Q2 2020 Earnings Call
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Please be advised that todays conference call is being recorded.
I would now like turn the conference over to your Speaker today Mr. Dustin Stilwell. Thank you. Please go ahead Sir.
Thank you and good morning, everyone welcome to Bury second fiscal quarter 2020 earnings call.
This call we refer to the second fiscal quarter out the March 2024.
We get our call well not to mention that our website, we provided a slide presentation to help guide our discussion this morning.
And after today's call a replay will also be available on our website, a very cold dot com under our Investor Relations section.
From the company I have various chief Executive Officer, Tom Salmon, and Chief Financial Officer, Mark My Oh.
Oh in color and marks comments today, well my question answer session.
Hello, everyone the opportunity to participate we do that you limit yourself to one question at the time I didn't fall back into the queue for any follow up or additional question.
I was referenced on slide two during this call we will be discussing some non-GAAP financial measures.
Most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are based on our earnings release and Investor presentation on our website.
And finally, a reminder that certain statements made today maybe forward looking statements.
These statements are based upon management's expectations and beliefs concerning future events impacting the company and therefore, a number of uncertainties and risks.
Funding, but not limited to know described in our earnings release.
Our annual 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 and now I'd like to turn the call over to marry CEO Tom Salmon.
Thank you Dustin and good morning, everyone hope everyone is safe and healthy during these extraordinary times first and foremost I want to express my sincere appreciation for the commitment and dedication of our employees and continuing to work seamlessly their business partners to ensure our key supply chain remain uninterrupted and operational.
We are taking precautions and our facilities to keep our people say quite aggressively cleaning and disinfecting high touch areas bracket seems social different seen a good hygiene and we've been doing for many weeks now.
Our number one priority in our core value always being health and safety of our people everything we do it Barry starts with safety.
Thank you can see on slide three we have a never ending commitment to identify managing eliminate rep and I'm very proud of our safety record within over 40% improvement in recordable injury rates since 2016, and it Osha recordable rate significantly below the industry average we understand that what we do here Barry is very valuable part.
On the supply chain maintenance supplies products that are protecting each other our friends our families and our neighbors in communities around the globe.
We are truly living our mission I've always advancing to protect what's important.
As you can see on slide for the safety and supply of necessity, such as food medicines sanitizing products and protect the health care apparel named just a few have never been more viable.
Additionally, we're donated materials to help stop the spread the buyers as part of this effort. We donated approximately 100000 face yields to local health care workers and first responders, which were in short supply in over 50000 hand, sanitizer balls to community and businesses to aid in the protection of spreading the infection to name just a few.
Now let me highlight the key topics, we would have you take away from today's call.
We had a terrific work with solid organic volume our portfolio diversity is unmatched in a recession resistant has proven through past economic downturns, approximately 65% of our business isn't advantage to neutral end markets related the corona buyers pandemic.
The integration of RPC remains on track, we expect low single digit volume growth post cobot 19, and feel very confident that we can exceed our free cash flow guidance of $800 million this fiscal year.
Looking at some highlights for the quarter in segments on slide six.
We generated March quarterly records for both net sales operating EBITDA, both increasing over 50% to $3 billion and $530 million respectively.
Our adjusted earnings per share increased 42% to $1.19 and we reported significant improvement in free cash flow, bringing our four quarters totaling $886 million.
For the March quarter organic volumes were up 2% led by our health hygiene and specialty segment, which recorded stronger than expected volume growth of 3%.
As you might recall, we anticipated volume growth inflection within our HHS business in the June quarter, and we're very proud of the team achieving this goal linked quarter ahead of plan.
Equally pleased with our engineered materials team delivered volume growth in the quarter, 2% inline with our commitment.
Our consumer packaging North American business had flat volume for the quarter with strength in health care household cleaning and grocery offset by weakness in foodservice and industrial markets.
We remain encouraged by the momentum of the division with a growing revenue pipeline.
And lastly, our consumer packs the international business reported improved volumes sequentially and we continue to efficiently integrate the business.
Lets focus of developing aren't wrote pipeline and realize the cost synergies toward our initial forecast of $150 million.
With respect to the impact of Colby 19, we're very fortunate to have an extremely diversified and stable portfolio products with 70% being consumer non discretionary products, such as food and beverage health care hygiene and personal care.
We estimate the impact of cobot 19 to be a net one person benefit to volumes in the quarter.
Specifically, both our consumer packaging businesses are experiencing strong demand in health care hygiene and grocery markets and some weakness from impact of cobot 19 in foodservice and more economically sensitive industrial markets.
Hello, Hi, just specialties continue to see benefits from increased demand for hard surface disinfecting wipes personal protective equipment and health care apparel, such as surgical face masks and gallach.
Engineered materials that strong demand in grocery films retail trash bags and ecommerce films, partially offset by modest declines in our industrial businesses and certain product categories, such as can minor sold to schools and office buildings.
Well some markets we serve will be more damage. During these uncertain times offsetting others will be more negatively impact and we believe our underlying long term demand fundamentals remain intact. As we continue our focus on delivering protective solutions and enhanced consumer safety.
Before I pass the call remark I wanted to stop the strong defensible unpredictable nature of Barry and make sure. It's fully appreciated very close communication with our key customers and suppliers working collaboratively through these uncertain times and today, our supply chain remains robust and fully operational.
We ended the second half the fiscal year positive volume momentum driven by our forecasted focused investments towards driving long term sustainable growth.
Cost containment plan solid balance sheet and confidence our ability to execute our plan and deliver on the outlook, we're providing here today.
