strongest quarter.
What September being the second strongest quarter.
And then again you have to recognize tierpoint the synergies will build.
As well as the year goes but in terms of excluding synergies. The ranking again would be June from strongest to weakest June September March and then December .
I would say if you look at our historical results from Barry.
It would be very similar post RPC.
Okay. Thanks, so much.
Thank you. Your next question comes from the line of George Staphos of Bank of America. Your line is open.
Hi, This is my bond sitting on for George He's traveling today I just wanted to.
A quick question on hydrogen specialties can you.
Yes.
Paired remarks, but can you kind of go through a little bit more detail on what's driving the as $14 million of negative price I'm, sorry price mix and kind of how you expect that to.
Prove as you had their off 2020. Thank you, yes. The drivers we've talked about some previous causes there was a technology change.
That ultimately created a headwind for us will pass through that headwind beginning in the third quarter.
During that time that will obviously on a comp basis provide lift an improvement, but the real driver comes from the benefits that we've been working towards which is increasing our share of wallet with existing customers, which continues to go very well the deployment of our new Arfive technology in Asia, Our air filtration investment in Asia.
As well as our premium wipes technology in North America. So it's really those things that are driving the benefit coupled with recent investment in clean room medical packaging, where we were very.
Excited about signing a 10 year supply agreement.
With an end user in this very stable high growth space. So those are the key drivers for the pivot.
Inside at HHS.
And particularly on for from price cost as well or were those kind of more volume comments.
Yes, the impact of those volume on price cost. So we've got the double factor of incremental business coming on the costs associated with that starting up new lines.
Starting up new business.
And maintaining the costs that we had on weaker volumes right. So we're at rather than flexion on on price cost as those volumes ramp up.
Got it. Thank you appreciate it.
Thank you. Your next question comes from Brian Brian material Goldman Sachs. Your line is open.
Hi, good morning, guys and thanks for taking the questions.
RPC.
It looks like the EBITDA came in I know the acquisition contribution total was 198 seemed like maybe RPC, specifically might have been 192 that seemed a bit better than what you guys had been targeting from my recollection.
Just wondering if you could comment how much of that might have been any synergy capture you that occurred in the quarter.
Might have been already kind of getting a head start on the 150 versus just maybe better margin or our underlying trends and sort of related to that the volume outlook for RPC. I think you talked about a 1% or low single digit kind of an increase which which is consistent with what you talked about in the past, but I know in the past after you're done acquisitions, sometimes there's a little bit of going through the portfolio.
Improving some of the less attractive pieces just wondering if you if we should expect a similar kind of phenomenon in in RPC and 2020, when we're looking about looking at volume growth.
Yeah, Brian Good morning, we're really pleased with the start from RPC, the synergy realization was pretty modest in the quarter.
Not a meaningful impact there so the.
The results there were driven by.
Our strong strong operations as we said enough in them.
Prepared comments, we're off to a good start there with respect to the last part of your question.
On volumes the company has a very historical track record of delivering low single digit growth.
And we're really excited about the combination of the products with our existing.
Businesses, and we're going to look to overdrive that down is this will be a multiyear process and we're excited about the opportunities, but the combination of the product lines will provide globally and brought I'd add I just had reiterate remarks at the transformational in nature of this as exciting for us because it gives us an opportunity look beyond.
You know the the first two three years in terms of process optimization throughout the combined business the sharing of best practices, which the collaboration between the two groups both consumer pack International consumer packaging North America has been outstanding where we're saying if theres product line components that we ultimately bring.
Bring value in through legacy RPC that we ultimately can adopt in North America, let's do it quickly and vice versa in North America. So that collaboration itself is actually creating a pipeline of opportunity.
For us to bring more value to our end customers.
Okay and final one from me just.
Congrats on getting the SFL deal close just wondering if as you're looking at the portfolio of diverse businesses. You've got now following the RPC deal closing any any updated thoughts on potential further divestment opportunities as a way to sort of accelerate the deleveraging process.
Nothing nothing would comment during the call, but suffice to say, it's an ongoing process inside our company and with our board of directors relative to doing portfolio reviews.
Making certain that we understand how and where we extract value in each of our portfolios and what its strategic fit is based on our overall organic growth and capital investment objectives.
Okay. Thanks very much.
Thank you. Your next question comes from the line of Neel Kumar of Morgan Stanley . Your line is open.
Right.
Thanks for taking my question, so you've talked about a pipeline of $120 million than you've ever revenue opportunities in EM can you just give us a sense of what type of new product introductions disconcert stuff.
Multi layer films.
