Q1 2021 Berry Global Group Inc Earnings Call
Yes.
Ladies and gentlemen, thank you for standing by and welcome to the Berry Global earnings call. At this time, all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session. The ask a question. During this time, we will need to press Star then the number one on your telephone keypad.
To withdraw your question press the pound key stinky I'd like to turn it over to Mr. Dustin Stilwell you may begin the conference here.
Thank you and good morning, everyone and welcome to Berry's first fiscal quarter of 2021 earnings call. Throughout this call. We will refer to the first fiscal quarter of the December 2020 quarter.
Before we begin our call and would like to mention that on our website. We have provided the slide presentation to help guide our discussion this morning.
After todays call and a replay will also be available on our website and Berry global Dot com under our Investor Relations section.
Joining me from the company I have various chief Executive Officer, Tom Salmon, and Chief Financial Officer, Mark miles.
And Tom and Marty Thomas Today, one of the question and answer session and order to allow everyone. The opportunity to participate and we do ask that you limit yourself to one question at the time with the brief follow up and then fall back into the queue for any 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 and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and Investor presentation on the website and.
And finally, a reminder that certain statements made today may be forward looking statements. These statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks.
<unk>, but not limited to those described in our earnings release and annual report on form 10-K, and other filings with the SEC.
Therefore, the actual results of operations of our financial condition of the company could differ materially from those expressed or implied in our forward looking statements and now I will turn the call over to Berry's CEO Tom Salmon.
Thank you Dustin and welcome everyone and thank you for being with US today first let me start with our number one core value on slide three net and safety, we fully understand and what we do here and Berry is a valuable part of the supply chain, making and supply and products that are protecting each other our friends our families and our neighbors and communities around.
The loans.
Our number one priority of the health and safety of our team members. We believe safety doesn't happen by accident and everything we do at Berry starts with safety our employees commitment to show up and perform their work on a safe and professional manner makes me incredibly proud of but.
And it doesn't and when they walk out of the plant one of their office.
The safety and health outside of work is just as important and they've demonstrated respect for their colleagues and their communities and this aspect as well.
As you can see on the slide we have an ongoing commitment to identifying and managing and eliminate risk.
And we're very proud of our safety record with an osha incident rate significantly better than the industry average.
Our team's emphasis on working safely and servicing our customers has ensured an uninterrupted supply of the essential products we produce.
This work has resulted in our strong start to the fiscal year and the numbers speak for themselves.
First quarter results for revenue organic volumes EBITDA and earnings per share all came in significantly better than we anticipated with strong demand across every division.
Strong momentum we've created over the past several years delivered again record first quarter results on the topline bottomline and free cash flow.
Once again, we are proving our resilience across various economic cycles.
The diversity of our portfolio of across various end markets and regions continues to provide the consistency and dependability, we demonstrated for decades.
On slide four.
We said coming into the year that the key focus for the company was to grow organic volumes and improve our balance sheet, we're off to an exceptional start to deliver on those promises.
Organic volume growth came in and and outstanding quarterly record of 7% with all four segments delivering volume growth.
Stay at home food health and wellness, along with personal protective products continued to see solid growth and the quarter and.
Industrial and automotive distribution and building and construction end markets, while still facing some softness related to COVID-19 improved moderately resolved and smaller headwinds to our respective segment volumes.
Additionally, our strong results on earnings and cash flow allowed us to reduce our leverage by two tenants and in the period of $4 one times net debt to adjusted EBITDA.
We are well on our way of meeting our objective of getting our leverage below four times.
After we have achieved this target we anticipate operating our company, while maintaining our leverage and a range of three to three nine times on a go forward basis.
To be very clear.
We believe our top two drivers now in delivering significant shareholder value is consistently growing our business organically and strengthening our balance sheet and.
And lastly, as most of you were aware and we've seen significant cost increases and our primary raw material that being resin.
Along with some modest inflation and other raw materials and other costs over the past several months, including the anticipated February increases.
With the strong volume growth momentum and the business along with our efforts to improve the timing lag of the pass through of inflation and our customer contracts.
We are active and fully intend on passing these transitory increases through.
Our updated guidance includes an incremental timing lag of $50 million over the next three quarters related to this incremental inflation.
Despite this timing headwind and with the exceptional start to the year, we are raising our fiscal year operating EBIT guidance range by $25 million and increasing the rent organic volume growth assumption from the original 2% to now 4% for the full year.
We began fiscal 2021 with enthusiasm and confidence and our ability to grow organically as we've demonstrated over the past year and I believe we are well positioned to continue to see long term predictable and sustainable growth with customer linked capital investments of target continued expansion into both the faster growing <unk>.
<unk> and emerging markets.
Now I will turn the call to Mark Who'll review Berry's financial results in more detail Mark.
Tom.
Before we move ahead into the highlights for the quarter. Please note that the December 2020 quarter contained additional shipping days for our U S based businesses compared to our prior year period.
When we discuss volumes, we have made the necessary adjustment to exclude these additional days and have provided the normalized data for a proper comparison.
I would like to refer you to slide five now for the first fiscal quarter reported sales were up over 11% to a record $3 1 billion.
Revenue included reported organic volume growth of 11% of which 4% was attributed to the additional shipping days, resulting in comparable organic volume growth and the quarter of 7%.