We know the quarters ahead have some uncertainty around consumer purchasing behavior, but as one of the world's largest manufacturers of non woven materialism protective packaging where to strong position to weather. The told at home and 19 pandemic is having on the global economy.
Through the wide range of products that we manufacture proven benefits. They provide our diversified portfolio is stable and we'll continue to deliver to meet or exceed expectations for 2020 beyond.
As we piloted in prior calls, we're taking proactive approaches in for body environmentally friendly solutions educating cuts consumers and providing design automation all to aid in the collection in support of a circular economy for plastics.
In fact, one of our key organic growth opportunities are buried comes from an increasing consumer demand for more sustainable were environmentally friendly packaging.
As you can see on slide seven plastic packaging offers several environmental advantages versus other substrates, such as two times less energy consumption six times less water usage five times less solid waste and four times less greenhouse gas emissions to name just a few.
This past year was a transformative year for us it's Barry we continue to make tremendous progress toward all of our goal is to maximize positive impact and lead the transition to a more circular economy.
As we announced in early April we're ahead of schedule far impact 2025 strategy and set a new record for annual usage of post consumer plastics.
More specifically, we continue our long term reduction in greenhouse gas emissions intensity, having reduced its intensity, 3% year over year and 46% since we began measurements carbon footprint in 2008.
We're ahead of schedule for achieving our size based target of 25% reduction greenhouse gas emissions intensity by 2025, having already achieved a 14% reduction versus our baseline.
Over the years customers consumers alike have become accustomed to the advantages of plastics packaging weight versatility durability convenience barrier properties, keeping fresh food fresh longer in cost effectiveness.
During these extraordinary times trends such as an elevated focus on health and hygiene increased at home consumption and increased E commerce adoption become immensely important and plastics provides all the necessary winning characteristics.
Characteristics, such as shelf stability and preservation property size, Optionality and customization multi use capabilities anti microbial impact clarity and cost efficiency.
These trends are now for some forefront will be largely adopted longer term is consumers demand their products to be safe from disease and shop more in line.
The bottom line is that plastics has become an indispensable and necessary part of all of our lives that protect does help prevent the spread of diseases and enhances our lives each and every day and it's Barry we're very proud to be the leader in providing protective packaging solutions.
Now I'll turn the call Kumar, who review various financial results in more detail Mark.
Thank you Tom I Wonder wish good health every one of their families.
As Tom referenced and shown on slide eight second quarter reported sales were up 53% to just under $3 billion.
The increase included revenue from the acquisition of RPC, along with organic volume growth of 2% and coating, 3% volume growth and health hygiene, and specialties and 2% and engineered materials.
These positives were partially offset by lower selling prices due to the pass through of lower resin costs and the sale of the seal for life business.
From an earnings perspective, the March quarter operating EBITDA also increased over 50% to a quarterly record of $539 million.
The increase included contributions in the RBC acquisition synergy realization and the benefit from 2% organic volume growth.
These improvements were partially offset by the sale more sand for like that's not an unfavorable price cost spread as expected and our health hygiene and specialties and consumer packaging North America segment due to a timing benefit from falling resin costs from the prior year quarter.
Now looking at the results of each operating segment, what the prior year quarterly 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 and operating EBITDA of $175 million.
This division primarily consist of business acquired as part of the RPC transaction in July of 2019, and therefore not included in our historical results. So for comparison purposes, we're utilizing RPC results prior to our ownership.
Volumes were 2% lowered in the prior year due to the impact of Cobot 19 in Asia, along with weakness in European industrial markets, partially offset by growth in grocery pharmaceutical and hygiene markets.
Operating EBITDA was slightly lower as cost synergies were offset by a timing benefit from lower polymer costs and the prior year quarter.
Through our first nine months of ownership, we continue to be encouraged by the growing pipeline and momentum at the business Im proud of the execution of the team.
Next on slide 10 sales in our consumer packaging North American Division were $706 million in the quarter, which was 10% higher than the March 2019 quarter. As a result of the addition of the North America Richard business from the RBC acquisition, partially offset by lower selling prices from the contractual pass through.
Our resin cost to our customers.
Organic volume was flat in the quarter was 60% on the portfolio seen growth in end markets, such as health care hygiene, and grocery partially offset by reduced demand for foodservice and industrial related products.
Operating EBITDA for our consumer packaging North American division in the quarter was $151 million compared to $124 million in the prior year quarter. This 22% increase was primarily driven by the contributions from the RBC acquisition, including synergies from the combination.
Turning to slide 11, our health hygiene and specialties division delivered sales of $576 million in the quarter compared to $642 million in the prior quarter.
The decrease was primarily attributed to the contractual pass through lower resin prices to our customers the sale of the seal for like business and an unfavorable impact from foreign currency changes.
These headwinds were partially offset by stronger than expected volume growth of 3% in the corner with growth in all four regions globally.
Segment volumes benefited modestly in the quarter related to the current a virus, which we estimate at around 1%.
We are encouraged by the progress our team has made and the positive momentum in the business as demonstrated by the 3% volume growth Inflecting a quarter ahead of our expectation.
Operating EBITDA decreased by $6 million from the prior year quarter, when adjusted for the sale and feel for life business.
Modest decline was consistent with our expectation as result of timing like benefits received in the prior year quarter and we continue to expect price cost in the segment to inflect positive and the June 2020 quarter.
Next on slide 12 sales for our engineered materials division were $598 million for the quarter compared to $619 million in the prior year quarter.
This decrease was attributed to the past or lower resin prices, partially offset by organic volume growth of 2% in the quarter.
Volume growth in the quarter turn positive as we expected and was a result from our efforts and focus to regain market share with regional and local customers as we continue to onboard new business wins.
