Q3 2020 Berry Global Group Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Barry Global earnings call.
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After the speakers presentation, there will be a question and answer session.
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I would now like to hand, the conference over to your speaker today Dustin Stilwell. Thank you. Please go ahead Sir.
Thank you good morning, everyone.
Larry third fiscal quarter to delve in 20 earnings call.
Throughout this call we will refer to the third fiscal quarter of the June 2020 quarter.
Before we begin our call I would like to mention that on our website. We provided a slide presentation to help guide or discussion this morning.
After today's call a replay will also be available on our website at <unk> Dot com under our Investor Relations section.
Joining me from the company berries, Chief Executive Officer, Tom Salmon, and Chief Financial Officer, Mark Myles.
Oh, and Tom and marks comments today.
<unk> answer session in order to allow everyone is the opportunity to participate we do ask that you limit yourself to one question on time, and then fall back into the queue for any follow up for additional questions.
As referenced on slide two during this call we will be discussing some non-GAAP financial measures.
The most directly comparable GAAP financial measures in a reconciliation of the differences between the GAAP and non-GAAP financial measure normal level in our earnings release.
Your presentation on our website.
Finally, a reminder that certain statements made today, maybe forward looking statements.
These statements are based or made based upon management's expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks, including but not limited to those described in our earnings release annual report on form 10-K, and other filings with the FCC.
Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward looking statements.
Now I would like to turn the call over to Bury CEO Tom Salmon.
Thank you Doug good morning, everyone and thank you for being with us today.
Three our quarter after much the global went into combine.
Situation that none of us have experienced before.
Many companies Cobot 19 has created one of the most challenging an uncertain times from an operational and financial perspective that we could work that we can recall.
Orders were closed travel was limited and offices in school we're baking.
I spent a lot of work for our teams across the globe and I can probably today say that we have shown very stand strong just as it has in the past under various challenging economic conditions.
Through our employees relentless effort and dedication along with our diverse stable portfolio, we were able to deliver record EBITDA for any quarter and the company's history, while growing organic volumes, 2% compared to the same quarter last year.
Makes the second consecutive quarter volume growth for the company.
Further exhibiting our intense focus on investment towards consistent.
Possible long term growth.
I'd be remiss, if I didn't give a special thank you to our entire Barry team across the globe.
Finally, our essential frontline team members pretty amazing job they accomplished during a challenging environment in third quarter.
We're not only achieving our financial performance results, but helping keep each other shape, while meeting critical needs of our communities and customers.
We fully understand what we do here very valuable part of the supply chain, making in supplying products that are protecting each other our friends or family and our neighbors in communities around the world.
We continue to take precautions and our facilities to keep our people say by aggressively cleaning and disinfecting high touch areas practicing physical distance in a good hygiene as we have now for many months.
Our number one priority core value is the health and safety of our team members everything we do it Barry starts with safety.
As you can see on slide three we have an ongoing commitment to identify and managing and eliminating risk and we're very proud of our safety record with an over 20% improvement in number of injuries in fiscal 2020, and an osha incident rate significantly better than the industry average.
Turning to slide four.
Plastic packaging offer several environmental advantages versus other substrates.
Very had a long history of providing sustainable solutions to our customers with a clear goal of improving our environmental footprint supported by our culture of innovation and continuous improvement.
As highlighted through various product launch initiatives and partnerships across the value chain, we're using the breadth of our portfolio the bar technologies and geographic presence do our park and helping to drive not only climate change issues, but also focusing on eliminating plastic waste.
Plastic packaging offers many advantages such as lighter weight versatility durability convenience barrier properties like keeping fresh food fresh longer and cost effectiveness.
The bottom line is that plastics has become an indispensable necessary part of our lives that protects us helps prevent the spread of diseases enhances our lives each and every day and Barry we're very proud to be a leader in sustainability for body protective packaging solutions to the Mark.
Next is you can see on slide five the safety and supply in the southeast such as food Medicine, Sanitizing products and protect the health care apparel named just a few continue to be in high demand.
We believe about two thirds of our portfolio are unaffected or advantage in the end markets such as hygiene stay at home food cleaning in health care through.
The remaining portion of our diverse portfolio observing industrial and away from home food and beverage markets in aggregate continued to see pandemic related headwinds. However, we are beginning to see improved demand trends across those more pressured end markets and areas around the world continue to reopen.
In the short term, we view the headwinds related to cope with 19 as transitory.
While we believe the advantage area benefited from the pandemic for products use for protection safety and cleanliness will be long term sustainable benefit to our global portfolio.
Now let me highlight some of the key takeaway for today's call on slide six.
We had an outstanding quarter with strong organic volume growth our portfolio diversity is unmatched in recession resistant proven through path economic downturn and further evidenced by our last few quarters of solid financial results.
We expect low single digit volume growth post cobot 19 in all four divisions.
The integration of RPC remains on track, while synergy realization is coming in ahead of schedule for fiscal 2020.
De leveraging and also pacing ahead of schedule. We ended the quarter at 4.5 times net debt to adjusted EBITDA and we're now increasing our fiscal 2020 free cash flow guidance to $830 million.
And Mark will discuss momentarily our outlook incorporates the appropriate level of uncertainty and dynamism associated with the coal bid 19 Europe.
With that said, we remain confident in our ability to execute and deliver on our commitments. During these uncertain times.