As Tom noted demand for our products remained consistent.
And certain markets, which previously experienced COVID-19 related headwinds and recover sooner than we expected.
The quarter included a modest foreign currency impact of increased sales by 2%, which was partially offset by lower slightly lower selling prices and the sale of the U S flexible packaging converting business the closed at the end of November.
From an earnings perspective, the December quarter operating EBITDA increased by 20% to of December quarterly record of $539 million, primarily driven by strong volumes and realized cost synergies.
Adjusted earnings per share increased by 100% to $1 12, and the quarter, which include the benefits just referenced relating to EBITDA, along with interest expense savings from debt reduction of over $1 billion and fiscal 2020.
Free cash flow for the last four quarters and that was over $1 billion. The.
These strong financial results of the byproduct of our entire global teams focus on organic growth and driving cost productivity, while managing the increased demand from our customers and the human resource challenges related to COVID-19.
The results are yet. Another example, as you can see on slide six of our proven performance over many different economic cycles.
As referenced on prior calls we have consistently driven top tier results and key financial metrics, including 20% or more compounded annual growth rates for both free cash flow and adjusted earnings per share.
Now looking at the quarterly performance by each of our four operating segments on slide seven.
On the quarter, our consumer packaging International Division delivered sales of just under $1 billion.
And EBITDA of $170 million.
And the quarter comparable organic volumes were up 4% driven by strength and consumer markets, such as food and hygiene as well as a partial recovery of certain industrial markets that had previously been facing the pandemic related headwinds.
Regionally, we had 2% volume growth in developed markets, such as western Europe, with robust growth and emerging markets, such as China and India.
The CPI team produced an impressive 21% increase and EBITDA, primarily driven by the strong volume cost synergy realization and cost productivity.
Net sales of our consumer packaging North American Division were up 12% to $686 million, primarily as a result of the 8% increase and comparable organic volumes.
The organic volume growth and the quarter was ahead of our expectations provided on our last earnings call. As we saw continued strength and our core businesses from products, such as closures bottles and containers.
Our facilities extended operating schedules to meet the additional demands of our customers and November and December where we commonly see downtime within berry and that our customers.
EBITDA was $121 million compared to $107 million on the prior year quarter. The 13% increase was primarily driven by the strong volumes and the quarter and cost productivity, including some acquisition synergies.
Our health hygiene and specialties division delivered sales of $740 million, the 21% increase included comparable organic volume growth of 15% with.
And with growth and all four regions globally.
We estimate the segment volumes were up high single digits, primarily related to organic growth investments with the balance benefiting from the additional COVID-19 demand for health care hygiene and other PPE related products.
EBITDA increased by $45 million of our 45%, primarily driven by the organic volume growth favorable product mix and cost productivity.
As expected and consistent with the September quarter. The December quarter continued to benefit of approximately $25 million and EBITDA from favorable product mix associated with pivoting our assets two products related to COVID-19 protection.
And lastly sales for our engineered materials division were 9% higher at $722 million.
The increase was primarily attributed to volume and the additional days of just over 5% and comparable organic volume growth of 2%.
<unk> growth was primarily driven by our consumer facing products and some of our industrial businesses, along with a modest recovery of certain markets that were negatively impacted by the pandemic such as our can liner business serves away from home waste disposal.
EBITDA was flat versus the prior year quarter as organic volume growth was offset by a modest timing lag and recovering cost inflation.
Next on slide eight free cash flow for the last four quarters ended December 'twenty totaled $1 billion and $30 million.
Our free cash flow continues to be utilized to reduce our outstanding debt and we have paid down over $1 $2 billion over the last five quarters, which has lowered our annual interest expense and reduced our net leverage from four eight times to now four one times.
We remain committed to maintaining a strong balance sheet and our consistently increasing and dependable cash flow provides us the opportunity to further improve our strong balance sheet as we have demonstrated historically.
We also continue to evaluate opportunities to reduce our financing costs and extend our maturity profile.
We recently issued two sets of investment grade rated first priority senior secured notes with fixed interest rates of 157% and 95%.
We used the proceeds to replace existing variable rate term loans, which will reduce our annual interest expense by over $10 million and also extended our weighted average debt maturity profile.
The investment grade debt market represents a new market opportunity for our company and we intend to continue our efforts to further strengthen our balance sheet.
Net.
Our updated fiscal 'twenty, one operating EBITDA and free cash flow guidance as shown on slide nine.
Given the stronger and getting to the fiscal year and improved demand outlook across our business. We are increasing the range of operating EBITDA by $25 million to a new range of two one and seven five to two to two 5 billion.
We are increase our increasing our organic volume growth assumption by 2% and now anticipate volume growth of 4% for the full fiscal year, which is supported by a robust and growing pipeline increased level of capital expenditures and the positive trends and momentum we are seeing and each of our businesses.
We havent quoted of modest incremental negative from inflation and the associated timing lag in passing these higher cost over the next few quarters.
Expected free cash flow will remain and the range of $875 million to $975 million the.
The range of free cash flow includes 12525 to $1 $65 billion of cash flow from operations.
Partially offset by capital expenditures of $650 million.
Excluding incremental growth capital of our fiscal 'twenty, one free cash flow and is expected to exceed $1 billion.