Operating EBITDA in our engineered materials division increased 4% to $116 million, primarily as a result of improved productivity and 2% volume growth in the quarter.
We are encouraged by the progress our team has made and the positive momentum in this business as well as positive momentum is not only seen in our positive volume growth, but can also be seen when price cost coming in positive in the March quarter from improved productivity a quarter ahead of our expectations.
Slide 13 provides a summary of our income statement for our second fiscal quarter.
Overall operating income increased nearly $100 million over the prior year quarter, primarily attributed to the improved operating EBITDA I, just discussed partially offset by incremental depreciation and amortization from the RPC acquisition.
Our net income for the quarter increased over 70% to $126 million and adjusted earnings per share improved over 40%, so quarterly record of $1.19 per share.
As a reminder, we do not add back amortization of intangibles from acquisitions to our adjusted earnings per share.
If we were to add back this amortization that would increase our annual adjusted EPS by more than 30% I.
I believe the should be considered when compared to other companies that make such adjustment.
Next on slide 14, the company generated $315 million and cash flow from operations in the quarter compared to $170 million in the March 2019 quarter, increasing over 80% primarily from incremental cash flow, resulting from the RPC acquisition.
Net capital expenditures in the quarter were $115 million as we incurred spending on cost reduction initiatives as well as customer link growth related projects and inline with our 600 million dollar plan for fiscal 2020.
Our free cash flow from an order was $200 million, an improvement over $100 million compared to the prior quarter, primarily attributed to our growth in EBITDA.
For the four quarters ended free cash flow was $886 million, we remain committed to maintaining a strong balance sheet and are consistently increasing dependable cash flow provides us the opportunity to improve our strong balance sheet as we have demonstrated historically.
The company maintains a strong liquidity position with over $950 million of cash at the end of the quarter as well those are now under on 850 million dollar asset base line of credit.
Representing $1.8 billion of liquidity.
Also we have no financial maintenance covenants for near term debt maturities.
Additionally, the back half of our fiscal year is historically, the strongest period of cash flow generation with over $500 million expected in fiscal 2020.
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 over 15% using our quarter end market capitalization.
And finally, while certain markets have been impacted by cobot 19 unrelated for restrictions were fortunate to have such a diversified portfolio with strong stable end markets.
Our guidance has assumed cobot 19 related restrictions continue for the remainder of our fiscal year.
We believe approximately 65% of our portfolio is advantage to neutral with about 35% negatively impacted by over 19.
Well, we expect the current a virus to negatively impact our volumes from low single digit growth to a low single digit decline. We believe that we will still generate growth in EBITDA in the back half of our fiscal year, driven by cost synergies and improved productivity.
Specifically on volumes for the back half of this year.
Assuming probably 19 related conditions persist.
I would anticipate our health hygiene and specialty segment to produce high single digit growth related to capital investments. We've made the continued pivoting of our portfolio to higher growth products.
Along with higher demand from our health care products.
Most of our consumer packaging businesses, we believe will experience low single digit volume declines related to weakness from the impact of the pandemic and foodservice and more economically sensitive industrial markets, partially offset by solid demand and healthcare hygiene and grocery.
Within engineered materials, we believe low to mid single digit volume declines are likely.
As pre buying phase for stronger demand products in grocery films, which will be offset by declines in our industrial businesses and certain product categories, such as institutional can liners sold the schools and office buildings.
The net negative impact we are anticipating related hope at 19 on volumes and earnings are transitory.
As the restrictions are lifted we anticipate over segments will return to positive organic growth as demonstrated in the most recent fiscal quarter from the pre cobot 19 volumes and earnings levels.
As such our fiscal year 2020 free cash guidance assumptions are shown on slide 15.
We anticipate our fiscal year free cash guidance will be an excess of $800 million concludes at least $1.4 billion of cash flow from operations, partially offset by capital expenditures of $600 million.
Our free cash flow represents a free cash flow yield over 17% using our quarter end market capitalization.
Cash taxes are expected to be $150 million and cash interest costs are projected at $430 million assuming interest rates at the end of the March quarter.
Additionally, we expect restructuring costs, primarily related to the RPC acquisition.
$75 million.
25 million dollar cash benefit and working capital from lower material costs.
This concludes my financial review and I'll turn it back to Tom.
Thank you Mark given the evolving situation and the uncertainty related to the potential effects of the coven 90 pandemic. We believe it it's prudent to remain focused on our top three financial objectives of improving our strong balance sheet organically growing our business isn't integrating the RPC acquisition.
Were 100% dedicated to producing sustainable profitable growth as demonstrated in this recently completed quarter.
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 recent results.
Organic growth projects in both engineered materials and health hygiene and specialty divisions are now benefiting us with engineered material growing 2% and HHS growing 3% in the recently completed court.
Our anticipated capital expenditures in fiscal 2020 at $600 million is further evidence to our commitment to move capital dollars into those markets and regions seeing greater growth, while maintaining our low cost position in the markets. We serve to drive further value for Barry.
Our AJ step to vet HHS Division is performing very well as we continue to benefit from the pivot to higher growth markets, such as premium hygiene capital investments like our eyes Arfive line in China, our non woven white line and more still North Carolina. The continued pursuit to increase our share of wallet with existing customers and now and added tail.
As for essential products like whites, Max and gowns needed to combatant Corona virus pandemic.
We believe this business will show mid to high single digit growth for the remainder of 2020.
Next the acquisition of RPC gives us world class product innovation engine, where we enjoy a leading positions in higher value added closures dispensing systems medical devices and healthcare packaging.