Transition to some financial highlights for the quarter, we generated a June quarterly record for net sales of over $2.9 billion, an increase of over 50% and an operating EBITDA record for any period of $581 million an increase of 67%.
Compared the prior year quarter.
Our adjusted earnings per share increased 69% to $1.52 and we reported significant improvement in free cash flow, bringing our workforce total to $1.040 billion.
For the June quarter organic volumes were up 2% led by our health hygiene specialty segment, which reported strong growth of 14%.
We anticipated volume growth related to our recent investments and our targeted market approach. While also benefiting from cobot 19 related products in our health care portfolio.
Excluding cobot 19, we believe the HHS business delivered high single digit growth in the quarter and we're very proud of the team achieved in their objectives of delivering profitable and sustainable growth on time versus our commitments.
And lastly, our consumer packaging International segment comprised primarily of legacy RPC business performed well in the quarter, there's been able to drive earlier than anticipated synergy realization as we now we're targeting $85 million to be realized in fiscal 2020 $10 million higher than our previous outlook.
Additionally, RPC continues to provide many benefits from his dancing, our sustainability capabilities and initiatives the landing multiyear business wins in access of $50 million over the term of the agreements through our combined consumer packaging global platforms.
We remain committed to maintaining a strong balance sheet and our consistently increasing dependable and improving cash flow provide us the opportunity to further improve our strong balance sheet as we've historically demonstrated now I'll turn the call Woodmark overview berries financial results in more detail Mark.
Thanks, Paul.
First I would like always been held to everyone in their families.
We'd like to referring to slide seven now.
As Tom referenced third quarter sales were up 50% to over $2.9 billion. The increase included revenue from the acquisition of RPC, along with organic volume growth of 2%, including an impressive 14% volume growth and health hygiene specialties.
These positives were partially offset by lower sales dollars from the past or a lower resin prices to our customers and the sale of RCM for wife business.
From an earnings perspective, the June quarter, operating EBITDA increased over 65% to accompany quarterly record of $581 million.
The increase included contributions from the RBC acquisition, including synergy realization cost productivity and the benefit from organic volume growth.
Now looking at the result of each operating segment, what the prior year results restated to match the current structure.
Hey.
For the quarter, our consumer packaging International Division delivered sales of just over $1 billion and operating EBITDA of $184 million.
This division primarily consists of business acquired as part of the RPC transaction and therefore not included in our historical results. So for comparison purposes, we are utilizing results prior to our ownership.
As we just completed our first year of ownership of the RBC business on July 1st this will be the last quarter the year over year comparison will be impacted.
In the quarter volumes were down 7% comparing to the prior year due to the transitory impact or Kobin 19, and end markets, such as automotive industrial and building and construction, partially offset by growth in grocery health care and hygiene markets.
Excluding the impact of the pandemic on the quarter, we believe volumes would have been flat on a year over year basis.
We saw improving trends within the segment as the quarter progress and anticipate sequential improvements over the next several quarters as a transitory pandemic related headwinds of baby and we would expect the business to return to low single digit volume growth.
In spite of the pressure on volumes related to cobot, 19th the legacy RPC business generated an impressive 35% increase and operating EBITDA from cost synergy realization favorable product mix and productivity.
Net sales in our consumer packaging North American Division were $718 million in the quarter, which was 10% higher than the June 2019 quarter. As a result of the addition of the North America rigid business from the RPC acquisition, partially offset by lower sales dollars from a pass through.
Resin prices to our customers.
Organic volumes were flat in the quarter slightly ahead of our expectation provided on our last earnings call.
Operating EBITDA was $159 million compared to $126 million from the prior quarter. This 26% increase was primarily driven by the contribution and synergies from the RPC acquisition.
Our health hygiene, and specialties division delivered sales of $608 million compared to $603 million on the prior year quarter.
The increase was primarily attributed to organic volume growth of 14%, including growth in all four regions globally.
Partially offset by the pass through of lower resin prices to our customers.
Well the feel for life business, and an unfavorable impact from foreign currency changes.
Segment volumes were up high single digits related to organic growth investments with the balance benefiting from the additional coven demand or products such as material for mass wipes and medical gallons.
Operating EBITDA increased by $38 million from prior quarter when adjusted for the sales for life business.
This improvement was primarily driven by the organic volume growth just referenced favorable product mix and cost productivity.
As forecast for the HHS segment inflected positive in price versus cost in the quarter, which was enhanced by the better than expected volumes.
And lastly sales for our engineered materials division were $564 million compared to $630 million in the prior year quarter.
The decrease included an 8% decline in volume along with lower sales dollars from the pass through of lower resin prices to our customers as anticipated our engineered materials segment saw more unfavorable impact from cobot 19 compared to the other divisions.
Many of our products in this business are sold through distribution to schools offices and restaurants to name a few which are more contracted demand that are more consumer facing businesses.
Excluding the impact from cover 19, we believe volumes were up low single digits, driven by continued growth and our different differentiated products around barrier films for the growing snack trend and films for E Commerce.
We saw improving trends within the segment as the quarter progressed and anticipate sequential improvements over the next several quarters as the business returns to growth post co bid as demonstrated in the March quarter.
Operating EBIT da saw modest decreased to $109 million as the team delivered strong cost productivity offsetting the cobot related volume headwinds.
Slide nine provides a summary of our income statement for our fiscal third quarter.
Overall operating income increased $132 million over the prior year quarter, primarily attributed to the improved operating EBITDA, just discussed partially offset by incremental depreciation and amortization from the RPC acquisition.