We also continue to anticipate further strengthening our balance sheet.
And I expect our leverage ratio to be three eight to three nine times at the end of fiscal 'twenty one.
This concludes my financial review and now I'll turn it back to Tom.
Thank you Mark we continue invest and each of our businesses to build and maintain our world class low cost manufacturing base with an emphasis on key growth markets and regions.
We made these investments for a specific purpose.
To be competitive regardless of any economic cycle.
Those investments set the stage for what Youre seeing now.
Overall, the diversity of our end markets and product offerings, as well and the essential nature and demand consistency of our products have been core to the undermine performance of the business.
I'm very confident and the our team's ability to meet our near term and long term expectations and commitment to provide sustainable profitable growth.
Across our company our teams are performing at a very high level with an exceptional sense of urgency to demonstrate consistent organic volume growth by providing advantage products and targeted markets as evidenced in our recent quarterly results.
As we've stated on slide 10, and the key drivers for organic growth and why we feel confident and our continued trajectory or our focus on both faster growth and markets and emerging markets along with sustainability led packaging.
We expect emerging markets to grow considerably faster than advanced economies with increasing populations and the need for protection products.
And we've increased the revenue and faster growing regions from $100 million and 2013 to now over $1 5 billion.
We will continue to pivot our portfolio and center investments on faster growing end markets and global Megatrends and regions with stronger growth patterns.
Over the past several years, we've made internal business realignments in order to further accelerate organic growth across our global footprint.
The transition of our tapes business to HHS and the legacy RPC films business into our engineered materials segment are proceeding well and providing great commercial opportunities, we would not have had otherwise.
Additionally, these changes allowed us to create a global rigid healthcare packaging and device business and our total health care portfolio has grown from $500 million and 2015 to now over $1 billion of revenue.
Furthermore, as you can see on slide 11, we are a leader and healthcare primary packaging and device markets, including our global innovation product portfolio.
With over $330 million asthma, sufferers, and 250 million COPD suffered globally.
We are highly focused on ways to improve the lives of those with these conditions.
Long term growth for the installation market over the next five to 10 years is expected to be high single digits, where we have a primary focus on growth and our Asia Pacific region.
On the sustainability of front, which we have long considered to be core of Berry's operating philosophy the.
The industry has taken tremendous steps forward and the journey to eliminate plastic waste, while continuously innovating to meet desired performance requirements of consumers.
We continue to invest in both new products as well as qualify and existing products against recognized sustainability standards and the market so customers and end users can make informed decisions.
On slide 12, we've highlighted just a few of the new amazing products, we have designed and manufactured with sustainability and mined on.
On the top right you can see our bio vantage bio resin bakery film this.
And this film is made from renewable feedstock with lower carbon footprint and conventional based polyethylene.
This line of film is made from up to 89% <unk> polyethylene, which enables our customers protect their products and of material made from the Earth.
And one other terrific example includes the innovation and sustainability capabilities created by our global team of experts.
As you can see on the bottom left of the slide.
We continue to be a leader and dispensing solutions, where we've created lighter weight and sustainable dispensing trigger pumps sprayer that includes the modern design and improve ergonomics made from 100% plastic components, allowing it to be easily recycled.
Berry remains steadfast and his commitment to leave and collaborate to drive innovation and acceptance of products targeted towards improving recyclability reuse and reduction of Virgin plastics, all of the goal to promote and more circular economy.
Further demonstration of our efforts and commitments to promote and more circular economy. We've.
We've taken a leadership role in developing markets for recycled content made from waste and helping our customers achieve the growing needs of their consumers.
Slide 13 highlights various capability using in house mechanic and recycling process, we've installed capacity of over 300 million pounds per year after our latest expansion.
This new expansion is targeted for personal care and household care applications.
Similarly over the last several months Berry has partnered with our suppliers to procure of another 300 million pounds annually of <unk>.
Vance recycling, rather and by 2025 in Europe, and United States.
We've been partnering with leading brands to bring.
Products made from recycled content material to the shelf and late 'twenty, one or early 'twenty two to.
And to enable this berry has 14 sites globally that are I S cc plus certified to ensure we bring transparency and accountability to the recycled content process.
Our teams globally are working to grow our supply and expertise to introduce recycled content in our products to provide the same functional benefits while solving the plastic waste problem.
In summary on slide 14 and building upon our solid start in 2020, we delivered outstanding results across all of our operating segments, we again, including the first fiscal quarter and delivered on our strategic goals of driving organic growth and improving our balance sheet, all while setting financial records for any December quarterly period.
The EBITDA free cash flow revenue or earnings per share and finally I want to remind you that we believe the Berry investment case has never been stronger with consistent and dependable and markets of leading cost position along with substantial capacity to invest and long term steady growth.
And allows us to be well positioned to continue this momentum through our customer linked capital investments.
Target continued expansion and both faster growing end markets and regions and.
Thank you for your continued interest and Berry and at this time, Mark and I will be glad to answer any questions.
And at this time I would like to remind everyone. If you'd like to ask a question Press Star then the number one on your telephone keypad.
The first question is coming from the line of Anthony.
<unk> from Citi.
Hi, good morning.
And Anthony.