Specifically, our healthcare environmental solutions are showing strong growth will be produced markedly respiratory inhaler devices to world leading brands mung. Many other healthcare packaging products for Injectables nasal apartment and durable applications, our position as a sustainable packaging recycling solution provider drives our.
Asian.
We have and will continue to commit resources to create profitable sustainable organic growth across these markets.
Similarly, rpcs presence in emerging markets complements berries growth objectives in multiple industry segments and provide the geographically diversified global portfolio of products and end markets.
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.
As you know, we've never seen a global pandemic and macroeconomic market impact quite like we're witnessing right now, but I can say that through historical recession, such as those in the early two thousands and in the great recession of 2008 nine that the results from the economic recession, some modest negative impact on volumes lower input.
Raw material cost provided a modest tailwind to earnings along with more significant benefit to cash flow through lower working capital.
Relate with Cobot 19, we would expect volumes to be down low single digits with cost inflation, providing a partial offset with a larger one time benefit to free cash flow from lower working capital needs.
I would add that our portfolio today is much more recession resistant geographically diverse with unmatched end market diversification.
Are those reasons I'm very confident in our team's ability to meet our near term and long term expectations and provide sustainable profitable growth for all of our stakeholders.
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.
Our key priorities now are to safeguard the continued help them our employees and communities ensure the reliability of our supply chain and provide accurate and timely service for our retail customers and consumers.
Additionally, we continue to be laser 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 grow and create value for our customers all while doing our part to protect our environment.
Confident that the people that Barry will continue to drive positive results and achieve our goals and mission always advancing to protect what's important.
Thank you for your continued interest in Barry and at this time, Mark and I'll be glad to answer any of your questions operator.
Ladies and gentlemen in order to ask a question. Please press star one on your telephone. So we do I guess question you May press the pound.
Please stand by low we compile the kidney roster.
Our first question comes from the line of George Staphos from Bank of America.
Sir your line is now.
Hi, everyone. Good morning, Thanks for all the details and.
You are doing well and thanks, all you're doing on uncoated.
My two questions then I'll turn it over.
If you could give us.
Additional color in terms of which segments should see a sequential.
Pickup in price cost and when the time that might be over the back half the year that would be helpful. I think you mentioned m. should be.
More positive price cost coming up the June quarter, but I want to make sure that had all those details and then away from the inflection on price cost.
If you could talk a little bit about.
Whether you've been a involved in any projects trials related to co. Good remedies.
Obviously, the industry has to get working on infrastructure and capacity before any.
Remedies are approved hopefully that'll happen somewhere down the road is there can you comment on what trials you might be involved in and then more broadly how this endemic and the recession is in your view.
Changing the view.
Plastics in the market based on any data not your perception based on data that you might have thank you guys.
Thanks, George first and foremost we'd have committed that engineered materials. Originally the projection was both it and HHS would pivot to positive on price cost in the June quarter engineered materials pivoted, a full quarter early and we remain on track for HHS to pivot to positive in the June quarter.
You know, it's interesting relative to our our involvement relative to cobot. It it's quite extreme night I would say that.
The health and safety.
Concerns for people, we believe will remain a top concern.
Post covance.
I can't get into specifics, but there are certain flexible applications right now that that we are working with and around that will support.
In some instances vaccinations in terms of how those materials are actually produce I can't go into a lot of particulars on that but needless to say our involvement relative to co bids extreme.
With the business ultimately, making materials for gowns and drapes.
That covers for health care tables infection prevention whites the.
The material ultimately for disinfecting wipes surface disinfecting wipes.
Filtration for farm in blood health care under pads, we touch the healthcare system and a tremendous number away on a global basis. So clearly the differentiation our portfolio the investments that we've made a to support this.
Differentiation specific in HHS as we previously communicated with investments into the our five in China with the air filtration investment in China, where the investments that we've made morrisville on surface disinfecting wipes.
Are all part of this fight towards a resolution to cobot 19, and how we protect people and again, we do not believe this is a a.
Short term trend, we think this will be a sustainable and I would tell you George.
Never been more proud of our company and people in terms, how they manage through this crisis working remotely odd to provide an uninterrupted supply of products to our end customer. So I'm very proud of the team and what they've done and frankly, our investments that.
We've made you know where a large contributor to the success that we had pending to grow the full quarter early and that business remains very very solid and very strong and we were similarly pleased with engineered materials because relative to co bid.
You know, we simply saw benefit and trends like cracker snacking in snacks were engineered materials benefits from some of the converted films. It makes the manufacturers.
Okay.
We're just mark just good morning, just to add to the price cost question. Your first part of the question. We've got a relatively neutral assumption and for the balance of the fiscal year across the businesses certainly to the extent theres any incremental deflation on the market.
That would be a tailwind we've got a conservative assumption in our guidance associated with incremental deflation we use current.
Current costs.
Projected forward.
Yes.
Just I don't want to doubled up here, but do you have any data right. Now that tells you where the consumer is viewing plastic better worse. The same based on what's been happening the co good and or just the realities of being in a deep recession. Thank you guys I'll turn it over.
Well the reality as we continued the strong growth in and our businesses both in CP I International as well as NCP North America, the pipeline for opportunities in those two businesses in those categories specifically.
Continues to grow and be very robust.
And that's why as we've said we note that the impact of cobot are clearly transitory.
And we feel very comfortable at these businesses will pivot.
Growth post cobot, and the pipeline of opportunities Ondecks substantiate.
That outlook and lifting clearly.
The the attributes of plastics in terms of.
Protection.
Barrier.
Are you know.
I think very evident right now and.
We continue to want and we'll do our part relative to a weight, but we couldn't be more proud of being ahead of schedule on or impact 2025 goal you know, where we're focused on creating competitive advantages in our business by using design and its optimization to make products more usage.
