Q1 2020 Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to the very Global earnings Conference call.
So I'm all participants are in listen only mode.
Third we will conduct a question answer session and instructions will follow but this time.
If anyone should require assistance during the conference was pushed bar the numbers are off all the telephone keypad.
As a reminder, this conference call is being recorded.
I'd like to hand, the call, but your host Mr., Justin So will you may begin to culture.
Hi, Good morning, everyone welcome to berries first.
For 2020 earnings call.
Relative to call.
Her to the first fiscal quarter.
From 2019 core.
To begin our call like you mentioned that all website, we provided a slide presentation, you know kind of discussion this morning.
After today's call a replay will also be available on our website and very normal dot com under our Investor Relations section.
Joining me from the company I'm, very Chief Executive Officer, Tom Salmon, and Chief Financial Officer, Mark Myles.
Oh and Tom in March calling in today.
A question and answer session.
Andrew allow everyone the opportunity to participate.
Did you ask that you would limit yourself to one washing out of time, they bought back into the queue for any follow up for additional questions.
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 of the differences between the gap and non-GAAP financial measures are available in our earnings release.
Poster presentation on our website.
And finally.
Certain statements made today, maybe forward looking statements.
These statements are made based upon management expectations and beliefs concerning future events impacting the company.
Therefore involve a number of uncertainties and risks.
30, but not limited to notice crime in our earnings release, our annual report on form 10-K, and other filings with the FCC.
Therefore, the actual results of operation.
National condition of the company could differ materially from those expressed or implied in our forward looking statements.
Now I'll turn the call over to Bury CEO, Tom Salmon. Thank you Dustin and good morning, everyone. This morning, we'll be discussing several topics, including our fiscal Q1 results highlights from our four operating segments, including an update on the RPC acquisition and our expectations for remainder of fiscal 2020.
Afterwards, we'll be happy to answer any questions you may have.
Starting with our overall financial results and highlights for the quarter on slide four.
In summary, <unk>, our progress relative to our key three strategic initiatives remain on plan. As a reminder, these objectives are to generate sustainable profitable organic growth integrate the RPC business and continued to improve our strong balance sheet.
First our results inorganic growth progression were consistent with our plan specifically turning to slide five.
Total net sales and operating EBITDA were records for any December quarterly period at $2 billion $816 million and $451 million respectfully.
Overall organic volumes were flat in the quarter as we improve sequentially. Following our key objective of driving positive growth in our businesses I'm pleased to report that our North American consumer packaging Division delivered positive organic volume growth, while both our health hygiene specialties and engineered materials segments reported sequential volume improvement.
As expected.
Our consumer packaging International segment has gotten off to a solid start with cost synergy realization on plan and commercial activities to drive long term growth well underway our integration of the RPC business continues to move forward and synergy targets remain on track.
Lastly, I'm very proud of our continued momentum on strengthen our balance sheet as we were able to refinance and reduce our debt saving the company $45 million, an annual cash interest costs.
Now looking at some details specifically by segment.
Our consumer packaging North American business recorded stronger than expected organic volume growth in the quarter of 3% as we continue on FFO to focus on investing in growing markets, where we have advantage price.
And we're encouraged by momentum of the division delivery now seven consecutive quarters of positive organic volume growth.
Our health hygiene specialties Division reported flat organic volumes, excluding the customer product transition, we spoke of previously and saw sequential quarter over quarter volume improvement.
We continue to innovate deploying new capital for organic growth and focus on increasing our share of wallet with existing customers, while pivoting our business to faster growing markets, such as adult incontinence feminine care and medical.
Our investments made in China, and North America are on track and started benefiting us here in early 2020.
Insider engineered materials Division, we also saw sequential quarter over quarter volume improvement as projected and we made progress onboarding, our new business pipeline discussed in previous calls.
Additionally, we have started to deploy capital as part of our commitment of investing $150 million over the next three years toward growth in next generation products.
And lastly, our consumer packaging international business reported another quarter of solid results. This segment primarily consists of business from our recent acquisition of RPC group, which closed in July nine 2019.
Now been two quarters since we acquired RPC and we're even more excited about the long term benefits and strategic rationale this combination.
Our team continues to work diligently to identify opportunities and share best practices.
This acquisition has transformed Barry, creating a leading global company with an unmatched diversified global product offer and delivery capability, creating significant value for our customers.
Additionally, through our combined collaboration know how material science product development and manufacturing technologies. We truly are an innovative thought leader when it comes to designing for sustainability.
We continue to integrate the business with intense focus on realizing the cost synergies in our initial forecast of $150 million.
And finally before I turn the call over 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 volumes in all segments.
Additionally, I'm pleased to say, we anticipate delivering positive organic base volumes in the March 20 quarter.
Specifically, we continue to expect engineered materials to inflect positive growth in the March 20 quarter with health hygiene, especially since lacking in the June 20 quarter.
We remain committed to being a low cost manufactured with high quality products and service to our customers that are you every day in consumer centric product categories, such as personal care healthcare food and beverage and finally I want to remind our investors that as a global leader, we scale, an unmatched diversified portfolio bear.
He is a consistent and dependable free cash generator irrespective of cost volatility consumer demand or global macroeconomic conditions.
Globally, we believe plastics will continue to grow as it has for the past several decades was clear cost and performance advantages to support this expected growth our suppliers are committing billions of dollars in capacity additions with the benefit of low cost raw materials in the United States.
Now Mark will provide more details in his remarks, and then I'll come back to discuss our strategy and then open the call for questions Mark.
Thank you Tom.
I would like to refer everyone to slide six now.
As Tom referenced first quarter reported sales were up 43% to just over $2.8 billion. The increase included revenue from the acquisition of RPC and continued positive organic volumes and our North America consumer packaging business.