Tom you referenced increased efforts to tightened and raw material pass throughs and I was wondering if that was the comment on resin as well as non resin costs and can you give any color on how you've been able to maybe shortening lags or improve pass throughs relative to previous years of previous periods. When you've seen this really sharp cost inflation.
Well listen the it's a fair question and we've really attempted to and we're working with end users on normally RASM, but non res and freight and other items as well and <unk>.
During this period I noted in my prepared comments, we are active right now and passing this inflation through.
And we feel confident that while there'll be a lag we'll see full recovery I can't comment it generically, but certainly on a case by case basis, we're making and making improvements both and reducing the lag and covering some other non traditional items.
Where we can where we can build indices that can regulate.
Up movements and costs and down as well so it's a work in process, but we feel good and feel confident and our ability to recover here what we're seeing through February.
Got it got it and then you obviously saw a really remarkable growth and consumer North America, and Hh and as just wondering if that's continued into January and February and can you remind us how much visibility you typically have and to customer demand and those businesses is there anything you can say about customer order patterns or customer inventory.
Please.
I can't really give you any inter quarter guidance, but suffice to say the.
The expectation and the raise that we made on the organic volume from 2% to 4% was really driven by.
The current robustness of our pipeline, which on average is about 20% better than what we've seen in previous years right now the close rate of the existing applications that teams were working on.
And the sell through and ongoing demand from our end users, but we do have clear line of sight.
I would say decent visibility to demand the relatively short cycle business.
And feel comfortable with our new outlook at 4% organic volume growth.
Okay. That's helpful I'll turn it over.
Next question is from Ghansham Panjabi from Baird.
Thank you good morning, everyone.
Im just trying to reconcile all of the 4% and volume growth organic volume growth the increase from your <unk> versus the fiscal <unk>, which was up seven.
And if you can kind of as you think back to the December quarter.
And what happened in terms of expanded Lockdowns in Europe a lot.
Of your peers that have reported have talked about increasing sequential volume joined the during the calendar year <unk> just based on the expanded lockdowns and consumers staying at home et cetera. So how much of that boost do you think you benefited from specific tier one here in terms of volumes, maybe the evolution of the quarter would be helpful in terms of volumes.
Yes, I think on charms so.
December is always a little bit of a tough quarter I think I had a comment on my prepared remarks about holidays and.
And what customers do over holidays, certainly impacts what we do over holidays, obviously, so december quarter always tough, but given the robust nature is as we discussed of the start to the year.
On the outlook from our customers and our businesses and we're comfortable certainly going from two to four we expect all businesses to grow.
Low to mid single digits on fiscal 'twenty one.
And some upside to that and our HHS business, HHS and will likely be mid to high single digits.
We're going to lap some of the.
Some of the comps the back half of the year.
Related to the benefit and PPE now obviously some of that will depend on how long the pandemic laughs, we've got it last thing of.
Specifically for that business.
And.
As one of the biggest impact is and we've got that lasting through the March quarter to the extent of it. It continues beyond that that would be upside relative to our outlook.
Hugo on some I think the other two pieces I'd mentioned is just as we talked about some of the industrial markets that we serve clearly have.
<unk> had improved theyre not theyre not at a post.
Post pandemic.
Right now, but the continued progression in those businesses as well.
Coupled with what has been really strong execution from the teams in terms of deployment of capital.
The investments that we've made targeted specific customers and the sell through that we're seeing.
And some of those opportunities give us a lot of confidence and the back half of the year. As a reminder, all of the capital investments that we make is the company are tied and linked to specific customers or customer link.
As a result, we have a we have a lot of confidence in terms of the predictability of that demand, giving us confidence and the rates.
That's very helpful. And then the $50 million of additional raw material inflation and not betting and guidance how does the phased in over the next three quarters and just.
The question and calibrate against are you assuming just the February price increase and get more out there, which are pretty substantial for resin or.
Any incremental cost inflation and beyond that specific day. Thanks, so much.
While we've got incorporating guidance as is the February increases nothing beyond February.
Perfect. Thank you.
And again to ask a question. Please press Star then the number one on your telephone Keypad next question is from George Staphos from Bank of America.
Hi, everyone. Good morning, I hope you're doing well.
For the details and congratulations on the progress so far guys.
I wanted to come back to the question on value creation, and Tom and you had mentioned in your remarks, and we would agree.
And as we've talked about and our research that good organic growth and deleveraging help create value.
One of the of things that also from our research over the years helps create value is.
Elimination of volatility and.
And one of the ways that that's accomplished is by on the one hand, improving your margins.
And on the other hand, improving the predictability of the return to the shareholder.
One what do you think is likely to be seen for of mixed standpoint, and a margin improvement standpoint from some of the new product areas that you are pursuing either within and Hh and ask or maybe even within sustainability and.
And on the other hand.
How should we think about.
And improving value returned to shareholders.
Over time, obviously, not this quarter, but as the leverage gets to where you'd like it to be should we expect something of a dividend, which again that together with higher margins would also take out of volatility lower your cost of capital and ultimately improve your evaluation of what are your thoughts on that and I had a follow on.
Let me answer the first one the that comes to mind, and I think relative to growth and new business. Yeah. I think if you take into consideration the capital investment that we've made.