Our reusable recyclable compostable.
And I think us continuing the x. turnley to demonstrate the part that we're playing in terms, reducing greenhouse gas emission landfill waste and energy.
I think is huge and we'll continue to work with our end users our partners trade organizations to focus on how we modernize our infrastructure to continue to increase recovery and loss to ultimately addressed that concern and ER and I feel really proud of the work that the lines and plastics waste is doing.
Okay, and other organizations like all Mcarthur and others, but we're we're very bullish and we're going to do our part to address those areas that need to be addressed but the attributes and plastics speak for themselves.
And there there there are bringing very loud right now for sure.
Alright, thank you.
I'll turn it over.
Your next question comes from the line of Anthony Pettinari.
Your line is now.
Hi, good morning, and thanks for all the details, especially with what you're doing on safety.
Yes.
Your consumer international business sells into some Asian and European markets that saw negative volumes in the quarter and I was just wondering if you looked at the trends in the three months of the quarter and into April did you did you discern anything with with regards to kind of the trajectory of demand are you seeing kind of continued deterioration in Asia and Europe.
Maybe some stabilization or maybe even improvement.
The the impact in CP, VI, clearly industrially driven in the automotive business.
Very negatively impacted both in Europe, as well as Asia I know our operations are back.
Up and running throughout Asia, right now I would say that demand is continued to be somewhat muted no our outlook for the back half is forecasting down low single digit.
And in Europe. They were clearly a little further ahead relative to a co bid there is definitely some easing of some policies right now throughout Europe.
And as we provided our guidance we felt that most prudent to just assume absolutely no change and therefore any type of improvement in terms of you know stayed home restrictions the degree to which businesses.
Our open and returning workers.
To the offices.
People traveling to and from work in schools no impact say, a number of our businesses that have been negatively impacted.
Like foodservice and others, a clearly we saw weakness in industrial demand.
Free cobot, beginning it'll take some time for that to work out, but Asia as a whole for us.
Certainly heavily driven by our HHS business is very positive, where we'll show double digit growth in and growth as well as earnings in the back half of the year.
Okay. That's very helpful. And then with regards to Capex guidance unchanged for the year the investments that you've highlighted around stretch films masks wipes pp ne is it possible to size the capex dollars associated with those investments and then.
Expected returns earnings contribution and then are there any capex investments that you're maybe pushing out.
In other parts of the business to keep that overall number flat.
Where we believe maintain our guidance relative to Capex makes really good sense, we've seen no real success directing investments into into growing spaces, where we're targeting specific markets with advantage solution then tying those up said letters of intent from our end customer is proven.
Very valuable and HHS.
In engineered materials and consumer packaging, North America, and we're deploying that same strategy and CPI. We believe it's prudent for us to continue to reinvest in our business.
We feel comfortable with that level and it's it's exhaust strong sign and testimony that hey, we're going to continue to reinvest our low cost position and be we're focused on continuing to develop a sustainable platform of growth opportunities, where our company can continually be relied on delivery.
Thanks.
Growth on a go forward basis post coated so we think it's prudent.
We're always.
Choosing relative to different opportunities based on the return on investment.
So we're not really trying to be short term oriented at anything we do it's always strategically in terms of how it's going to benefit the business and it's pretty balanced right now so.
In terms of size it really ranges.
All over the map and it'd be probably be too long of a discussion because summer.
In the several million dollars range in some certainly larger that's up little bit Barry.
Okay understood I'll turn it over.
Your next question comes from the line of a nodes and Shah from BMO capital markets.
Your line is now.
Hi, Good morning, you called out some weakness in foodservice understandably. This quarter can you remind us for Barry what the relative size is food away from home purchase food at home.
And then more specifically we saw some CTC guidance discouraging self serve drink machines can also tell us how much of your portfolio as a disposable drink cups. Thanks.
Foodservice for our company ultimately as a little over a 20% of of our business for consumer packaging North America.
Obviously during co bid with people being restricted from.
Travel into school to work.
That business.
Ben negatively impacted.
I would say it was probably most pronounced in the month of March.
We've seen some stabilization relative to demand here in April.
However, we've clearly forecasted that any.
Just to continue to add to stay at home restrictions and no change in the back half so any any change relative to.
Shelter in place.
People returning to work normal activities, we think we'll have an incremental.
Improvement, especially through.
Through drive through a which is a large component of our of our business mix, yes, most of our.
Cup business within foodservice is filled by the employees out by the consumers until the extent there were in in store dining comes back and consumers have the ability to refill I know some of our customers are choosing for.
For them to get a new cup as opposed to reusing the same cup.
But most of our business is employee filled not consumer filled.
Great. Thank you.
Your next question comes from the line of Glenshane.
Job.
Baird. Your line is now okay.
Hi, Good morning, everybody is Bakken well I guess.
Hey, that's I'm, just kind of picking up in the last question on the 35% of the portfolio Thats not advantaged can you give us some of the other big buckets.
From foodservice that you just mentioned in terms of what would constitute that 30, 35% just trying to get a sense as to what variables property backdrop, we should think as we kind of recalibrate as the operating environment changes relative to that 35% bucket.
So you think about our business for example, anything automotive related engineered materials, we sell paid for wire harnesses. So it's going to their directly be impacted by auto builds.
Directly the institutional can lennar business is.
Really businesses manage through distribution, but as sold to schools municipalities all of which are shut down right now so as those continue to open clearly, we'll see we'll see a lift in demand as a result, those are some some particular examples.