Our net income increased to $191 million and adjusted earnings per share and improved by 69% to a quarterly record for any period of $1.52 per share.
As a reminder, we do not have back amortization of intangibles from acquisitions to our adjusted earnings per share.
If we weren't to add back this amortization it would increase our annual adjusted EPS by more than 30% and believe this should be considered when comparing to other companies that makes us adjustment.
Next on slide 10, the company generated $446 million of cash flow from operations compared to $240 million in the June 2019 quarter, increasing 86%.
Primarily from incremental cash flow, resulting from the RPC acquisition.
Net capital expenditures in the quarter were $156 million and $419 million through the first three quarters as we incurred spending on cost reduction initiatives as well as customer link growth related projects.
Our free cash flow was $290 million, an improvement of $154 million compared to the prior year quarter, primarily attributed to our growth in EBITDA.
For the four quarters ended free cash flow was an all time record of $1.040 billion.
We remain committed to maintaining a strong balance sheet and are consistently increasing and dependable cash flow provides us the opportunity to further improve our strong balance sheet as we have demonstrated historically.
The company maintains a strong liquidity position with over $900 million of cash at the end of the quarter as well as an Undrawn 850 million dollar asset base line of credit representing almost $1.8 billion of liquidity.
Also we have no financial maintenance covenants or near term debt maturities.
We are progressing ahead of plan on all three of our primary financial objectives, including strengthening our balance sheet as we have repaid over $600 million on our outstanding debt through the first three quarters.
Lowered our annual interest expense by over $100 million and reduced our leverage from 4.9 times to 4.5 times.
Our fiscal year 2020 free cash flow guidance and assumptions are shown on slide 11.
We're increasing our guidance to $830 million, which includes $1.45 billion and cash flow from operations, partially offset by capital expenditures of $620 million to support our increasing growth pipeline.
Our fiscal year 2020 free cash flow represents a free cash flow yield of over 14% using our quarter end market capitalization.
Cash taxes are expected to be a $170 million and cash interest costs are projected at $430 million.
Additionally, we expect restructuring costs working capital and other costs to be $50 million.
Overall for volumes, our trajectory and outlook heading into fiscal Q4 is improved from our last earnings call.
Specifically on volumes by segment, we anticipate our health hygiene and specialty segment to produce low double digit growth.
Our consumer North consumer packaging, North American business, we believe will deliver low single digit volume growth as the foodservice space recovers, along with continued solid demand and hygiene and grocery markets.
Both our consumer packaging international and engineered materials businesses. We believe will experience flows single digit and mid single digit volume declines respectively related to the weakness from the impact of Cobot 19.
As cobot 19 headwinds subside, we would expect the businesses to get back to low single digit volume growth.
From an earnings perspective, we're increasing our operating EBITDA guidance by $70 million to now $2.1 billion.
This assumes the fiscal Q4 would have a sequential decline from the June quarterly result of $581 million due to the traditionally seasonally weaker September quarter, along with some incremental inflation.
This concludes my financial review and now I will turn it back to Tom.
Thank you Mark.
As I stated before our economic resiliency and durability has proven true as it has in the past challenged economic periods Cobot 19 at anticipated has modestly impacted our global business. However.
Due to our diverse and stable portfolio, we've grown volumes the face of these headwinds while cost productivity is providing a modest tailwind to earnings for those reasons I'm very confident in our team's ability to meet our near term and long term expectations and commitment to provide sustainable profitable growth for all our stakeholders.
We continue to work diligently across all our businesses to grow organically and I've been able to demonstrate organic volume growth by provided advantage products and targeted markets as evidenced in our recent results.
Our HHS division is performing very well as we continue to benefit from the pivot higher growth markets and from capital investments in non woven and build one for premium hygiene healthcare disinfecting wipes and high end air filtration products.
We're also seeing additional demand for products like disinfecting wipes masks and gowns needed to come back Corona buyers pandemic some of which we think are going to continue post coated.
Net.
With the acquisition of RPC, we're able to provide differentiated sustainable solutions using our material science know, how an operational promise that our global customers have come a custom to marry over the years RPC has given us world class product innovation engine, where we enjoy a leading positions in higher value added closures.
Dispensing systems medical devices and healthcare packaging.
We close to 300 facilities around the world and a wide mix of technologies, we're working on translating solutions for our customers in different parts of the world to meet the changing needs of the customer cost to consumers.
Lastly, in a period that rule almost came to a complete standstill for over two months.
Weve recorded positive organic volume growth of 2% strong earnings while increasing our free cash flow guidance in what had been some some of the most difficult conditions, we've witnessed in our history.
We're pleased with the progression and perseverance of our teams and remain focused on driving positive growth throughout all businesses in the post call. This environment.
Additionally, on our other key strategic targets were pleased to be outpacing our planet cost synergies for the RPC acquisition.
Our team will continue to leverage our combined know how material science supply chain product development manufacturing technology, and sustainable solutions, which will benefit us for many years to come.
Im pleased with the discipline demonstrated by our teams on cash management, which is a core competency for Barry as such we've been able to overdrive, our free cash flow target use that cash to reduce our interest costs and de lever quicker than we anticipated yielding the leverage of 4.5 times at the end of the quarter.
We are well on our way to get below our targeted leverage ratio four times.
And finally, we 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 are to safeguard the health of our employees and communities ensure the reliability of our supply chain and provide accurate and timely service to our retail customers and consumers.