And to surpass the to support our organic growth now the.
Profitability of that business the margin of that business had been at or above the company average and we would expect that to continue to be the case going forward and as the primary driver of why we've targeted faster growing markets, where we have advantages.
And faster growing regions of the world and that that continues that pipeline of opportunity and continues to be robust.
And the unique thing about Berry George is that we didn't we didn't stop we continue that pace of capital and investment to support our growth throughout the pandemic based on the dependability and predictability of the business that that we serve so we feel very comfortable and that'll be the ongoing strategy going forward.
Relative to leverage of the company I'm thrilled with the progress that the team has made and we intend.
And to operate our company with leverage between three and three nine times, we bet and we generate substantial cash flows of around $1 billion, we're going to allocate the 100% of that debt until we're in the range.
And when we're in the range, we anticipate a balanced approach which will include <unk>.
Cash returned to shareholders bolt on acquisitions and further debt reduction while staying within the targeted range.
Understood.
And appreciate you reaffirming the the value of returns I wanted to just piggyback off the first question and then to the extent that you continue to push on.
On sustainability.
And you're getting your products from sustainability.
Are those products typically higher margin higher mix relative to the overall portfolio and if you pulled all of your customers right now.
And said here is the Berry suite of sustainable products, what would you say and how much of their portfolio would you be able to.
Sir.
<unk> fulfill you know how much of their metrics would you be able to hit right now and what would you say your percentage of overall business would be typify the sustainable by your customers. Thanks, guys and good luck in the quarter.
Clearly what we walked you through during our prepared remarks was the fact that between <unk>.
Advanced reciting the materials and mechanics, and recycled materials and that's about 600 million pounds of material and it's just it's a tip of the iceberg George if you will.
It is clearly not enough to fulfill and satisfy all of the requirements of all of our end users, but I don't know of anybody in our space that has the breadth of offerings that Berry does.
To begin that process.
I'll also note relative to advanced recycling of materials I'm really pleased to report the kind of work that our teams have done the first two years.
The capacity that we're receiving from advance recycling is sold out.
It sold out so we're doing a good job in terms of.
Being able to demonstrate the value getting people comfortable with the technology. So certainly as as the demand for those products grow will be and a very good position.
And what we find is that all of our end users have strong.
And publicly communicated sustainability objectives, and so they're keen to partner with us.
Help understand how we can help them meet those needs and I.
I would say still the number one opportunity across the chain rims.
It remains around weight reduction and companies that have the design prowess and knowhow to reduce the weight of substrates, while not impacting physical properties using both design and material science Knowhow.
Are going to benefit.
And we certainly at Berry are in that position given that it's been a core capability for us for some time and.
And you've also seen that over the last.
Year or so we've.
And we've made a lot of advances both in terms of commercializing fully recyclable flexible pouch is made of polyethylene biobased materials supporting our tubes business.
Real examples of circular solutions with.
And with the likes of Georgia Pacific and others and.
And I feel really good about the progress and our teams making again this is.
This is a.
A large component of what we do we anticipate that this will be a <unk>.
That we monetize and has similar profitability to what we enjoy.
For the remainder of the portfolio and frankly.
And it's the value attribute that we think is going to be unique to berry because not everyone is going to have visibility.
And to help solve some of those those and customer problems and so we're pleased and and again I'm excited about this investment but more importantly, we're excited about the progress we'll make here.
Thank you very much good luck in the quarter guys. Thank you Tom.
Next question is from Neel Kumar from Morgan Stanley.
Hey, good morning, Thanks for taking my question.
And the recently announced their capital and investment into the wipes and masks day, which I think should come in early 2000 and Tony great.
And what are you seeing in terms of the customer conversations that gives you confidence and additional investments and the space with a fairly long time horizon.
Yes. It is.
And all of our investments certainly on the HHS side typically have long lead times associated with them and.
The investment and additional wipes capacity and North America is strategic to US, We're a leader and North America. We were very fortunate given that we maintained our regiment of targeted investment in that space. So that we were able to take advantage and help serve the the nation's needs for hard surface disinfectant wipes what were.
Is that there continues to be growing demand for that substrate and frankly, as we see increased openings of the country.
We think there'll be exponential demand because youll see the wipes being used in and more settings that were not typical as well as whites being provided and in packaging offerings that make it.
Easier to carry on the go if you will.
On the every investment that Berry makes is again customer linked so you should assume that if we're making an investment and a business that there is ultimately customer alignment relative to that capacity and.
And that demand outlook. So we're bullish we're a leader in that space, we're going to continue the lead and.
And we're very confident that the the demand will continue.
<unk> two <unk>.
Support the capital investment and the return that we that we're assuming.
Great. That's very helpful. And then in terms of of your EBITDA guidance can you just talk about what assumptions you have embedded for price cost and how you expect that to evolve through the year.
Yes, so we had a and the and the first quarter we had hoped.
Modest benefit on price costs, primarily driven by the mixed benefit we got and HHS.
And as well as cost synergies that we're still lapping from the RPC acquisition.
And the incremental inflation we've seen.
And the last call, we actually have that now coming in as.
The headwind for the full year.
And what you will predominantly be experienced in Q2 and Q3.
And there is obviously, a lag and and getting that pass through but.