And then on slide eight where you have the sales and EBITDA bridges. It looks like you generated by $4 million EBITDA $32 million sales. That's about a 13% contribution margin can you just give us some more color on that is there any sort of negative mix component on the on the new volume that you've been onboarding.
Yes, I wouldn't say its negative mix due to onboarding.
I would say, it's just due to overall mix of what products are selling more versus what products are.
How revenue declines so I would just saying overall company Max not not a reflection of new business wins.
And it is the cobot 19, I guess, that's one part at the products that you're selling the plus 1% you called out for the first quarter specific to covert 19 in terms of the benefit is that lower margin product that you're selling.
I understand yes, no I would say overall, it's similar certainly have some categories that are going to be a little bit stronger and some that are going be a little weaker, but I would say overall.
In the aggregate that percentage would not have a different margin characteristics.
Products third advantage to neutral.
Okay excellent.
Your next question comes from the line of Tyler Langton from JP Morgan Your line is now.
Hi, good morning, However, it is doing well.
Just some debt the volume guidance for the at the low single digit declined in the second half I was just wondering I.
How much visibility.
Do you have on that maybe compared to sort of sort of recent trends and with that.
Would it be edit or any other impact from that volume decline.
On earnings or in the second half or what earnings really just kind of move with those volumes.
Yes, I would say generally earnings would move inline with the volumes.
And the outlook is consistent with our.
Our current look both from a shipments and order perspective.
As we stated we're assuming that it.
It doesn't improve but as restrictions are lifted the stay in place orders are.
Removed.
A phased approach or more accelerated those would all be tailwinds with respect to our guidance. So we've assumed.
Current outlook current demand remains for the rest of our fiscal year, obviously, we've got a little different dynamic and that our fiscal year ends here in September.
Or.
Our look forward as a little bit shorter than some of our other peers that are looking through the balance of the calendar year, but again as.
As things are lifted as businesses go back.
Come back that will all be tailwinds with respect to our 2020 guidance.
Yes, I'd also say during this period the level of connectivity with our end users both in terms of.
Choppy demand demand outlook et cetera has been something that we've continued to stay very very close to and the teams feel feel very comfortable.
With what they put forward right now and again, we clearly believe this is transitory for the company and that any improvement that we see relative to restrictions being released no will be additive to to our outlook.
No. That's helpful. And then just a quick follow up in terms of the synergies on RPC and I guess is there any risk.
The getting those synergies just because of cobot related travel restrictions or I mean are.
Flipside of any feeling any better you know about him that level or see any upside.
We've maintained will deliver $75 million in this current fiscal year, our first year owning RPC and again, we were a very thoughtful and that outlook as we obviously prepared for this this presentation. So we still feel comfortable with 75 million teams done extraordinary.
Given the environment I'm amazed.
In terms of people sheltered in place the amount of.
Work, that's getting done everything from utilizing augmented reality to help qualify applications and businesses remotely.
Something we invested in several years ago is bearing a lot of fruit both to maintain stable operations as well as qualify new business, but we feel we feel good about the synergy outlook in the 75 million we've committed to.
Great. Thanks much.
Your next question comes from the line of Neel Kumar from Morgan Stanley.
Your line is now open.
Hi, good morning, Thanks for taking my question.
In terms of be 65, 35 portfolio break down related to covert 19.
I just can't complain to a net negative impact on volume in second half, but is there a way to quantify the magnitude of impact for the 65% piece versus the 35% piece of the portfolio.
Sure Yeah, I would add on the.
65%, it's going to be.
In the mid single digit range, and the 35% of going to be in a in the double digit decline range.
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And in terms of the double digit decline pretty 35% piece would that mean may be to be considered packaging.
Segments, just given if its everest failure.
No I would also be the engineered materials business. Some of the examples Tom provided I like our Cam liner business that sold the offices schools.
Cetera.
Obviously with people not.
Not going to work are working from home I should say.
That's going to be less consumption on office can liners.
Similarly, any any impact you know in terms of industrial demand has a.
Theres a component there as well in terms of shipping and volume going through warehouses and things like that for shrink films and stretch films.
Okay. That's helpful and then in terms of that kicking ass.
I was wondering just give us a sense of what you're seeing the diaper market in terms of underlying trends and seems like theres, probably some pull forward of demand into the.
Into second quarter, what do you have seen in sort of equal demand has there been any significant slowdown.
We've really been focused on.
Finding ways to innovate differentiate during this time and frankly.
It's allowed us to ultimately picked up.
Share in premium hygiene area. So you know things like using last American products in both our films and non woven applications to support greater comfort.
In the premium baby care markets, that's certainly something that's.
And as advantage for US right now and demand has been stable.
For for our business. So we feel very comfortable with that Theres certainly was some what I'd argue as pre buying done.
But all in all I think the level of differentiation, we haven't how we're now incorporating a both our non wovens know how and capability.
With our films know how is truly trading at a competitive advantage and allowing US ultimately then to to win additional business. So that our piece of the pie grows in that space. So that was part of the strategy that we've already outlined before the team's doing a great job executing against that.
Your next question comes from the line of everyone Viswanathan from RBC capital markets. Your line is now open.
Great. Thanks, good morning.
Thanks for all the detail as well I just wanted to go back to.
The trends in EM and H. an S.
I guess as just a year ago or so you had a a march quarter Nm, where you saw some supply chain issues and maybe some share losses I guess is it your assessment that those have been resolved and you may or may be gaining share back and then similarly in HHS we've had some.
You know difficult.
Periods and baby care would you.
Consider maybe an inflection point here and the baby care market. Thanks.
In engineered materials, yes, clearly we've recovered and the team did an amazing job in recovering share from tier two tier three distribute distribution. During this period. They also on boarded a record pipeline.