And converted films are two of the key components.
For engineered materials, those tend to be higher margin components for our business.
And again, we like it because they are specified materials, you know with a specific end user this isn't.
This this is tied to a targeted piece of business with a known no demand outlined so that's that's why we're we enjoy that that component of our pipeline is far more predictable.
Great. That's helpful and then it and consumer packaging North America are there any other key drivers of the volume improvement over the past six quarters, David call out besides but the growth at foodservice products and what's your confidence that the growth can be sustained.
I have a high degree of confidence that the growth can be sustained insider consumer packaging business, a foodservice space continues to impress the performance in the quarter versus a very difficult comp and prior year.
I think is a strong testament to that.
We're looking to translate those successes not only in foodservice, but the methodology about how we're penetrating that space.
Incorporating that both in our closures business as well as our containers business.
And I'd also say that.
I am now as well, but the combination routine RPC and legacy berries created the world's largest animal label.
Provider worldwide, so all those things.
Go into our level of confidence and again, we continue to.
Further penetrate foodservice by consolidating other skews inside that space, both plastic substrates and others.
Okay, great. Thanks.
Thank you. Your next question comes from the line yet Tyler Langton of Jpmorgan. Your line is open.
Good morning, Thank you I'm.
Just on the the synergies I know you you talked about getting 75 million of 150 million total this year.
Can you talk a little doubt is that mostly this year procurement or just sort of where you're seeing sort of somebody a the initial successes.
Like most of our acquisitions that the primary driver typically is on materials.
Followed by process improvement optimization.
And then where there's opportunities for.
Redundant synergies in terms of people are process.
Got it.
And then just switching the M.B. I think you mentioned the the 150 million.
After that Capex investments over the next three years can you just talk a little bit about I guess.
The timing of that and kind of how we should think about those investments benefiting sort of revenue and earnings.
Well when we said that's going to play out over the next several years.
Two things one we're continue to make investments around automation and finding ways to to further automate our facility secondly.
Investment in converting technologies converting technologies allow us to continue to wait reduce and incorporate other materials in those films substrates to lower the basis weights, while at the same time driving.
Performance that is consistent with what was the legacy product.
It's too early to talk about but we continue to make.
Pretty significant strides in that business, while relative to weight reduction.
Relative to our current standard unit of measure which is pounds.
So the team's doing I mean, very good work right there in a lot of the work that we've done around.
In a bump vacation by raw materials.
The know how do we have in the business relative to material science is is allowing that.
With some converted films being lightweighted up to 20% so.
When you think about that on a comparable basis, it's quite significant and generating the same physical properties. So that's that's a general description of those investments.
Great. Thanks, so much.
Thank you. Your next question comes from the line up higher White Deutsche Bank. Your line is open.
Good morning, everyone. Thanks for taking my question just focusing in on engineered materials. The price mix headwind kind of continues to accelerate sequentially here now for few quarters can you talk about competitive dynamics in this business is it becoming more price competitive as you start to see softness and industrial markets or is this something that's more related to.
Cost inefficiencies from the material qualification.
Yes, it's as we expected a Kyle we we as we talked about earlier in one of the questions.
We're onboarding the new business and so we've got costs associated with Onboarding that business.
But yet while we're still lapping the year over year headwinds from volumes.
Obviously, we've got stranded costs associated with that that will be absorbed as this new business ramps up.
So as the business comes online we would expect that relationship that continue to improve sequentially.
Volume increases right now we're at that point, where we've got the cost associated with the new volume that's being incurred.
Without the full impact on the volume.
Benefit.
Got you that makes sense, just moving to H. and that's just trying to understand what's embedded in guidance, we've talked about the kind of inflection in the back half for this segment as as you out the customer product transition.
But just curious what guys assumes for the baby care market are you assuming a similar levels of weakness or are you assuming that kind of stabilizes in the back half there.
Yes in in aggregate, we're not forecasting significant changes in the baby category. However, the share of wallet gains that we've worked toward and achieve.
I will provide lift for us in the back half of the year.
Thank you good luck in the fiscal 2020.
Thanks.
Thank you. Your next question comes from the line of I wouldn't this momentum of RBC capital markets. Your line is open.
Great. Thanks, good morning.
Just to clarify the a volume outlook again I.
I thought I was under the understanding that I.
I guess could could potentially turnaround dispositive on growth in the March quarter, HHS and the June quarter.
And I guess now you're kind of maybe ex expect when that happened in the back half.
Am I right in that understanding if you push that out or and if so what drove that don't know nothing's changed same same projections relative to EM.