Q2, Q3 is where I would expect most of them.
Negative price cost to persist.
Alright, thank you.
Next question is from Mike.
<unk> from Barclays.
Thanks, and good morning, guys.
I guess first I wanted to circle back to something similar to Neal's first question on Hh and asked that I think last quarter you highlighted some mix headwinds you would expect as we worked through fiscal 'twenty. One can you just update us obviously HHS demand has remained quite strong has the mix component of the timing of that changed at all on your thinking.
Yeah. When we started the year, we had the only assumed the mixed benefits would.
And would be in the December quarter, and now we've extended that to the to include the March quarter.
And we'll continue to.
Now to monitor that and update the market as the quarters.
Move forward, but at this point, we've only assume that benefit continues under the March quarter.
Got it that's helpful. And then maybe a question for Tom around sustainability of it.
There's been a lot of focus and investment lately and greener resident and whether thats bio source plastic recycled plastic.
And you kind of sort through all of these headlines when you talk to your customer what at the end of the day do you think is driving their decision process. There why do they choose berry versus some of your competitors' offerings and have you noticed any changes and their willingness to pay premiums for recycled or greener resin.
Listen it's.
It's partly of learning exercise right now by a lot of the the global brands out there. There is an a rated array of ways that they can meet their sustainability objectives. There is a <unk>.
And see our interest to make an informed scientific based decision.
And they realize there is a number of ways to accomplish that and what we chose to do at Berry is pad access to a wider range of solutions and.
And then as the market ultimately determines what the ideal substrate will be going forward or one that makes most sense. We ultimately can leverage our global supply chain and scale to get behind those particular types of innovation I don't think youre going to see the plastic waste problems solved by one solution I think it is going to be a variety of solutions and we.
Feel really comfortable with where we're at right now the 300 million pounds of mechanically recycled material that we have.
And that we own.
Again, we learned more about the industry, we've learned more about the collection processes the sorting processes. It makes us a more valuable supplier.
Similarly, with the advance recycling materials taken the proactive stance that we did.
And to secure and commit to that kind of capacity is simply going to grow the knowledge of our end users to get them comfortable around the substrates, so that as it scales and it will ultimately be able to take advantage of the opportunity and transition them into those materials, where it makes sense.
There is an understanding of that as products are ultimately new and initial there can be higher costs associated with those and again. The evaluation is what's going to be the change that disrupts my and customer the least addresses their concerns and allows our company and continue to generate the growth and profitability of <unk> always.
Become accustomed to and that's that's a lot of the discussion I feel.
And that really during the pandemic, we have made an amazing amount of progress further.
Further penetrating our key accounts globally.
We have a pretty strong passion and finding ways to help them meet their growth objectives.
And we continue to bring that to bear relative to the sustainability.
We will take advantage of our global scale, our material science Knowhow and the intimacy we have of those end users and to ultimately.
Put ourselves on a growth position and Thats why it truly is the growth opportunity for Berry. Its not this is something not only that we're talking about but we're investing in and we're seeing the actual results.
Play out and it's it's encouraging and I think youre only going to see the pace of.
Of this improvement and this evolution around sustainability and circularity and it's only going to grow and I think it is going to grow and a collaborative way.
Great. Thank you.
Next one is from cloud of white from Deutsche Bank.
Hope everyone's doing well I think you mentioned on your health care and health care portfolios over $1 billion of sales now and you referenced the asthma opportunity just kind of wondering here on the the 1 billion of sales how much of this has to go through kind of increase the regulatory approvals are being produced and kind of clean rooms, and maybe what the returns here on a relatively rarely.
To the broader portfolio.
It's a mixed bag in terms of the type of manufacturing environment, but clearly.
True to support health care will be invest and those types of capabilities.
With the appropriate lead times taken into consideration so that there's no disruption and so it's going to be and as you go depending on what we close and where we close it.
We clearly believe on the azimuth metered dose inhalers debt that Asia presents a really significant opportunity for us.
We're encouraged by that because we already have a leading position in that space.
There is mid to high single digit demand for it and the margins and those businesses are at or above the company average.
Okay, and then focusing in on one of your other organic growth drivers in terms of emerging markets just kind of wondering how you think about emerging markets in terms of your overall capital allocation process.
Analyzing investments relative to investing in developed markets do you look for similar return profiles or are you mostly following your large multinational customers on looking to invest and these kinds of the emerging market regions.
We have similar return profiles, regardless of where we operate so.
That's one to anything we do from an investment is going to be linked to a customer. So it's going to be supported and aligned around that that partnership which increases the likelihood of success. We've clearly made significant investments in China over the last several years, which have.
Paid huge dividends for us.
We've announced a recent new.
And non mobile capability.
And on an high site in China that will serve.
China Southeast Asia for the health care space.
For dedicated for the help through Cal the care space and and we're excited about it. We are we are we are going to align ourselves again around market segments that are growing faster and geographies that are growing faster.
And do it all and of customer linked way our position with global brands around the world and.
And the type of investment dry powder that we have to invest alongside of our customers is part of the driver for this confidence that we have and this and the predictability of our growth.
Because it's with leaders.
And brands that can pull that demand through.
And the trust and confidence that we build.
They already have and existing positions.
And they expand their business to similarly match those those growth geographies.