These positives were partially offset by lower selling prices due to the pass through our resin costs and the sale of our seal for life business.
From an earnings perspective than December core operating EBITDA increased by 36% to $451 million increase included contributions in the RPC acquisition synergy realization and organic earnings growth in our North American consumer packaging segment.
These improvements were partially offset by the sale of RCM for life business and anticipated unfavorable price cost spread and our engineered materials on health hygiene and specialty segments.
Now looking at the result of each operating segment starting on slide seven.
The prior year results have been restated to match the current structure.
For the quarter, our consumer packaging International Division delivered sales of over $1 billion and operating EBITDA of $142 million.
This division primarily consists of business acquired as part of the RPC transaction and therefore, we are not included in our historical results. So for comparison purposes, we are utilizing results prior to our ownership.
Legacy RPC operating EBITDA and volumes declined low single digits comparable to the prior year quarter.
Typically our pharmaceutical and waste management businesses produced solid volume growth in the quarter, along the flat volumes in our food business offset by general softness in European markets.
As a reminder, 70% of the portfolios consumer non discretionary products, such as food and beverage healthcare and personal care and the remaining 30% as tight end to end markets like building and construction automotive distribution and other specialty categories.
We now have two quarters of result, under our belt and remain very confident of the long term value creation opportunities from the combination.
Through these first two quarters, we are encouraged by the prospects on the business and proud of the execution of the team with the legacy RPC business generating low single digit operating EBITDA growth on a constant currency basis on slightly lower base volumes.
Next on slide eight sales in our consumer packaging North America Division were $680 million in the quarter, which was 13% higher than the December 2018 quarter. As a result of the addition of the North America rigid business from the RPC acquisition, along with better than expected organic volume growth of three.
8%.
The business has continued executing its long term strategy focusing on advantaged products and targeted markets.
These contributions were partially offset by lower selling prices on a comparative tractional pass through lower resin cost to our customers.
Operating EBITDA from the division in the quarter was $121 million compared to $88 million in the prior year quarter.
This 38% increase was primarily driven by the contributions in the RPC acquisition, including synergies from the combination and continued organic volume growth.
Turning to slide nine.
Our health hygiene, and specialties division delivered sales of $541 million in the quarter compared to $659 million on prior year quarter.
The decrease was primarily attributed to the contractual pass through of lower resin prices to our customers a sale of our sale for life business and the customer product transition on hygiene, we referenced on prior earnings calls.
Excluding the customer product transition organic sales volume was flat on a quarter and on track relative to our commitment to generate positive organic volume growth as we continue to secure incremental demand and pivot our product portfolio to faster growing end markets.
Operating EBITDA decreased by $18 million from the prior year quarter when adjusted for the sales with seal for like business.
This decrease was consistent with our expectation as highlighted on our last earnings call. As a result of unfavorable price cost sprint in the last earnings in the customer product transition.
This will be the last quarter and the customer product transition will have a significant impact on us on our year over year comparison.
Next on slide 10 sales for our engineered materials division was $585 million for the quarter compared to $661 million and the prior year quarter.
The decrease was primarily attributed to the pass through of lower resin prices and lower organic volumes, which were consistent with our expectation as we sequentially improved volumes and continue the qualification process of recent business wins.
Our effort and focus to regain market share with reach on local customers is positively impacting our results.
Operating EBITDA in our engineered materials Division was 101 million $106 million compared to $126 million in the prior year quarter, primarily as a result of unfavorable price cost brown as expected.
We are encouraged by the progress our team has made and the positive momentum of the business.
This momentum can be seen with operating EBITDA in the December quarter coming in higher than the seasonally stronger September quarter.
Slide 11 provides a summary of our income statement for our first fiscal quarter overall operating income was $199 million in the quarter compared to $176 million in the prior year quarter, primarily attributed to the improved operating EBITDA. It just discussed partially offset by incremental depreciation and amortization.
The acquisitions.
Our net income for the quarter was $47 million and our adjusted earnings per share was 56 cents, noting that we do not add back amortization of intangibles from acquisition.
If we were to add back this amortization. It would result in an annual adjusted EPS improvement over 30% and should be considered when comparing to other companies that adjust for amortization of intangibles from acquisitions.
Next on slide 12, the company generated $218 million of cash flow from operations in the quarter compared to $161 million in the December 2018 quarter, increasing over 35% primarily from incremental cash flow, resulting from the RPC acquisition.
Net capital expenditures in the quarter were $148 million as we incurred spending on cost reduction initiatives as well as customer linked growth related projects and inline with our 600 million dollar plan for fiscal 2020.
Our free cash flow for the December 2019 quarter was inline with the prior year quarter of $70 million.
For the four quarters ended free cash flow totaled $764 million.
With our substantial free cash flow and our commitment to strengthen our balance sheet. We completed a partial redemption of $100 million on our 6% notes during the quarter and also issued a redemption notice on another $100 million at close just last week.
We're pleased to report that we completed our first issuance into the European bond market opening a new market for Mary.
We issued two first lien notes, a 700 million euro five year bond at a 1% fixed rate and a 375 million euro seven year bond at a fixed rate of 1.5% with the proceeds used to repay our 1.1 billion euro term loan.
Also during the quarter, we refinanced foreigner quarter billion dollars of our us term loans, reducing the interest rates brand by 50 basis points.
Annual cash interest savings from these recent refinancings and debt repayment is $45 million.
We remain committed to maintaining a strong balance sheet and are consistently increasing dependable and improving free cash flow provides us the opportunity to further improve our strong balance sheet as we have demonstrated historically.