And and HHS that changed HHS is Q3.
He and his future no change.
Okay, Great and then.
Going back to the the price cost side, I know that theres been a.
Calling of lower margin volumes over the last little while in the them and so on.
But maybe you can just give us a little bit more on on a potentially how you expect to win back some share loss to being what it would it be necessary to compete on price side or how do you expect to I guess drive that volume growth.
Side of your own initiatives.
Yes, first we compete everyday as a low cost producer in the space, we continue to make investments in that regard and our AR.
Our core competency is the ability to work with our customer partners.
Things like I talked about where you ultimately can.
Find ways to reduce weight of substrates provide the same exact physical properties, we talked about the onboarding of two thirds of $120 million pipeline still to common that business in the back half made sequential improvement in terms of recovering distribution business.
And we plan to continue to do that and simply the capital investments I talked about you will not only benefit us by reducing material usage.
But also allow us to reallocate our labor towards more value added activities in the plant.
And also reduce our energy consumption. So those are the buckets that drive that change innovation is the continued improvement in the sequential improvement in terms of the volume recovery and to reinvest in our low cost position that we enjoy today.
And just lastly regarding your deleveraging I know that's.
A large focus can you just confirm that that that's the main use of capital. I mean are are you looking in any bolt on M&A or would you consider anything at this point or are you solely focused on de leveraging thanks.
The primary objective for us is to Delever the company I would say that.
The.
Cash flow generation in our company gives us an incredible amount of flexibility to not only reinvest in our business.
But simply also focused on those delevering objectives.
Okay. Thanks.
Thank you. Your next question comes from the line of gave hefty of Wells Fargo Securities. Your line open.
Good morning, Thanks for taking my question I'm going to try to take a stab one more time I guess at the EBITDA cadence Mark can you.
We expect EBITDA for the first fiscal quarter to be down on a sequential basis.
You guys are almost two months through that if you give us any color on that and then any change in I guess business trajectory, whether its legacy or RPC that you can call out or would like to.
Yes, it's certainly a December quarter again, as a weaker quarter seasonally although Barry is not a.
Significant seasonal business, we do have the holidays that impact our customers.
Given their shutdown so yes, the December quarter specific answered your question would be the December quarter would be segment, we would expect to be sequentially weaker than the September quarter that we're reporting on today and again that would build as the year progressive throughout fiscal 2028, just for to account for normal.
Seasonality and B as the synergies began to be realized throughout fiscal 2020 and ramp up.
Thank you for that and last one I don't always.
I know part of the rationale to acquire RPC and you guys have some overlap and blue chip customers has there been any inbound inquiries that you can talk about maybe in terms of.
I guess customers looking to source from you.
International basis, now that that you have the presence.
I don't want to get ahead of ourselves in terms of revenue synergies, but just anything you can speak up.
All the simple answer is absolutely we truly now have a global bag delivery capability.
Whereas previously we had in international presence today, we can coordinate action effectively.
In the specifier in North America, and we can convert in Europe , we can convert in China. We can convert in South America. So we truly have that global value delivery and that is.
One of those attributes we talk about our prepared comments it it's very synergistic with some of our other businesses in terms of people in terms of footprint and customer and certainly as as they look.
To grow their businesses, having you know a a single point of contact and ultimately coordinates everything from contracts.
Quality innovation and allows them to do that an international base its unique not not many companies have the opportunity to do that and it's certainly something that we'll look to extract.
Value from and I think the I would say since July the the amount of coordination between consumer packaged international and CP North America has been exceptional.
We've shared talent and it's going to go a long way to begin.
Further in those conversations to become quantifiable revenue and earnings.
Thank you.
Thank you. Your next question comes from the line Mark Wilde of Bank of Montreal. Your line is open.
Good morning, Tom Good morning, Mark.
Tom I Wonder do you know there's been homeless talk about the backlash against plastic packaging yet your.
European and North American packaging businesses had had volume growth in the quarter can you talk about what you're seeing from the.
Packaged food companies and CPG is right now in terms of packaging mix, yes, it's very fair. There's there's certainly a lot of question and interest in understanding what what's available right. They all want to understand what the what type of.
Materials from PCR will be available from a bio based perspective now we're going to have the opportunity to sample and trial chemical recycle materials. So there's a there's a big push in terms of ultimately what they might look to from a material composition composition perspective, but the number one thing that continues to get people the.
Attention and the biggest request that we have is how can you help was designed for sustainability to make our products.
Easier to ultimately recycle and re process inside of recycled facility secondly, how can Barry help us take weight on the products that we're using as an example, we gave a presentation at pack Expo.