Creates a lot of confidence and execution.
And commitment and quality.
And that's continued to be built as we as we continue to vertically penetrate these accounts so that the strategically we are aligned with our customer.
Alright, Thank you and good luck and the year.
The next one is from Josh Spector from UBS.
Yeah, Hey, guys good morning.
Just in your prepared remarks, you mentioned some of the segment realignment resulted in growth that you wouldn't have otherwise achieve I was wondering if you could give us. Some examples of what that is and why the segment of alignment of lies the required to achieve that.
And it really helped us create somewhat of a pure play and when we move the tapes business.
And the HHS, we also have a component of our HHS business thats tied to construction.
Construction through the house wrap business.
Having tapes that ultimately can be applied to house wrap substrates.
Created somewhat of a pure play right. It's it's a it's a logical combination we're serving similar markets and it made good sense.
And that has been an area that we've seen we've seen success that we wouldn't have had with those business is being <unk>.
And inside the engine and materials business, we brought the BPI business to be part of of the engineered materials and again.
You have two groups of people speak and the same language running similar equipment and.
And it's provided in that business not only commercial opportunities to globalize some of our North American business.
Similarly, and agricultural products.
But also in terms of best practice sharing and productivity improvements.
Based on the the.
The manufacturing process is being like for like.
And this frankly has been something that we've seen with our CPI and CP North American business as well so.
And it was a it was a it was a no brainer for us to make the move because we are already seeing the benefit.
And that we were enjoying between our international consumer packaging business in North America.
Thanks, that's helpful and just in terms of the assumptions in your.
Free cash flow guidance now I mean, obviously, the first quarter being better help to offset some of the resin price issues, but just wondering if you could provide some context in terms of how youre thinking about working capital cash interest some of the other line items between EBITDA and free cash flow.
Yes.
Not a lot of changes.
With respect to the individual line items interest, we've obviously benefited from some refinancings and the market, but that's been offset by FX. So there's been some incremental.
Increase in interest from FX, but of offset some of those savings.
<unk>.
I would say all of the other lines of generally in line and slight increase with respect of working capital just to account for the inflation that we talked about and our primary and raw material resin.
Mostly in the U S with polypropylene.
Followed by polyethylene.
So that's probably the biggest change is really higher working capital needs from inflation, we've offset part of that with our <unk>.
Restructuring and onetime costs related to the acquisition, we're actually coming on lower than we had expected which is helping offset some of that inflation.
Okay.
Growth.
Operator.
The question that is from yes, we do have a next question from of Rune vis once on from RBC capital markets.
Thanks, and good morning.
And congrats on the strong performance and.
Yes, so first off on resin.
Just remind us.
No.
I think in the past.
As mentioned our statement that resin and really hasn't affected your P&L by more than a couple of million dollars on the EBITDA line and any one particular quarter.
And there's obviously been quite of bit of resin inflation here and the back half of 'twenty.
And it looks like it potentially could be sustained through the first half of <unk> of.
'twenty one so.
Do you still feel that statement is accurate and.
And is it mainly a function of of the pass through or is it a function of the robust volume growth that youre seeing now, which makes it a little bit easier to pass through.
These increases.
And certainly the volume is helping us hold the overall earnings but with respect to resin we have very efficient pass through as you can look at our results historically as rose and goes up and down dramatically.
You just don't see the volatility on our earnings so.
And we've continued to do a good job as Tom mentioned earlier of working with our customers to shorten that timing lag, but overall I would call it pretty modest but to your point these increases are coming.
Coming rapidly and large increments so to the extent there is a lag it's just larger due to the magnitude of these changes so we felt it prudent to.
Reflect a little larger balance is the timing lag again, it's just timing it gets pass through.
And when it goes down by the way it works the other way.
And what goes on for will come down so we will see how ultimately the resin environment plays out.
And just as we have and the past.
Actually working with customers to pass that through.
Okay. Thanks for that Mark and then I guess on on the.
On the growth side.
It does appear that there's maybe some structural growth of has materialized post COVID-19.
If I go back to 2019.
There was definitely some some challenges on the volume side, and maybe we could refer to sustainability and the war on plastics, but.
On the one and it seems like many of that.
Some of those dynamics of have have subsided.
Yes.
Or is it that you've just made some some great progress and increasing the sustainability profile of your products.
Well, maybe maybe you can just just off of your thoughts on that is and it's the case that there isn't really as much focus on.
The the negative aspects of plastics or is it that.
Generally there has been increased.
And the inability of attributes with your products.
I think the pandemic has proven that plastics is an indispensable part of our lives.
I believe that the discussions with our end users have been more balanced.
And more data driven and.
And Theyre looking for the best holistic.
Decision that they can make to address their sustainability objectives.
That coupled with the fact that.
We have been making.
Targeted investments.
And frankly committing to and delivering on when certain businesses would actually pivot to growth if youll recall.
And we made a specific commitment and our engineered materials business on when it would recover the growth and it did.
And the pandemic hit right. After that we made a commitment when our HHS business with pivot to growth before the pandemic and it did a full quarter early and then the pandemic hit their share.
So yes, we think we've made smart targeted investments.
Prioritized our capital investment.
Staying ability of the value proposition for our company and it has not gone away and it's not going to go away.