Have converted film opportunity that support E commerce as well as I mentioned earlier, the cracker and snack segments.
For the business and we continue to also deployed.
About $150 million at which will invest so the next three years all focused on next generation products to support things like in the snacking businesses and ecommerce trend. So feel really good about the business. The business did a really nice job in terms of that recovery in as we said we believe you know the the.
Outlook is transitory for that business and it is poised to grow just as it did a in the second quarter, which we're very proud of relative to HHS.
You know baby continues to be a.
Relatively flat market, if you will flat to declining in some areas, but our investment has really been on how we take advantage of targeted capital advantage investment with advantaged products and higher growth regions of the world.
Like our our five line in China.
Like the Latin America focus in terms of where we come combine our know how both films and non wovens create differentiation.
We'll continue to be a leader in a winner.
In that place as a result, because of the growth characteristics around premium hygiene right. Now so we feel really good in the business portfolio. We have no in HHS is very diversified and as you can see right now the investments that we made were pre cobot, but.
Nonetheless, they reinforce our strategic.
Objective as Bina protection solutions provider and its is bearing great fruit with our outlook being high single digit growth in the back half of the year.
Great. Thanks, that's helpful and then I guess as you look into.
Future periods.
Your free cash flow I guess this here, you're expecting a free cash in excess of 800 million.
Given what you just said.
Would you expect continued growth in free cash flow I guess in fiscal 2001.
I guess I'm, assuming that CP continues to grow.
Maybe low single digits, and then you just highlighted growth rates in HHS and yeah, and then international kind of stabilizes. So yeah. Maybe you can just comment on your kind of long term free cash flow trajectory that.
We have grown our free cash flow every year as a publicly traded company.
It's a it's an objective that we have as an organization to continue that trend going forward and we'd expect to continue that.
In 2021 and beyond.
Thanks.
Your next question comes from the line of Brian Maguire from Goldman Sachs.
Your line is now open.
Hi, Good morning, everyone I'm sure all doing well.
Thanks, Brian.
Just a couple of questions on on resin trends, obviously oils had a big moves in the last couple of months and expect you'll get some flow to benefits there I guess as far as the guidance because it doesn't sound like you're baking in any benefits to.
EBITDA or working capital for movements from here, but I'm just thinking about in prior periods, where we've had big moves in oil I think we've seen some some volume destocking and particularly in EM.
A lot of that goes through third party distributors and there's a lot of destock in it takes place I'm. Just wondering if you factor that into the volume outlook you gave for the second half of the year. Some destocking potential there and then likewise, we've also seen periods with deflation is some of the smaller competitors in the market.
The more aggressive almost trying to pass that through to customer even before they get it. So just wonder if you kind of comment on the pricing environment as well, if you're seeing a more aggressive.
Movement to try and pass through potential deflation benefits.
Thanks, Brian with respect to Destocking actually think the trends likely to go the other way I think certainly those crisis put a lot of emphasis on the supply chain.
So customers wanting to make sure they have product.
And we're really fortunate im pleased that we've been able to provide service to our customers. Thanks to all of our employees continuing to manufacturing part so I don't.
I don't know that Theres, a huge risk I mean, we certainly have some markets where historically there has been some modest.
Stocking and Destocking, but in general our products.
Or just not conducive to that and a lot of cases due to the space requirements. So I don't think it would be a material factor in either direction.
With respect to rather than we have not assumed any.
Incremental deflation in resin in either our EBITDA or our working capital in fact, we've still got some cushion and working capital a modest amount with current resin pricing current being April.
Resin pricing so.
For the extent that happens your guess is probably as good as mine with respect to oil and how that ultimately impacts.
Isn't prices.
But we do not have any of that assumed in our guidance.
There's no reason to think instead, what didn't come down, though I mean nothing different than in prior periods you when you wouldn't guest.
Now I mean hard to predict those markets were as we've talked about in the past are we pass through resin prices to our customers.
We certainly are benefit from a declining environment from the perspective of lower working capital as well just making our products less expensive.
For our customers are for making them more competitive against alternative solutions.
But in general were somewhat or someone in different with respect.
I'm wondering I think part of your question, Brian was I guess led to our do we see a competitors out proactively offering discounts based on what they assumed going to happen youre going to have periods or periodic instances of that but I wouldn't say its pervasive right now running more concerned about.
$150 million, we're investing that business is to continue to grow and innovate, but also you know reassure ourselves.
That were low cost producer.
And that will be able to continue to win in that space and delivered low single digit growth and we remain very confident that we'll do that and that the near term low single digit low to mid single digit outlook for EM is a is transitory will clearly recover post cobot.
Okay. Thank you then.
Last one from me on the net that seem to come down more in her more than we are expecting is a nice nice progress there.
Maybe more than they normally in a seasonally for one Q2, Q and I think you said 500 million more cashless back into the or.
Yes, I just wonder if you could comment on that how did that that is progressing relative to your expectations and then I think it was something around $250 million. The proceeds from investment hedges that you guys. Just wonder if you've got to comment on.
What that was about and if any of that could.
Continue in the rest of the here.
Yes sure net net debt is progressing ahead of plan so were.
Good progress through the first half of our fiscal year. We're ahead of plan and certainly well ahead of prior year on progress and bringing that down with respect to your question on the derivatives are those are just to reflect.
We raised our debt and U.S. dollars and so thats just to reflect move at moves and currency as event that was raised.
And the local currency so we've got our.
Matched to the cash flows of the company.
So our U.S. dollar euro and pound Sterling ultimate that does reflect.
The cash most of the business.