Our fiscal year 2020 free cash flow guidance and assumptions are shown on slide 19. Today, we are reaffirming our fiscal 2020 free cash flow of $800 million, which includes $1.4 billion of cash flow from operations, partially offset by capital expenditures of $600 million.
This guidance includes a use of cash for working capital and other restructuring related costs related to the RPC acquisition of $90 million, along with cash taxes, and $160 million and cash interest of $500 million.
Based on current interest rates, we will have a tailwind on cash interest given the completed refinancing and debt reduction just referenced.
Additionally of softness in European markets persists, we would anticipate a headwind to our fiscal year earnings forecast.
The volume trajectory of our legacy businesses remain on track as we anticipate positive organic base volume growth and our March 2020 quarter.
We are proud of our history of exceeding our free cash guidance, each and every year.
Looking beyond 2020, including realization of synergies and excluding the associated integration costs, our normalized free cash flow would be more than $900 million, which represents a free cash flow yield of nearly 15% using our quarter end market capitalization.
This concludes my financial review and now I'll turn it back to Tom.
Thanks, Mark now across the company as we look forward. Our teams continue to be focused on integrating RPC acquisition, optimizing our cost structure and fully realize an acquisition synergies along with managing the investments in growth initiatives in each of our divisions going forward. We will continue to focus on locating and identify inorganic growth opportunities with target.
Good investments in select markets with advanced innovative solutions to provide high quality products and service to our customers.
Next the transformative acquisition of RPC gives us a world class product innovation engine, where we enjoy a leading positions in higher value added closures dispensing systems medical devices and healthcare packaging.
We have it will continue to commit resources to create profitable and sustainable organic growth across these markets.
Similarly, RPC presence in emerging markets complements various growth objective in multiple industry segments.
Strategic Merit long term benefit financial impact this combination represents an incredible opportunity for all stakeholders.
Being able to leverage our combined know how material science supply chain product development manufacturing technology and sustainable solutions gives us certainty that the combination will benefit Barry in the years ahead.
Despite the preset Im sorry, we remain confident in our total cost synergy target of $150 million with half or $75 million expected to be realized in fiscal year 2020.
And again with the RPC acquisition, we can generally say, we're even more excited now than ever about the growth potential of its combination the best practice sharing and global servicing capabilities. It will provide coupled with an unmatched unique set of global product solution offerings for our customers, creating an extraordinary opportunity for all stakeholders.
Which will generate much value. We continue work diligently across all our businesses to grow organically and I've been able to demonstrate organic volume growth by provided advantaged products and target markets as evidenced in our consumer packaging North America segment, which has grown positive bonds the past seven quarters.
Organic growth projects in both engineered materials and health hygiene specialties divisions remain on track and we remain confident in our projections of mind inflection for these divisions the fiscal 2020.
Our record level of expected capital expenditures in fiscal 2020 of $600 million is further evidenced our commitment and focus on organic growth, while maintaining our low cost position in the markets. We serve to drive further value for Barry.
Additionally, I want to highlight again the continued strength, we are seeing in our consumer packaging business.
Despite the perception of possible headwinds regarding plastics, we continue to grow our share versus ultimate substrate evidenced by nearly two years of averaging 3% organic volume growth inside our north American consumer packaging business.
Through plastics advantages of offering lighter weight clarity design versatility durability protection and costs.
For these same benefits it has taken considerable share over the past 50 years, we now see additional opportunities as we designed for sustainability and provide optionality for our customers to reduce plastics way.
To be clear, we're doing everything possible to increase in demand of recycled materials, such as Lightweighting re formulation tagging and identification and chemical recycling all in an effort to create a more circular economy.
As the market navigate and choose the best options to improve recycling the rates and reduce plastics weight, Barry along with Rpcs already proven expertise puts us in a leadership in scale position to assist our customers meeting their sustainability goals in initiatives.
Lastly, I would like to highlight that we remain committed to maintain a strong balance sheet and we are well positioned to continue our historical track record of growing our free cash flow.
We feel very confident in our ability to meet our 800 million dollar free cash flow target fiscal year 2020, just as we've done every single year as a publicly traded company and we're equally confident as our in our expectation to volume trajectory in fiscal 2020.
And finally, Barry will continue to take the steps necessary to remain a leader in the markets, where we participate through a relentless focus on building and strengthen our competitive advantages to ultimately maximize shareholder value.
The management of Barry continues be focused on finding ways to extract more value for our stakeholders by reinvesting in our leading low cost position leveraging our resources around the businesses with the greatest opportunity to growing create value for our customers all while doing our part to protect our environment.
Im confident that the people of variable continue to drive positive result, and achieve our goal is an mission of always advance to protect what's important.
Thank you for your continued interest in bearings and at this time, Mark and I'll be glad to answer any questions you may have.
Ladies and gentlemen at this time, we'd like to open up the question answer session. So questions. Please press star and the number one telephone keypad.
Thats far one you asked a question.
Our first question sounds from the line of Neel Kumar from Morgan Stanley Plan is open.
Hi, good morning.
Fail.
You talked about some earnings risk when the weaker European economic environment can you just given a sense of how you quantified a downside and how are trends looking so far in your March quarter pretty industrial piece of the business for RPC.
Well like we said where it it's it's early in the quarter right now, but clearly.
While we're pleased with the progress we made inside of RPC relative to synergy realization, we did see softness in in our industrial space.
And generally just a European markets market landscape as a whole both eastern and Western Europe that was offset somewhat by strengthen our pharma business waste management and the food business was relatively flat.
So again, we are assuming going forward flat volumes for the legacy RPC business.
And at this time, we're we're watching it closely to see just how transitory. This is at this stage.
Okay.