Additionally, we continue to be laser focused on finding ways to attract more value for our shareholders.
By reinvesting, our leading low cost position leveraging our resources around the business with the greatest opportunity to grow and create value for our customers all while doing our part protect our environment.
I'm confident that the people that Barry will continue to drive positive results and achieve our goals and mission.
Please advance to protect what is 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.
As a reminder to ask a question you will need to press star one on your telephone to address your question first abound.
Please standby well, we compiled acuity roster.
Your first question comes from Anthony Pettinari with Citi.
Hi, This is actually Bryan brokmeier sitting in for Anthony.
You discussed sequential volume improvement for consumer packaging international in the fourth quarter.
What have you seen in July so far and what indicators are you looking at that give you confidence and improvement throughout the quarter.
I'll comment really on the on how we exited Q3, we saw probably the tougher parts on the quarter occur in April and May with a strong rebound in June.
And that gives us confidence that we as we.
Our outlook is for sequential improvement in Q4, which which were confident up it's really driven by that I'm not going to give any current quarter commentary on the call, but I would say, we exited Q3 in a very strong way and the outlook is positive for sequential improvement.
Yes, I would just add the feds, Brian This is mark consistent with economic indicators you're seeing.
In Europe, which as I am sure, where the predominant portion of that businesses UK, Germany, France being the three primary countries.
Great.
Go ahead.
Thanks.
You are LTM free cash flow is well above the normalized level that you called out after the RPC acquisition do you still feel that the 900 million is representative of berries longer term earnings power or is there, possibly some upside to that number based on what you've seen.
Yes.
Yes, the 30 guidance would still reflect a normalized level above 900, when you exclude transition costs that we've incurred in the year, resulting from the integration of the combination.
As well as Annualizing the synergies that we are realizing this year so that.
When you factor in those two additional points.
I would take you over 900 million for fiscal 2020.
Brian I'd add we take a great deal of pride at Barry.
In the consistent dependable free cash flow as well frankly as earnings year on year out.
Irrespective of the external environment, it's something that we focus on throughout the organization.
And at the strong value attribute we'd be open the company.
Great. Thank you.
Your next question comes from Phil Ng with Jefferies.
Hey, guys.
Congrats on a very strong quarter.
I guess good to see a free cash flow coming in really strong.
If you have line of sight to that four times leverage.
Would you be open to kind of returning cash to shareholders, who maybe a little sooner and what are some of your bigger capital deployment.
Priorities going forward.
I'll start with the capital priorities. We you know our strategy has been across all four of our business is to continue to invest in.
Specific targeted markets with advantage products and always try to link those investments to an anchor customer. We continue to believe areas around protective solutions health and wellness continue to be strong category.
If you look inside many of our spaces, we're seeing it now in HHS as well as CPI.
Lot of focused on areas like health care dispensing systems sustainable solutions, and we feel really good about it gets a model that we deployed inside our consumer packaging North American business, which has consistently delivered organic growth last couple of years.
And all of our business is frankly pivoted as we had projected pre co bid.
From a growth perspective, we had highlighted so more of the same in that regard, but again those bigger trends around health and wellness.
Food safety and protection barrier properties continue to be areas of of high interest for us.
What was the second part of that question I apologize.
If you have line of sight to your four times leverage would you be open to returning cash back to.
Charter sooner well, we review that every quarter as a board of directors and the first priority to get to achieve our objective of getting back below four times than we were really thrilled in the quarter here to take it down to four and a half times.
So we're well on our way to mean that objective and we'll we'll be updating that guidance in the next couple of quarters.
Got it and Tom sorry to sneak one had just you're talking about some these growth opportunities.
On health and hygiene I mean, obviously, we can appreciate a bump from coated how are you thinking about like the medium term growth is because there seems to be a lot of momentum in that business.
Well, we were really pleased that view if you look really across all of our businesses. We were able to highlight upgrade from our last call.
Our guidance in terms of for Q outlook CP North America is improving from what we had forecast it was down low single digit to up low single digit CP VI.
It's going be down low single digits in the upcoming quarter, our HHS business up low double digits and engineered materials, you know down low to mid single digit that as Cobiz continues to abate, though.
Good about the growth trajectory.
Certainly both in engineered materials the CP both businesses, we anticipate sequential improvement and the key teams continue really outside of co bid to work on all those things absolutely under our control people safety the processes that were using inside the businesses operational conversion cost the paced by which we.
Continue to automate the business.
Largely inefficiency, which which continued to be.
A key attribute for our global portfolio in terms of how we deliver value.
Has continued to shine through the decoded pandemic and frankly postcode bid I think we'll be that much more important.
Okay. Thanks, a lot guys.
Thanks, Phil.
Your next question comes from Ghansham Panjabi with Baird.
Hey, guys. Good morning, and hope everybody is doing well I.
I just wanted to go back to a CP international.
Marketing in your prepared comments, you called out weakness in autos industrial and building and construction.
As a regions opened up in Europe will there be some level of pent up demand that benefits future quarters interviewed and not just three Q.
The cyclicality sort of works in your favor and just asking because auto production is ramping up meaningfully and so as construction in Europe and so how are you kind of netting out these dynamics.
I'll answer that question for Mark.
Yes, the target position in that pipeline in that pipeline for CP VI is very strong. So it's a couple of not only with expected new business closes, but also a sequential improvement just based on the pace of reopening.