There was we ran out of space for people the topic in subject matter was ultimately designing for sustainability.
As a result, we hosted a webinars this week.
Webinars, we had 367 participants and end users part of that participation all focused on learning more from us relative to what they should think about in terms of designing for sustainability. So two prong wait reduced understand how they ultimate design understand then ultimately what materials will be available.
And what the cost differences maybe versus version RASM. That's why we're certainly taking advantage of all the different possibilities but.
Because there is still not one that is our then I would say is the preferred way everyone know is heavily focused on finding.
Finding a way to eliminate waste getting into our environment and most recently I worked with congressmen do Sean here in Indiana and.
Represented 20, Cardenas on California, where they issued the recover act and the recover act is all about how we ultimately create matching grant to support expanded recycling infrastructure. How would also be supports private partnerships aimed at increasing the recovery of materials and it's a direct grant money to consumer.
Education recycle packaging. So we're in the early into this mark.
But we feel on a global basis, we are very well positioned in fact, we're evaluating over a dozen potential products.
Projects I should say in the recycling side that would give various strategic advantage helped drive end market demand for those materials and increased consumer recycling access so early innings more to come.
We're going into this knowing that whatever we do it's all focused on how we generate growth.
And greater shareholder value.
Okay and time I'm just curious in your prepared comments. This morning, I heard you talk a lot more about dispensing pharma and health care than I can recall in the past and it and it sounds like you might even be looking at some some investments or can you give us a little bit of color on that.
Yes, just a combination of the two platforms between our closures in dispensing solutions business creates about a 2 billion dollar business inside of Barry and when you consider that now we have the opportunity to take on any advantage products that legacy RPC.
Had already introduced or was marketing and deploy that in U.S., it's an exciting space for us. So this is definitely something strategic it's around that macro trend market, we've talked about before which is health and wellness the global phenomenon not going away and it's a great opportunity for us to participate in that and even the carryover.
The clean room medical packaging to support biopharmaceutical is another great example of we continue to look to find ways to pivot the portfolio to areas that have higher growth rate, where we bring an advantage and ultimately we can capitalize and bring value to our end customer. The long term agreement just as we did in the medical packaging side as well.
Okay very good good luck in the coming quarters. Thank you.
Thank you. Your next question comes from the line as well, but towards the I don't vertical research. Your line is open.
Hi, good morning, guys.
So first thing I've lived Clark failed beat the working capital contribution for these here and makes what's kind of embedded in that working capital.
Restructuring and other backup, especially for this year I think.
If we take into account the T.I. Ray I think to working capital now that it was around 140 million benefits. So as you can talk a bit about what things happening there.
Sure.
Good morning, yes. So the theory that you referenced that was settled and terminated in fiscal 2019. So that's a that's a cash out that will no longer exists going forward with respect to working capital in fiscal 2019, we did benefit from falling.
Resin costs in fiscal 2019, as those were passed through with lower selling prices as well as lower inventory costs. As we look forward into 2020, our assumption is essentially flat on materials.
We still have some integration costs remaining in fiscal 2020 relative to RPC immigration and so thats, a 90 million dollar headwind thats built into our $800 million guidance for fiscal 2020.
Perfect and on Capex I think the you know the 600 means that you're you know gold meeting to for fiscal 2020 seems to be obviously, all the higher end of what the company. What are your sales would do and been long term.
And I guess Bardulph rpcs prior projects may be country Butanes about I was when we open to normalized run rate than you have a slide was 900 million Plaza normalized free cash flow, how should we think about capex as a percentage of sales should be be reverted back to 4% or could your investments in for same a BBB keep.
Benevento, there around 5%, it's really going to be driven by what what opportunity. We have ultimately to continue to invest in advantage markets. Its product lines. It also may allow us to generate strong organic growth and that's part of the driver for the 600 million, it's actually a reinforcement that were.
Very serious about being able to deliver a organic growth across our portfolio and the capital investment is being supported by very good high return projects.
Great. Thank you very much.
Thank you. Your next question comes from the line of John Bob Cook of Bank of America. Your line is open.
Yes, Hi, this is George Staphos Hillary everybody sorry for joining the call late.
You may have already asked answer this question a couple of times.
My first question is really yes, Tom engineered materials, we incurred.
The discussion in terms of why it's been lagging in terms of performance.
For several quarters now yes. This is a business that.
Senior management is very very close to a knows very well.
It was a very large component of Barry.
Back number years ago, and from what was IPO and it just strikes us that it's just.