Thanks, and then just for my follow up.
Good just give some more color on the the price cost headwinds and M&A business I know that some of its been driven by the costs Onboarding business and the negative operating leverage but you also expect that to inflect positive in Twoq EM in Threeq for HHS on with volumes and then are you in what are you embedding in terms of price cost in your full year guidance. Thanks.
Yeah sure for both businesses, we expect fat relationship that continue to be negative.
In the March quarter, and expect inflection to occur within the June quarter for both HMS on M. for the same reasons as we continue to see the volumes inflect on some of the startup costs associated with a new assets wind down in the upcoming quarters.
Both I would say inflection within the June quarter.
And that is both of those assumptions are embedded within our guidance.
[music].
Operator next question.
Our next question comes the line of George Staphos from Boa. Your line is open.
Yes.
Hi, everyone. Good morning, Thanks for all the details.
Got it early in the year and I wouldn't have expected due to adjust your guidance.
Either way frankly, unless something significant change, but nonetheless.
One of the the obvious question I think Neil was touching on it a little bit is.
You know the risk that your for his answer maybe doesn't to your free cash flow guidance. So is there is the takeaway.
Yes, you have gotten whatever after tax perhaps about a $30 million benefit from the refinancing.
Maybe a little bit less back because it would happen partially through the year.
Because of the European risks is that basically one offsetting the other in terms of why you didn't adjust guidance now or is there something else.
That's at play here, perhaps it's just it's too early near to adjust guidance and again, if you're NRC part two of my question here and we're trying to determine what combination of macro or other fundamental trends that we could track from the outside market.
I would occur that would.
Make reaching your guidance a little bit.
More difficult.
That then currently has a case thank you.
Yes, I think George relative to the interest comment it's a combination of the refinancings that repayment as well is softer interest rates.
In the order of magnitude of all of that wouldn't be found a tailwind of $50 million that's pre tax.
Fiscal 2020 relative to our original guidance to your point, it's still early in the year up a based on current conditions. If interest rates were to remain the same on thing for play out as expected. We would have a tailwind of about 50 million pre tax on interest.
Okay.
Relative to European.
Economies in our guidance.
As you pointed out appropriately it's early in the year, we have a flat assumption as you may recall embedded in our guidance.
It started off a little weaker than that in Europe, we had offsets in our North America consumer packaging business as well as Hh announced that got off to a little stronger start relative to volumes, but helped to offset that weakness in Q1.
As you pointed out it's just early in the year, we have a short cycle business to the extent European economies stay the same as they did in Q1.
It would be a pretty similar offset to the interest savings that we have but as you said still early.
We'll continue to update the market on a quarterly basis, and George I would say any any macro factors in Europe, you know I know, we believe ultimately will be transitory.
The business.
We'll be a low single digit grow or long term, we have no no doubts about that whatsoever. We continue invest in aspects that business, specifically around dispensing solutions enclosures.
Because as with the combination of RPC in Europe, and legacy Barry we have a global leading portfolio around those product lines, serving areas like health care pharmaceutical as you heard from our results both both those business long through with food being flat and waste management was favorable as well so.
A little early in the year, but we're just articulated what we're seeing from a macro perspective.
But by no means do we think that has any negative impact relative to our expectation that this will be a low single digit grow or long term, but if the exit rate continues the rest of year basically best you could model now so we won't hold it to this because there's so many vagaries and a model in a forecast anyway, it would offset the interest, but hopefully it shouldn't continue for the whole year that.
Sure summary.
Okay fair Okay. Thank you.
Alright, guys. Thank you very much.
Our next question comes from the line of as to me.
CD blends open.
Hi, good morning.
Column I think both your legacy business and RPC have facilities in China and I was wondering if you could just remind us what your total presence in China is now from a sales perspective, and then just what impact you are seeing or you might anticipate seeing from the Corona virus.
Thanks, Anthony we've got 15 facilities within what I would describe as the effective areas of China and Thailand.
Those regions represent about 5% of our overall sales I am a I'm frankly, very proud of our Barry team.
In China, we are actually prioritizing the manufacturer of materials nonwovens, specifically for the healthcare market, we have been working with local authorities.
To maximize 24, seven the production of surgical grade base mass materials, and 95, respirators as well as surgical gowns and drapes for the protection of airborne and blood borne.
Pathogens in the region.
Our plans continue to operate we continue to work closely.
With the relevant health authorities with the priority of making certain our people are safe, but similarly.
Consistent with our mission of always advancing to protect what's important we're providing products on the non woven side to support what is a growing crisis around the world.
With protective solutions specific to face masks downs and in the United States the production of.
Disinfecting wipes for surgical suites and other region. So the business is very active relative to that and we are prioritizing the health care and medical portfolio across all of our sites specifically.
In our in our NAND high.
Silly.
In in China.
Okay.
Okay, that's great to hear.
I guess, just sticking with a kitchen as you indicated organic volumes were ahead of your expectations in the quarter. It seemed like some of the big customers in this space, maybe had a tough quarter from a volume standpoint, just wondering what you're doing that kind of allowed you to outperform your own expectations in the quarter on a kitchen us we have.
I'm very proud of this team and as we've talked about for.
Several quarters the level of agility that this business showed when frankly, we made a growing a focused effort to increase our share of wallet with existing customers. We made targeted investments in faster growing regions of the world, We pivoted our portfolio to areas such adult comp.
Thats feminine care, biopharma and specially applications and paying dividends.
I will reiterate I'm very confident we will hit the volume inflection as we've committed.
Okay. That's helpful I'll turn it over.
Our next question comes the line of done Sean Sungevity from Baird. Your line is open.
Hey, guys good morning.
Good morning.