There's a there's a bigger expectation I think in Europe right now that the calendar Q3 is going to be stronger in Q2, just based on.
The the way they ultimately shut their country down relative to cobot, I think you're the higher expectation that there'll be a stronger recovery.
We are certainly we're trying to be as agile as possible in that regard gunshots, just given that each country. Each region different Germany is going to be different than the UK, which is going to be different from Italy.
But we feel very good we feel very confident that we'll see sequential improvement the quarter and to your point.
Most industries have not been holding on and carrying a tremendous amount of inventory as they've been weaning that off over the last several months of course, so they'll they'll probably be some component to that difficult to articulate what it did but we're really focused on given our customers.
Challenges in terms of forecasting demand.
Our agility on our supply chain strength is really as I said previously.
Rang true I have to share with you got I'll give you. Two example, and we talked a lot about global value delivery capability and it marks comments he noted.
Recent close that we secured you know, but 50 plus million dollar opportunity with a major brand a worldwide brand and the way that team has actually managing supply chain management execution. In this environment is incredibly impressive four months ago, we were identified the opportunity we identify.
Slide and negotiated in India, we built the tool in China, and we're manufacturing in four months in Mexico.
So when you think about how that team and how this organization is executing in a cobot environment and being able to support our customers growth objective what can it be post cobot and that's what I'm. So proud of this team has worked so incredibly hard during this time not only to execute around growth objectives to make that.
Progress delight, our customers and fully integrate that business. So I'm really bullish about what we've done in CP I and the prospects for that business going forward.
Very clear and then for the EMS segment.
Just comment on your strategy to offset the volume weakness given that many of the venues you cited schools office buildings et cetera will likely remain impaired from a use of standpoint for a while what do you. What are you doing in that segment of the thanks so much.
We got over $70 million.
New Capex commissioned over the next year, including new lines upgrade all around multiple advantage product in that space to support ecommerce to support snack packaging.
The retail trash bag business and it's interesting if you look at that business. It by design, it's historically been industrially driven business to a large extent.
And we have also been under index. If you will for at home consumption, but that is coincidentally, where we've been making the majority of our capital investments over the last 12, an 18 month to give that business better balance. So engineered materials has been a strong business for a long time, we continue to focus on ways that we can innovate.
Differentiate and against support those faster growing components that business, specifically E commerce and snack packaging.
Perfect. Thanks, so much down.
Your next question comes from line this Swanson with RBC capital markets.
Good morning, Thanks, just wanted to delve into the free cash flow guidance I guess for the rest of this here and then potentially into next year.
I guess do you see any upside to that I guess, given that you're you know increasing EBITDA guidance, a little bit more I guess, what is the offset on free cash flow that leads to a slightly lower I guess increase there.
Sure good morning, everyone.
So a couple of things one as you probably noted we've increased our capital plan.
By 20 million for the fiscal year, we continue to see a strong pipeline growth opportunities that we're investing behind our customers.
And then there's some timing elements, where our cash flows while it's still heavily weighted towards the June and September quarter, It's a little more balance and it has and in the past.
And we've got some incremental inflation as well built into our cash flow guidance is there some.
Chatter as you probably know and the work in about some potential increases in our primary raw material inputs.
Around Palmer's so those are really the three factors that we've got considered.
When we provide the guidance of 830, but we're certainly proud of our track record of exceeding our cash flow every single year as a publicly traded company.
I want to make sure we maintained.
Okay.
Thanks.
And I guess looking into next year I guess.
Are there any large items discrete or otherwise that a with.
We help us kind of understand where you think capital will be for next year Capex for next year and you guys are made a lot of investments and HHS recently and redirected some capacity towards pp any I guess is that they're going to continue or a would we see that reverse.
Thanks.
I won't comment specifically on what the amount of investment will be in a by business basis, but I'd take you back to what we think are some.
Trends that will be more sustainable in the future and specifically relative to HHS as you recall a couple of years ago, we invested in new technology and faster growing regions of the world specifically China.
To support premium hygiene.
As well as in more as the North Carolina for hard surface Didnt back in ways that we not only got the benefit of the pivot to the faster growing reads the world, but also no things like hard surface disinfecting wipes, we believe will be a longer term trend that will benefit Barry and specifically our HHS business not only in the most developed regional were.
So which is the U.S. and Canada, but also it's going to begin to proliferate outside the United States, and Canada and add that happens.
Barry with its ability to have over 290 manufacturing sites around the world. It gives us the opportunity to consider investment and get some support you know as you've seen on multiple press announcements in communications of collaboration that we've done with local governments municipalities in such to support investment all around.
The spirit of nationalizing certain supply chains in certain items. So we believe some of those dynamics going to how are going to have much longer legs were recognized leader in terms of hard surface disinfecting wipes know, how and certainly when people consider global expansion.
There is obviously one of the one of the company that has to be part of that conversation. So.
But again, the bigger Mega trend health and wellness food safety.
And sustainability for us continue to be real primary is along with no barrier in general.
It's just a strong attribute for the global barrier Port Barry portfolio.
Great. Thanks for that and if I may squeeze in one more.
Given what you just said I guess, how are you looking at the long term growth and H. and asked if if if if you could mean is is it higher post covance, maybe by a point or two and maybe you get into kind of a mid single digit gross or how should we think about that kind of mid to long term growth.
A normalized basis and HHS now well I'd start with the portfolio all our businesses, we believe will be low single digit growers and obviously the dynamic that you've seen in terms of HHS.