That it's still struggling at this juncture when you know the business. So while we know the customers. So well you know the manufacturing so well what comfort should we take that in fact, the business welcomed flat by the fiscal second quarter from what I recall on volumes and ultimately be back performing where it should be.
Based on history, and then how to fall on the on consumer packaging.
No I'm happy to George and I think it goes back to we still have two thirds of our $120 million pipeline to onboard inside that business. We made sequential improvement in terms of recovered the distribution business, but we're doing a george in a prudent manner, we want to do in a way that ultimately preserves the integrity of our leadership position the value, we bring and we're selling value.
While we do that.
Okay. So you remain very comfortable to Q3 Q.
From a physical standpoint, you've inflecting, possibly on volume and then ultimately earnings would that be fair my putting too much ahead of you at this juncture no that's fair.
Excellent.
The other question I had I was surprised what you said about trade show in the interest that you're getting.
On on plastic packaging, what are you seeing aside from the Cup and maybe that's the answer.
Food service what are you seeing resonate the most with the consumer with your customers right now can the new packages from very related Italy.
It strikes me that the ready to recycle program seems like it has some traction.
From your data is are the consumer companies find the consumer is actually buying into this being part of the solution. That's why you're maybe seeing some.
Improving volume or is that really still out in another world.
And that really driving volume at this juncture again I'm talking about the right and recycle program. Thank you guys. Good luck in a quarter. Thanks, George on its still a very small percentage of our business, but I think this is going to take time onto rollout I mean, there our third on number of products that we've introduced in the past that have strong sustainable story that the market needs to get comfortable around from a from a cost per se.
And in many instances and then ultimately the recycle how is ultimately gets recycled and reintroduced to be re process. You know as a key component. So I think how that infrastructure gets built over time will ultimately play a big rolled that I'm excited about the recover act ultimately coming on board and the work that the alliance and plastics waste is doing as well as bill.
Turning to showcase some opportunities in southeast Asia in terms of how we alternately heat plastic ways from getting into the the environment and ultimately allowed to be part of the circular economy. So I would just say, Georgia in a very early inning. It is not stopping us from presenting other solutions that are either lighter weight that.
Reusable recyclable compostable.
The amount of content, regardless of its chemical recycling burgeon materials PCR based biobase, we're really exploring every possible alternative to give our end customers the ability to choose and then they also may have to make the decision where their end customers relative to.
The cost and value equation, and what makes sense.
Alright, thanks, Thanks, Tom I'll turn it over good luck in the quarter. Thank you.
Thank you. Your next question comes from the line that Adam Josephson Keybanc. Your line is open.
Thanks, Good morning, everyone Hope you're Wow.
One on cash flow. So forgive me. If this is aspect what your cash flow being 100 million higher than what you had guided to was that resin can you just help me understand what exactly that was.
Sure. Yes, we had we had a benefit from working capital in the year again due to falling raw material prices, Adam and that was offset partially by expenses associated with completing the RPC transaction.
Fees to advisors.
Lawyers accounts bankers et cetera, so as benefit from lower raw materials offset by charges associated with completing RPC transaction.
Thanks, Mark I just want one other one on on your EBITDA expectation for this year I think on the last call you kind of got us to a range around 2.15 Deli and is that still your x. I know you've been asked about the cadence of EBITDA, but do you still is still expect that same 2.15, or so and within that.
What are your expectations for RPC specifically.
We don't provide explicit EBITDA guidance, but obviously from the.
From the guidance, we do provide there's an implied a number there and that number you're giving would be in line with that implied.
Result, with respect to RPC they were doing.
Call it $760 million ish of EBITDA.
We would expect again continued growth in that as well as the benefit from the synergies in fiscal 2020.
Now the RBC business keep in mind will be commingled within some of our segments.
As we mentioned in the prepared comments the North America rigid business was moved into our Cpnine business, you'll still see it as acquisition contribution throughout fiscal 2020, but again there won't be a separate line. If you will that you can tie to where you can add what goes into the components.
Our decisions as we go forward.
Thanks, I had just your leverage pro forma leverage at year end I forget if I.
I don't know if you mentioned that sure yes, we came in at 4.8.
Obviously, the strong cash flow helped us so our leverage came in at 4.8, our targeted leverage remains below four times.
Our again consistent predictable cash flow allows us to get below that enough.
In a very efficient timeframe and that's our top priority as a company. In addition to growing the company organically.
It's a lot mark thanks.
Thank you can see no further questions at this time I'd like to turn it back to Tom for any closing comments. Thanks, everybody for your interest in very global afford to speak into next call take care.
Yeah.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.