Hey, Tom just picking up on that last comment on the March quarter volume inflection year over year and just to clarify is that comment specific to legacy Barry So CP North America engineered materials and HHS or does that include RPC as well and if so does that assume the RPC volumes will be flat.
Just trying to get a better sense of that yes relative to the organic volume tied to legacy Barry that be the organic definition.
Okay and then thanks for clarifying for and then for the OEM segment.
It does have some level of macro economic exposure I think with industrial end markets etcetera can you just give us a sense as to how big that industrial end market composite would be for that segment. How did they perform in the December quarter and what it what are you embedding for that specific end market for the March quarter.
Yes.
On previous calls we've talked about our efforts to ultimately.
Regain our share at small and midsized customers I I'm very pleased with our progress towards that objective.
And ultimately driving the confidence that we have in the volume inflection I will state that the month of December for engineered materials business was positive on a year over year basis, which is a positive inflection for us relative to our AR.
Q2.
Pivot to positive growth. We are represented by a small now mid size as well as national distributors. It was a key objective for us to regain that share.
And similarly, we're also as market talked about some of the price cost headwind part of that's also driven by additional resources that we brought into the business from a technical perspective.
To not only onboard new demand pipeline that we've talked of in the past, but also relative to the support of our capital investments, which are about $150 million. It will invest over the next three years to support not only next generation products, but also.
Invest in our conversion cost to make certain that it would that we maintain our low cost leadership position I'm also pleased that from a commercial perspective. The team has done an excellent job not only working with our operations to onboard the pipeline, but also continue to build that pipeline and I feel pretty confident.
The the size of the pipeline that will enjoy in 2020 will be consistent with what we saw in 2019 as well. So the commitment that we are making towards organic growth. It's real it's for all of our businesses again with the objective to have all our business to delivering low single digit growth.
[music].
This is morganton North thing I would add is so engineered materials is.
Almost exclusively in North American business, our health hygiene and specialties is global business.
Where we did see some softness again in Europe, they were able to overcome that in the other regions and achieve flat volume, even with that weakness I think thats a great point. It is as Mark said the weakness we saw was not tied specifically to RPC. We sought similarly in our in our European based business tied to HHS, but.
We were fortunate to offset with strengthened CP North America.
In North American HHS business in the quarter.
And just just to clarify that 70 34, RPC that you sort of outlined what did that 70% do from a volume standpoint in in the December quarter, and what about the 30%. Thanks again.
Yes, I don't I don't have that breakdown.
In front of me gone from I think the weakness there was more pronounced in the 30%.
Then the 70%, but I don't have a broken down in that in that manner.
But it was a larger negative in the 30% more industrial type applications on the legacy RPC more industrial applications automotive.
Some softness as well as you've heard and other calls relative to the personal care business.
Got it thanks again guys.
Our next question comes from the line of Tyler Langton from JP Morgan Your line is open.
Good morning time, our thanks.
I guess now that you've them set time to dig it'd be seal. It more I mean are there any I guess assets that you'd kind of consider selling and then also just have you rationalized any products and it was not a whole lot overlap with your sort of consumer North America, but has there been any sort of rationalization, that's sort of wait on volumes.
Not not significant rationalization from an RPC perspective, but I would note anytime we do an acquisition and with a portfolio the size of berries as well it prior to the acquisition of RPC, we're constantly looking at the portfolio and determining if there's areas that all.
Ultimately.
Aren't going to be prioritize relative to our growth objectives relative to.
Pairing are shutting businesses, that's an active process.
That we undertake and you know at a point in time that we have anything to share that is actionable will be certain to share now on a on a future call.
Great and then just you know with consumer North America, the the volumes at 3%.
I guess, just give a little bit more detailed.
What's driving that growth and then next compared to last quarter you take it to think that high rate sustainable is kind of what you think about that for the back half of the year, yes that good question. If you listened CP the business that again, we think we talked about in previous calls you know, we've we've been investing that business relative to organic growth now.
To support our objective to deliver low single digit growth I would say CP is going to be a low single digit growth.
Producer clearly we were pleased with 3% in the quarter, but we thought from a range of product lines inside that category containers bottles.
Pharmaceutical healthcare, our vials business were all strong in the quarter and we're really pleased with the pace of progress from those teams and the pipeline. That's ultimately they're executing against that will benefit us not only here in 2020, but certainly 21 and beyond this is.
This is a strategic commitment and objective for our company to deliver the growth and we're applying the right resources towards the right targeted investments to make it happen in the fact that we saw growth across such a diverse number of segments gives us a great deal a competent and what we're doing in CP North America.
Is the same thing that we're doing in deploying in the acquisition of RPC, making certain that we're prioritizing our investments where we can further stimulate growth where we can expedite speed the pace of growth in businesses that we believe we have a sustainable differentiated advantage. The same model that we're applying across all the businesses.
Great. Thanks, so much.
Our next question comes from the line the Brian Maguire from Goldman Sachs.
As open.
Hi, good morning.
Just wanted to come back to some of the the differences in volumes between.
North America, and international consumer and I guess Europe in general.
Our next time, you said that you're not seeing any real impact from the sustainability conversation.
I guess the questions really why do you think so much of the weakness that you're seeing in volume is is taking place in Europe right now I know their economies, maybe a little bit slower than in the us.
It seems like the consumers, maybe holding up our I just wondered if you could talk about if you are seeing like more pronounced destocking there were things like Brexit if any impact.
And then just sort of related to that 30% of that consumer international business is sort of more industrial facing maybe why not put that in the EM segment or break it out a little bit separately, because it does seem like a lot of the volume weakness or call it out or more industrial cyclical markets, then that clearly the more stable consumer markets were used to seeing.