Got it thanks very much.
Your next question comes from the line of kind of like some of them should.
Your line is now open.
Hey, good morning, I, just two questions here upfront, but you've had the RPC business for few quarters. No. You also did the sale for lies life divestment last year have you identified any more businesses or maybe exposures within RPC or your legacy Berry business that may be viewed as kind of noncore going forward I could be.
Invested to aid in deleveraging or has this type of superior to view kind of been putting hold given the crisis and then related I think after the acquisition of RPC or kind of targeting a four times leverage range. Two years post the acquisition do you still view this target as achievable given the crisis.
The targets achievable given the crisis and we remain fully committed to de lever in improving our strong balance sheet and relative to strategic reviews.
We stop nothing relative to cobot, we've had the obviously heavily focused on the safety of our employees maintenance of our supply chain, but we've made a commitment as a management team that through this coded Perry we will continue to focus on ways to continuously improve and make our business better and we continue to do just that so any reviews that we do which happened on right.
Your basis relative to monthly business reviews with each of the given businesses and performance outlooks, all way into that factor and I'm not going to comment on this call relative to what we've identified are not identified but you should assume it hasn't quote stop the process per se, we continue to look and evaluate that as we always do because.
Of our incredibly diversified portfolio.
Sounds good. Thank you good luck in there.
Your next question comes from the line of detached from Wells Fargo Securities. Your line is now open.
Tom Mark good morning.
Morning.
A quick one on the competitive landscape and I.
You partially addressed this time, but I'm curious to the extent that may be this crisis negatively impacts some of your competitors and I know it isn't a strategic priority as it sits today.
But might there be opportunity to pick up a few distressed.
Assets out there.
Okay. So maybe there are mismanaged or something like that and while we are looking for a way out.
Listen this is we obviously wouldn't comment I think clearly there's a there's a likelihood that some companies.
Or not ultimately going to to benefit, but I continue to reaffirm that for Barry the strength of our scale for our customers relative to supply continuity. What we've delivered during this period that uninterrupted supply given the choppy demand.
10 used to reinforce to me that the structure of our company the diversity of our portfolio geographic footprint that we have is second to none and I believe it's ultimately going to be a strong.
Value contributor.
To our shareholders as well as our as well as our customers a longtime going forward but.
Somewhat speculative, but I would I would probably concur that yeah. It could certainly impacts some companies. If this is a sustained longer term trends, but as we've discussed Barry performs very well in these environments and now the diversity of our portfolio and geographic footprint is better today than it.
Been any prior crisis.
Well, Thanks, and then I apologize I joined a couple of minutes late if you guys have already addressed this but I guess, probably phasing perspective, if I look at the June quarter. It historically has been.
By the strongest and I think kolata companies are sort of signaling will be at the trough given stay at home orders and the like.
Have you did you provide any guidance in terms of phasing or maybe second half EBITDA.
Again, maybe just specifically second quarter, if it would be lower.
Yeah sure Thanksgiving.
Our to our fiscal third quarter is traditionally our strongest I think this.
We see this current events and prices creep a little bit of a different situation. So I think it will be probably modestly lower we didnt provide specific quarterly guidance, but I would expect that sequentially to be maybe slightly lower than.
In the March quarter in the September quarter would be similar to the June quarter.
Great. Thank you.
And the last question comes from the line of George Staphos from Bank of America. Your line is now open.
Hi, everyone. Thanks for taking the the follow on.
Two questions for you in March of questions.
One can you comment on the leverage target of four times. My guess is you think that's the right number for now.
You never.
Written off that that target could go lower overtime, you probably would have updated us if you change your view in the press release, but just wanted to think about or how you're thinking about.
How that target might evolve over time, given the progress you're making you're answering my other questions earlier.
Go ahead of plan and then the second question I had.
Are there any projects that you are somewhat worrying about completing that you need to hit your guidance because a social distancing other you're having difficulty getting equipment in time more you get having difficulty getting people in place to into the last minute assembly of lines et cetera, such that that would be a risk.
Got it for the year, Thanks, and good luck in the quarter.
Thank you it's actually I'll start the latter part of your question any type of delays in terms of project has already been factored in.
To our back half outlook to give you a sense in our CP North America business. The pipeline is in aggregate robust enough to allow us to continue growing low single digit as it has for the past couple of years and just in the current you know year period of time, just the number of quote delayed projects that are we.
One they are close to just a matter of getting them a process would literally in another self generated 1% tailwind in the back half of the year and we've excluded that from our outlook, but I have to complement our team you know the fact that you know over the last several years, we've been using augmented reality devices to allow us to.
Qualify.
Projects remotely.
The usage, obviously inside our company's exponential right now and it's been amazing to see what we can actually do remotely any lifting or improvement that we see in terms of shelter in place and his business opens George that's only going to be an additional benefit for us in the back half a year and that's really.
How we thought about and why we got into way, we did to kind of create a scenario that says it's pretty much a worst case, where we're at right now in anything that ultimately improves in the quarter in the back half you know generate momentum for us both from a from an earnings into cash perspective.
Relative to targets as I've said before making good progress.
We're Russian and running to get to the lowest level. We can our first milestone is for and when we get to for George will reevaluate and present views in terms of what the longer term outlook will be if that's okay.
Understood. Thank you very much guys. Good luck in the quarter.
Well, there's no further questions I want to thank everybody for your time today in your interest in Barry Global again, a we truly believe that today, our portfolios incredibly well.
Situated for this difficult period that we're facing with cobot 19, we'll get through it and will be a better country better world as a result of it and clearly Barry is going to be there to lend its value relative to protect the solutions going forward. Thanks, everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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