Similarly, we believe well we'll show.
Towards the higher end of that range for sure and again the continued investments that we're making around the world. The globalization of this business and the sustainability of some of these platforms are very exciting for us not just in 2021, but for the for the longer term so.
No more to calm and obviously, we're not getting guidance, yes on the on 2021 and beyond but nonetheless, it's a very healthy price franchise for us.
Globally deployed and what I'm proud of is the team and their focus strategically on making these investments. Some two years ago. So this is part of our step strategy as a company to make certain we have local value delivery capability in advantaged products and every one of these investments we ultimately match up to targeted.
Customers that can help pull that demand through again, thus reducing risk.
Thanks.
Your next question comes from Brian Maguire with Goldman Sachs.
Hey, good morning.
I had my congrats on solid results here.
Just a question on the the fourth quarter guidance, and then third quarter results I think last quarter you talked about.
Like you that fourth quarter, EBITDA would be flat with three Q.
But now you're sort of guiding for it to be $50 million lower so just wondering if there were any.
Unique items in Threeq, you, you're not expecting to repeat.
And it kind of associated with that wonderful kind of quantify what sort of resin benefit if any you got in the quarter and.
Kind of headwind you might be expecting in fourq. It.
Our normal seasonality.
Brian would be that June is typically a little stronger than September quarter.
So I wouldn't say, there's anything unusual we do have as I mentioned in the cash flow question.
We do have some incremental inflation coming that we're expecting in Q4, obviously to the extent that doesn't happen.
That would be upside with respect to our guidance I wouldn't say anything unusual again other than normal seasonality things are a little slower in September.
As well as the inflation.
That may or may not happen in the September quarter. We've we've assumed that does for the purpose of the guidance.
Okay. So just to be clear, it's not inflation that you're seeing today this would be kind of inflation above and beyond where we sit where we sit today that you're just putting in there for some conservativism case, we got it.
Yeah July hasn't settled yet for our primary raw material again, I think theres indications that there there will likely be some increases the magnitude of that is still undetermined, we're we feel comfortable with.
The outlook we provided.
Okay, Great and then just one more on.
Consumer International I think you noted in the release that coated.
Yes, it seems can hurt the volumes there by roughly 7%.
But in North America, the impact was more muted only kind of a low single digit impacts until we just wondering if you could.
Talk about why.
Covering a lot downs would be having a bigger impact on international business.
And what you're seeing in the North America business. That's it's a it's a great question. We have the driver as we about larger foodservice business in North America that showed ramped improvement from the prior quarter.
That's probably the biggest distinction and also the the makeup of the industrial business inside of Cpis, specifically around automotive industrial is heavy again that didn't have that offset of ramping.
Improving foodservice business that we that we saw in North America.
All right I'll turn it over thanks very much.
Your next question comes from George Staphos with Bank of America.
Hi, everyone. Good morning, how you doing George how are you doing is on on the progress doing well and well Hey, I want to take a step back and some of the earlier question Ive touched on this to some degree.
But but Tom you mentioned early in the call I think you mentioned in your slide deck.
The company's current free cash yield of 14, or 15%, which implies perhaps that you think that yield in the market should be lower.
When you look at.
Other companies when you model best in class.
Companies that perhaps trade at lower free cash yield.
What do you think.
The takeaways are for Barry again, recognizing all the progress that you've seen.
In terms of how you will manage the balance sheet and allocate capital there.
And value return.
And also product areas for investment how do you think about those three things and capital allocation.
Aiming for best in class performance and overtime next quarter necessarily or next week.
Valuation metrics, how should we think about that.
Well I I'd start not let mark weigh in as well, but remember the top three primary strategic objectives for the company that we felt that were essential for us to address well tested liver predictable.
Sustained organic growth, which we've been investing in and around an executed against quite well. The second piece was we just completed just one year ago.
Transformer the largest acquisition that we had done in our company's history and our objective was first and foremost make certain that we execute against the synergy outlined that we've outlined on time, while integrating that business.
And getting it harmonized around our growth objectives, and then the third piece was simply making certain that we take advantage to de lever the company as quickly as possible because clearly there was a dislocation of our net debt to adjusted EBITDA versus the rest of the market strong improvement made this quarter four and a half will be on.
Track to get to four times by the end of end of the and the 2021 and certainly we feel comfortable that beyond that we can now begin to broach more dialogue with our board of directors around what the appropriate model is in terms of allocation of spend towards that that number one objective of consistent predictable reliable.
Growth.
Coupled with other opportunities to advance the company on a capital allocation basis.
I would say those are the exact things I would reiterate what Tom said than to say we have.
A very high level of confidence in our team's ability to successfully execute.
On those initiatives that we've got as a company.
And guys, perhaps perhaps you're not in a position to comment on it now and I recognize that but could you give us perhaps a bit more.
In terms of how you are deliberating thinking about it in terms of whether four times is in fact, the right leverage point, you said, you're making progress towards being below that targets, which suggests that maybe the target really should be below four times companies.
Of frequently in packaging do have some form of recurring value return.
And your minus what you said before and maybe about some of things that are on the horizon. There in terms of Varian and your move towards advancing your reputation evaluation the market overtime.
And then kind of a quick.
Unrelated follow on can you talk this a bit about how cove. It is is affecting your dispensing business and health care trends more more broadly forgetting about the impact. It's obviously, having on Ah Ha Tonight. Thank you guys. Good luck in the quarter.