So I would say the bond they don't how we ultimately pivot products and given segments. It's it's something that we look at on a regular basis actually we did we did some of that.
When we first but RPC by moving some of the North American businesses from international to our North American sided CP.
You said that 30% tied into things like automotive and if you look at the major economies in Europe relative to automotive demand I think about Germany think about the UK think about Spain.
You've got you've got economic softness in those regions I believe that is transitory.
And we continue to believe though this business will be a low single digit grower and it's really about you know there were pockets of de stocking or softness tied to personal care and you've heard others mentioned that we saw some of that as well, but by no means is this a component that.
We're losing share to other substrates I reiterate this is not about us losing share to other substrate. This is about transitory.
Macro softness specific to our our industrial base businesses.
Okay.
Separate question on capital reallocation priorities.
Yes. This call. It others you guys highlighted the free cash flow yield if you think that the attractive valuation metric.
Yeah. The priority has clearly been to repair the balance sheet de lever, but we know what the stock under pressure.
Again.
Any thoughts on maybe delaying the deleveraging process and restarting the buyback authorization is that something that's on the table.
Our our priorities are clear what we stated we're going to de lever the company get our leverage back below four times.
And ultimately deliver on our commitments relative to growth along with the predictable free cash flow, which is over $900 million on a normalized basis.
And I think things will take care of themselves.
This this business now with the ability for us to deliver value on a global basis and with the diversity of our portfolio with the strength of the sustainability capability. We have both from a design as well as the use of post consumer chemically recycled mechanically recycled materials.
And our ability to ultimately interface with our with our end users to the degree we are to support waste reduction. The circular economy is is frankly, a very strong value proposition.
We announced yesterday.
Partnership with Georgia Pacific further reiterating our ability to support the circular economy, where we'll ultimately take recycled materials.
From Georgia Pacific will ultimately reintroduced those into new products again, demonstrating our ability to deliver on that commitment to reduce plastics way to take advantage of a valuable raw material and resource and we have the ability to partner with key end users and partners like a Georgia Pacific with all the end user.
Is that we serve throughout the market, we're doing that as an example, and what was announced yesterday. We're doing this in the E Commerce space.
And there's a lot more to come this is an incredibly dynamic time and we're we're thrilled to be part of the narrative.
Hi, guys, thanks very much.
Our next question comes from the line of Vishwanathan from RBC capital markets. Your line is open.
Next question.
Our next question comes from the line of Mike Let me hit from Barclays. Your line is open.
Thanks, Good morning, guys.
I guess first worst first on the resin side, we've been hearing from the resin producers about greater discounting in the U.S. market just given the new supply there I know you're already quite a big buyer in that market, but I was curious if you're seeing any incremental impact from greater resin discounting in the market today.
Listen the majority of resin for us is a sensibly a pass through.
Clearly what I would what I think most partners that we see continued.
Stability.
In the commodities markets.
Unlike that we've seen in the in the prior years and Thats stability ultimately.
As a plus you know as you're all aware there has been significant investment made in North America relative to Polyolefins.
And clearly it supports.
Frankly from a cost perspective.
The value of of this material versus other substrates. So.
Yes, I think it's more of that we're seeing not only in RASM, but frankly other raw materials.
As well as freight greater stability.
This year than we saw last year for sure.
Got it Thats helpful. And then I was hoping you could provide a like on like volume number for the consumer international business for the quarter I think that was the one side when I didn't see a volume number four in the release.
Sure It was down approximately 3% year over year.
Got it thank you.
Our next question comes from the line I know it to shop from BMO capital markets. Your line is open.
Hi, good morning.
Good morning, I want to go back to this side, Georgia Pacific announcement, you made yesterday on recycling plastic is this similar so what rpcs already doing in Europe, and and can recycling plastic waste eventually be a profit center for Barry.
We we're not doing this just as a public service, we believe any opportunity to monetize these opportunities to recycle materials to eliminate plastics weight.
Given Barry scale number of facilities and ability to reclaim reprocess you know as unique value proposition. So yes, we'll look to continue to replicate this the differences in it's similar to what we do in RPC.
Not exactly the same but the project with our peace with would Georgia Pacific Inkjet very unique that you're taking you know and experience.
Company in the recycling industry, the opportunity to collaborate and partner with them.
To remove these materials from.
Landfills reincorporate them in new products.
Is it an exceptional opportunity and we clearly believe that from a scaled perspective that is a competitive advantage for us because we have the end use relationships the number of manufacturing converting sites to ultimately execute in it against that your comment relative to our PC again, though in terms of what.
They are doing from recycling, we're learning a ton from them on they clearly when we bought them were further ahead.
From a sustainability perspective, and the opportunity to steal the best practices from them.
And explore other opportunities that we can participate in the circular economy, whether it's come up recycling mechanical recycling, it's something we're really encouraged by and frankly RPC is help enable that for us.
Great. Thank you and then for my follow up question, sorry, if I must admit this can you talk about food service volumes and consumer packaging in the quarter and also what you're seeing in foodservice relative to the battle between plastics fiber and other alternatives.
Foodservice continues to be a strong performer.
Similarly, supported the positive growth in the quarter.
And I would only argue that the success of that business.
You know over the last two years.
Has been driven by substrate conversion.
In our favor.
Okay, great. Thank you very much.
Our next question comes from the line of Carla White from Deutsche Bank. Your line is open.
Hey, good morning, everyone. Thanks for taking my question.
Just following up on the Georgia Pacific announcement, and the talk on post consumer resin curious how much post consumer than you currently use and where you think that can go and the next few years years and then on top of the are you finding that customers I think we'd all agree. That's the brands are wanting to become more sustainable but are you are you find that customers are actually will.
To to pay up to use this kind of materials versus version.
Our percentage of use in terms of.
Most consumer materials relative or overall spent it was up on a year over year basis, but it's still relatively smaller percentage of our overall spend from a raw material perspective, I would tell you that discussion in conversation with end users is better.
More collaborative.
More balanced than it's ever been.
The both I think converters like ourselves as well as end users are balancing.
Not only.
Supply.
But ultimately determining what the best sustainable designs will be for them going forward and I think this is going to continue to materialize throughout the course of the year, but it is it's very encouraging.
The level of dialogue and the percentage of time that we're spending collaborating with our end users on how we can meet their sustainability objectives of reducing plastics weight, reducing waste to landfill.
And supporting.
Our objective and certainly our.
Our commitment to the lines to end plastics ways of eliminating plastics weight Dan.
It's been very positive I've been doing this a lot of years and.
The dialogue is more actionable and better than ever before.
We had very believed that our ability to educate.
Around designing for sustainability and the alternatives that are available our end customers are real clearly right now there is a there is a.
Disparity between burgeon cost and re recycle cost.
But over time as demand continues to increase that will that will level set and frankly.
Some are challenging themselves to take on the responsibility and past that cost forward. So we'll see it's going to continue to evolve overtime, but I will tell you. It's not just it's just not commitments on paper the discussions are active and their actionable and I expect to see that that.
Number in terms of post consumer usage and demand increase as well as the objectives to overall wait reduce which Barry is similarly, and industry, leading our ability to reduce and take wait out of our plastic parts.
Got you that's helpful. And then just a quick one if I look at the the normalized free cash flow. The 900. It can you tell me bridge. The 800 this year that you're guiding to.
To the normalized 900, I guess, if I layer on the additional 75 million of synergies kind of tax effect, those and then take out the working capital and other having them. So you had this year I get to little bit higher number, but I understand there's probably some of conservatism.
No thats the exact math, yes, just taking the 800, adding back the unrealized synergy.
As well as eliminating the.
Integration costs associated with RPC and tax affecting those.
Alright. Thank you good luck in there.
Thank you.
Our next question comes to the line not sold with our telephone vertical your line is open.
Yes hypermarket best.
Personally a little bit of Big picture question, you're kind of addressed that doesn't above convergence in foodservice to plastics.
But you know just.
Because when we go back a few years ago there are many.
Many years my role with the Mega the volumes and value from a very sustainable past two years.
Rob you posted growth can you tell us a little bit what you've done on the already to change you know the beans, and that's the segment and a lot that change with regard to the end markets not just foodservice and I guess plastic cups, but broadly that has led to these growth trajectory.
Yeah happy to ignite I think strategically you have to go back and realize that you often times historically when we would do acquisitions, we would we would call volume or walk away from volume because it may not have met our margin expectations.
The business for consumer back to North America hasn't been impacted by an acquisition for the last.
Seven five or seven years or so so it's really been operating on its own and our focus was identified which opportunity we create differentiation and that invest behind the differentiation.
And as a result, it has paid dividends for us not only in foodservice, but in our specialty bottles business and our farm and health care business, and we're making similar investments to support our already leading position and closures and violence and we'll continue to do that and I think its a.
That all all investments are not considered equal and we really are making tough decisions to make certain that the investments we make our absolutely on the right opportunities no different than what we've done inside of HHS to support growth in a faster growing region like like China with our high loss.
Soft material in our our five investment which remains on track and will be sold out by the end of 2020.
Great and that just as a follow up I wanted to see a little bit they impact of Lightweighting, you mentioned here materials and the health hygiene and special things I think historically deep of how you account volumes on a race.
Pricing basis.
Waiting consumer packaging has been a headwind to the reported volumes as we look more positive to make more sustainable products will be sort of a measurable impact of the way you report the volumes in the segments.
It's a fair commentary there is there's not a perfect unit of measure inside our business, but we're not doing this just to affect the metric. The reality is if we can make products better more cost effective.
Meeting the feature needs and benefits for our end customers, we'll do it we're doing an engineered materials by our expertise the material science, we're doing NHS by a by our ability to combine nonwovens with reasonable film technology, a complement of the most recent co pay acquisition.
But yes, it it's an ongoing effort to define the best unit of measurement that can best reflect the progress that we're making towards growth and we'll continue to seek out what those are.
But is there is not a perfect one in our business given the diversity of what we do.
Great. Thank you very much.
Our next question comes the line of game Hodgson from Wells Fargo Securities. Your line is open.
Good morning, gentlemen, thanks for taking my question.
To revisit the China commentary today that you made specific to into generics.
Notwithstanding any ripple effect that.
Yes. This virus may have on the economy or sentiment.
Should we interpret that they would be a net positive to volumes and HMS.
To the extent that Miss persists.
I would I think it's too early to say that it's going to be a net positive on the two plants that are that are.
Manufacturing the majority of those materials are NAND high facility and Suzhou facility.
But it's just it's a little too early to say what that will be at all really depends how long that health crisis last in some instances, where ultimately deferring the production of other materials to support the health care product to support the need that that both China and the rule ICANN.
We had relative to shortages in those those product lines I'll say, none of our plants right. Now are ultimately closed so there's a variety of facilities. You know there continue to serve local markets and I think we'll continue to serve the local Chinese market people need to continue to eat people need to continue to do those things.
Things that they do to support their everyday life as a component of our overall portfolio, but a little too soon to say I'm just I'm just proud of our team's ability to provide these kind of products ultimately to meet you know what is an unfortunate demand right now.
Understood.
You've made a couple of comments in the past couple of quarters about the dispensing systems business within.