Thanks, George and I start with that.
The fact that Barry has industry, leading growth rates on revenue EBITDA free cash flow not just near term, but for a long period of time gives us an amazing amount of flexibility. We've articulated that our first objective is to get at or below four times and then we'll ultimately restate that objective onto the broader market as we can.
Some of that conclusion with our board of directors not only on the net leverage but just what a more detailed relative to capital allocation in general.
And before we prognosticate on what might be or what we may have an object, we want to deliver on that commitment.
Before we ultimately start speculating on what the next hurdle could be.
Just as we did on growth and I George I have to mention this business and this leadership team and the teams inside of Barry They said when they would pivot to growth in engineered materials and they did they said when they pivot to growth in HHS and they did early.
And I'm incredibly proud of this team and their ability to execute make commitments and honor commitments and that's what the cornerstone of this company is going to be built around coupled with this global value delivery capability that has been enabled by the global pure play on packaging between legacy RPC and to be.
Sorry, CP, North American business, and the already international HSBC HHS business. So we got a tremendous amount flexibility as an organization and I couldn't be more proud of how this teams executing in terms of the pandemic. Let me say the first thing. The first thing. The pandemic has done has increased the level.
Those morale believe it or not inside our company to heights that it hasn't been in a long time by the way. These teams are carrying for one another caring for their communities and caring for their customers.
I think ultimately what we've seen in terms of our integration efforts even in a difficult growth environment. You know CP I was able to maximize earnings they were able to as well as free cash flow and continue to execute against synergy realization ahead of schedule.
Dispensing solutions.
He did a cornerstone of where we're investing.
We believe Thats, an advantaged area for US, we believe health and wellness healthcare dispensing systems metered dose inhalers are all key components. Both in terms of maintenance a good health as well as in some instances potential opportunities for vaccine through inhalation as an option.
That can be created so the portfolio continues to more fund continues to be centered around those larger mega trend that we think are going to continue to sustain.
For many years to come and we think we're really well positioned as a result.
Thank you.
Your next question comes from not just Shaw with BMO capital markets.
Hi, Good morning, I mean I wonder.
Asking about the M&A markets, particularly as we're seeing deal activity picking up around the space right. Now if you could talk about what kind of valuations are seeing that would be great and also similarly, how are you feeling about divestitures now to think the market has become more accommodating.
Listen we continue to stay abreast of what's happening from an M&A perspective, clearly our primary objective as Weve stated strategically is to fully integrate and take advantage of the synergy realization of of of the RPC transaction or just one year old.
But clearly add as the economy improves as people get.
Comfortable in a relatively.
New dynamic in terms of how different geography to open you know, it's going to increase the level of activity. So nothing specific I'd comment relative to Barry I'm more relative to multiples we own we always are continuing to look at our our diverse portfolio and if there's opportunities for you know.
US to reconsider portions of it that may might be ultimately better suited for no. Other individuals we could certainly it would would consider those for divestiture, but nothing we comment specifically on this call.
Okay. Thank you for that and then my question is we saw a recent news reports about and you propose elephant new tax on plastic packaging and building on non recyclable plastic packaging.
I think it's about 0.8 euros per kilogram to be introduced on January one can you talk about if this will affect you.
It's up it would affect everybody in this space ultimately and it's really driven to support larger percentages and post consumer materials, putting them into the product line.
Actually given our presence.
In terms of a post consumer consumer.
User I should say in our products already it's actually an opportunity for us because of the access that we have to some of those fee streams.
But nonetheless, it would be attacks that ultimately passed on to the end customer all in the sport to create additional larger infrastructure in the geographies, which is certainly relative to classics weight continues to be a great opportunity for the for the industry to address weights and also take advantage of the valuable raw material.
That could continue to be reuse multiple times so.
Nothing negative that we would outlook or forecast in that regard we look at sustainability for our business its actually been improved and bolster given the given the acquisition of.
RPC and not only in terms of PCR materials, but also some of the comment the recycle materials and we talked previously about what a what's where they exciting collaboration with monda leads.
In their Philadelphia cream cheese, using recycled materials from is permitted dance recycling technology Thats currently in the market today, we recently introduced a new product in in CPI today call sustain another high performance sustainable Palmer.
Using recycled content. So it's really driven more innovation, our business and we believe our background in terms of material science.
As well as recycle building and understand the post consumer as well as advanced recycling processes give us a great opportunity to provide that to our end customers where they need exists.
Great. Thank you very much.
Your next question comes from Neel Kumar with Morgan Stanley.
Hi, good morning.
In consumer packaging North America, I know that you polypropylene grain crop foodservice channel was a key driver of growth. Historically are you seeing evidence clearly theres customers wanting to pursue conversion opportunities to plastic or your first flight drink Cup product from from paper on the news gives a sense.
Conversations you're having with your customers.
Absolutely the Cpnine had really strong success not only in the foodservice space, but also personal care health care balls closures food on the foodservice side, the attributes of a fully recyclable polypropylene clear substrate.
You to grow and its popularity in the foodservice space.
So we're excited about that but as you mentioned relative to.
Versalite, that's a product line that continues to operate a very high level right now inside the CP North America Division, there's clearly a number of targeted niche niches that we're deploying that again.
And opportunities to keep cold food cold drink coal and very warm climates without without a lot of the condensation build up et cetera.