The acquired RPC operations I was curious if now you've had a couple of quarters to look underneath the 10 here.
Where that business has historically been successful.
And what type of investment might be necessary to expand it.
Is this a function of really installing some assembly equipment here maybe domestically.
And maybe even something where you can co locate operations.
And then I guess get some commercial folks in place or what timeline or anything give us on the in that front would be helpful. Yes. It's it's one of the most attractive parts of the RPC acquisition.
Combining rpcs closures dispensing business with various creates close to a 2 billion dollar.
Business for Berry and the team right now is prioritizing.
Around their innovation pipeline to get it commercialized as quickly as possible secondly, where they have commercialized around pharmaceutical.
Around health care, how we can deploy those existing.
Application and parts to other regions of the world. So it's really part of the of that global value delivery capability that we are hyper focused on I will say in general the level of investment to support this business.
Was outstanding you know from an automation perspective from a converting equipment perspective, it's really about making certain that we get more of that pipeline commercialize faster consistent with what we talked about our overall strategy, which is investing in and advantage products in targeted markets and deploying the resource isn't.
Capital against it, but we're excited about that business and that that is a.
Our objective clearly is to be a global leader and closures in dispensing solutions.
Great. Thank you for that and last one if I can squeeze and then.
Can you remind us on the on the I guess versalite product given the decline in polypropylene is that more of our cost competitive product now.
And something that you still have dialogue with customers on for how cup applications.
We continue to have questions, we continue to enjoy.
Business, we've made great strides relative to.
The cost of of that substrate are our portfolio of customers.
That enjoyed today in our pipeline is is robust.
I'll I'll leave it at that and it's robust with you know the major so we continue.
To believe you know, it's it's one of the world's most advanced.
Drink Cup solutions, and our existing customers continue to enjoy it benefits and there's a pipeline of new opportunity for us to consider.
Thank you good luck.
Our next question comes from the line of Adam Josephson from Keybanc. Your line is open.
Good morning, Thanks for taking my questions I appreciate it.
Mark just one on RPC volumes I know there you said there were slightly down in the two quarters you you've owned them can you just give us some context as to what they have been I think there were flat in the quarter to beforehand, and then they had been I think growing low single digits over the past few years.
If memory serves can you just talked to us about what rpcs volume trends have been over the past few years, because I know the European economies not great, but it has its been in a Malays for many years now so I'm just I guess trying to understand what if anything has changed from the days one ARPC was up low single digits.
Sure, Yes, I think Adam the progression I think you'd laid it out pretty accurately plus one plus 2%.
And as a reminder, they reported every six months so quarter to quarter.
I don't know that I've looked at closely to figure out volatility within the quarter. So I hesitate getting too excited about.
One quarter's performance, but yes, starting under varies ownership versus Q1 or two quarters in first quarter was flat.
This quarter was down three so for the first.
Six months were essentially flat down <unk> percent.
On volumes and I wouldn't say theres been any significant change other than what we called out weakness and some of the European markets here in the most recent quarter, but again as we pointed out.
Too early to call how long this will last we just want to be prudent in our approach and call out that it is weaker at the moment, but that could certainly changes as the clock rolls forward.
Sure and just one on resin Mark I know you mentioned year over year prices are down quite a bit they flow through your sales line how much of a benefit to your EBITDA was resident in the quarter and what if any changes are you expecting on resin prices poly pro in polyethylene for the balance of the fiscal year and just what's your outlook on supply demand on those.
Markets.
Yes, as a reminder, RASM is a pass through referrals. So the fact that resin is down year over year has reflected in a lower topline, but that's also a lower.
Price for our customers rights or it makes our products.
Ill less expensive for our customer so in terms of.
Impact on our profitability not that significant.
As it's passed through to our customers in terms of outlook I.
I think Tom May have mentioned this in some earlier answers, but it's been relatively stable.
Up down a penny or two a month.
It's been a pretty stable market.
Here in the recent history.
And you're expecting no change how about for the fiscal year I assume in your guidance along those lines.
Yeah, we're expecting a relatively stable market for resin going forward, which on cash flow I should point out as well that would be a modest tailwind to the extent.
Resin does stay benign.
But again early in the year. So we're not adjusting at this stage.
Perfect. Thank you Mike.
Thank you.
Our last question comes from the line.
George Staphos from Boa Your line is open.
Hi, guys. Thanks for taking the follow ons late I'll make a quick.
Can you, let us know or remind us what are the next one or two steps relative to and you're going materials requalifying and filling the pipeline.
In line with your targets.
Hit your guidance and or what's embedded in your guidance and then related Lee could you remind us whats in the $150 million a spending for the segment over the next three years. What are you basically when it's all said and done what will that segment look like how will it be different looking more competitive.
So on so for thank you guys. Good luck on a quarter.
Sure. The Onboarding remains on track, we've completed over 50% of the new opportunities that have become commercialize we'll do the remaining 50% here in this quarter and into the June quarter.
To kind of round out the whole year. The good news George it's not a it's not a not cast in stone. So it's very dynamic and we continue to add to that pipeline and that ultimately is what we're most excited about that they continue to add onto the pipeline side of engineered materials that gives us.
Support for beyond 2020.
We are making investments inside that business just to make certain that we've got the tactical app to know how from everything to support more automation inside that business. So that we ultimately can prioritize our human capital around the most value added applications inside the business.
To support some which I can't describe specifically converting technologies that will give us advantages relative to composition of products material science.
And the overall cost of conversion inside that space.
Thank you very much.
I'd like to turn the call back to the company profile comments very good I want to thank everybody for your interest in our in our Q1 results look forward to speaking to you next quarter. Thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you for your participation and have a wonderful day.
All this going to.
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