As well as premium is the properties on hot drinks as well so continued to be a nice component a profitable component inside CP North America and continues to be introduced more customers literally every quarter.
Okay. That's helpful. I just had also question on H. bass.
We've had several announcements relating to adding new non owned capacity for PDP production are always capacity now can based on specific minimum volume commitments from customers and as we think about the capex outlook in 2021 should we expect to step up to 10 $20 million levels. This year given all these new capacity additions.
I'll start with the investments all the investments that we're making relative to pp are tied to either a.
Municipality.
More anchor customer that pulling through percentages of that have that demand.
So we feel really good we've really we deployed the exact same model that we've talked about for the company as a whole making sure that we have anchor customers were letters of intent strategic commitment on the consumption that ultimately reduces risk, but what's most exciting as well about that business as the flexibility of the asset because it not only can.
Produced products for things like surgical 123 face mask and 95, but also can support.
Air filtration opportunities, which as many of you know continued to be a growing niche.
For Air cabin filtration home filtration office filtration and alike.
With respect to the capital dollars.
We believe 600 million, our $600 million capital plan is about half maintenance the balances.
A combination on cost reduction and growth.
We believe the 600 million can accomplish our objective of growing both our topline and bottomline.
To the extent, we have incremental opportunities that meet our thresholds, we'll certainly update the market.
I hope that's the case as it is this year, where we see some incremental opportunities to grow our topline and bottom line, even higher than our expectation.
It's a terrific prom the avid as Mark said and it's not one we would apologize for.
The teams are doing an amazing job, making certain that.
We continue to vertically penetrate allows a larger accounts, we do business with as example, RCP North American business. Our pilot line is close to full capacity right now, meaning that the lab and that's the lines that were ultimately testing in qualifying new application and new parts. That's a strong correlative indicee for US you know going forward and.
Thank you know what I, what I publicly need to say it. Thank you to my team and the teams around the world for them to develop and actually implement execute the capital that we have around the globe on time to allow this local value delivery capability, regardless of the geography that were in has been really impressed and the team.
Seems done an amazing job and really giving us a tremendous amount of confidence in their ability to not only manage the course of the day to day business, but also implement you know what is.
Very technical and complex.
Projects in terms of some of these this new capacity, whether it's on them on the premium hygiene products nonwoven applications.
Has been a lot of great examples of really strong execution by the group really front.
Great. Thanks.
Your next question comes from Kyle White with Deutsche Bank.
Hi, Good morning, that's taking your question I'll leave it to just one question here late in the call focusing on price cost expectations for fiscal 2021, any early thoughts there I'm on kind of underlying price thoughts when we take out the impact of the RBC synergies there.
See price cuts being a headwind tailwind or just kind of a neutral for next year.
Ex excluding the synergies I wouldn't expect a big a big Delta there on a year over year basis pretty modest.
Great actually if I could sneak another one I wanted to actually go back to the foodservice business as follow up on that Howard volumes in that business throughout the quarter. How is June relative to April may and what does the recovery there looked like.
Steady as she goes June was a was a stronger month than April and May and continue to be the outlook going forward that business is continuing to ramp that's interesting what you're seeing is ultimately you know people are kind of learning how to deal with this new norm.
Of complete shutdown to modified shutdown.
It's really been a learning for foodservice company. So we've been really pleased that the teams have been manage that successfully but yeah. We exited we exited our fiscal Q3 with June being a strong month.
Thank you good luck for the best there.
Thank you.
And your final question comes from Laurels.
Kills Berg with credit Suisse.
Thank you.
Thanks to one question.
RPC clearly it's been a good good.
Transaction for you.
It is interesting I'd say no what are your comments about Q2 deliberate and how do you are.
Expectations.
Well, there's been no great economics in Europe accounted now with Covance impact of scaling and the calendar second quarter.
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Why don't we see in.
Synergy benefit there of what they are now being opportunity.
We are a continuous improvement culture.
And we're also tend to be conservative in terms of making certain that we're providing.
Insight on numbers that we have line of sight to in that we can hit I can assure you that the team focused on maximizing.
Delivery of synergies on not only on time.
But the degree to which we can exceed our outlook, but at this time we've maintained.
The two year look on that at $150 million, but we were really pleased that the team in this cobot environment, we're able to execute so well.
That we were able to increased by $10 million the outlook for attainment in 2020.
Until tomorrow. So just wondering what one year into this acquisition is there anything that surprised you.
Yes to the upside and potentially in the thing on the downside, but this is your expectations year ago.
Not a lot on the downside obviously a difficult.
Growth environment throughout Europe, right, now, but blown away by the quality of the people.
The speed by which they pull together as a team and part of.
Of our one Barry family.
And the fact that there is a 100% laser focus.
Not only executing.
In terms of earning free cash flow, but wiring that business for growth.
As we said, we're very confident that we'll see sequential improvement in our fiscal Q4, and there is a strong alignment and that organization.
To return as quickly as possible post cobot or even before too low single digit growth of that business. We're we're pleased with it and as I said I I think that example of how we're able to close you know like 50 plus million dollar opportunity in four months as some of the best execution I've seen in May.
My history.
In this industry.
Hi, guys. Thank you.
Thank you.
I'd now like to turn the call back over to the presenters for any closing remarks, well. Thank you everybody continue to stay sake, we look forward to updating you on our progress.
Afterward for our next call thanks very much.
Ladies and gentlemen, thank you again for joining US today. This concludes today's conference call you may now disconnect.
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