And we're gonna have to address the number one issue that we have for our substrate, which is plastic waste.
<unk> is not the problem.
And I stick weight is the issue and what we've got to do is continue to find ways.
To reuse recycle.
The products and optimize our design to ultimately improve the likelihood and ability for those to be recycled and ultimately of infrastructure will be required, but it will get done and built based on the demand that we expect from our end users.
Great. Thanks for that and just real quickly if I could follow up on that so.
And maybe this is and this is also related to your new capital allocation strategy. So.
Is it the case that you now have a little bit more organic growth runway and that's why you feel that you could operate and AR and AR below four times leverage area and maybe even approached three overtime and pivot towards capital return and maybe the focus on M&A reduces.
Is that is that part of the strategy that may be of reduced focus on M&A and maybe a little bit more focus on organic growth and capital return.
It's just a it's just balance.
On the company over the last 32 years did 47 acquisitions acquisitions have created an amazing amount of shareholder value for the company, we simply provide and additional leg to our stool, which is organic growth.
And we're very comfortable that we're going to be able to consistently dependably predictably provide that organic growth that we've committed to the cash flows the company at around $1 billion.
It gives us an amazing amount of flexibility, whether that's returning cash to shareholders and the form of a dividend of share repurchase.
We're ultimately doing bolt on acquisitions or further reducing our debt. So we have an amazing amount of flexibility right now driven by the robustness of this business and the cash generation that and at that supported with.
Our proven track record on delivering for shareholders, whether it's of the commitments we make on growth.
Acquisitions or otherwise.
We're going to do what's best and make the best returns for our shareholders and we're excited about the position we're in and we're rendering Berry doesn't really have to do quote anything right.
We're a strong company, we're a leader we've got a global footprint.
And I think were and in the right markets growing around the world with the right partnerships.
We will be prudent will be.
Very conservative as we have always been in the past, but we intend to operate between that leverage range of $3 to three nine times.
Going forward.
Thanks.
Next question is from Phil non from Jefferies.
Good morning, everyone.
And congrats historically I've always thought of CPA and in North America be more flattish, maybe a little growth. So it's pretty impressive you've seen this nice acceleration and certainly the last few quarters can you highlight what's driving the strength and any of these wins.
<unk> had and just given the growth of opportunities that you see in front of yourself over the medium term, how you're thinking about it and do you need to deploy a little more growth capital going forward.
And we've we're.
Really pleased of our CP North America business as we are with how all of our businesses performed in the quarter, but Nonetheless, CP North America really going on almost two years now has been able to deliver that low <unk>.
The digit growth.
Targeted investments similar as we've talked about with advantaged products within customers.
And the team has executed very very well the pipeline is more than adequate to <unk>.
Support that low single digit growth and and we're comfortable whether thats and bottles bottles containers closures.
Feel really good about that business and that franchise.
Great.
And then within the 4% growth you guys are guiding for the full year really strong how are you thinking about the.
And the trends between your more defensive categories versus.
Some of the stuff that might be more cyclical in nature of that got hit by the pandemic are you assuming those categories kind of bounce back to pre COVID-19 levels and I'm, just trying to get a sense of what you're baking in and maybe some opportunity for upside if it does come back stronger.
We're assuming a modest improvement and the and the more COVID-19.
Related businesses that have the face the headwinds.
Not returning back to normal levels and the back half of the year.
Okay, and then on the stable side.
Yes, we really we continue to be bullish and in the categories of health care.
Of the at home consumption continues to be to be strong.
And for that bid those businesses, so continued steady performance and in those categories. Okay.
Okay Super helpful guys.
Next question is from Mark Wilde.
Bank of Montreal.
Alright, good morning, Tom Good morning, Mark.
A couple for you one can you can you parse the 2000 and 'twenty one capex.
By rough categories kind of growth versus maintenance and then.
The growth by segment.
And about half of our capital is what I would define as maintenance.
On the balances growth and cost reduction and some of those projects one of many of the projects and that category of checks both boxes. So they have an element of growth.
As well as cost reduction as we go to the larger tooling for example to replace.
Smaller cavitation and I would say and.
And the current environment, we're probably a little more weighted towards growth capital given the momentum, we're seeing and the business so that.
And 50% Pie I would say of slightly over weighted to growth.
At the moment I'd tell you the most years, it's pretty balanced between.
Growth and cost reductions of 25% call on each of those categories in terms of segments, we're investing and all four businesses.
And are getting capital we've got the.
We are of process here that we go through two approved capital both within the business as well as Corporately.
On the size and scope of the project.
And I would say and the current moment as you would expect areas of the been really strong volumes, our tight on capacity of getting some incremental capacity. So.
HHS as an example, Tom mentioned the investment and we've got going in China, and healthcare the wipes investment that we're making and the U S. So and the very near term I'd say <unk> is probably on a pro rata basis getting slightly more capital given the given the demand and the.
The tight capacity and some of those markets I think youll see mark and the.
And the coming quarters, the investments, we've made and our engineered materials business as well increased and our position both in terms of some of the premium snacking categories as well and E Commerce will bear.
The good results force.
Okay, and then Mark just secondly on the on the balance sheet going forward would you expect kind of to normalize.
Towards the upper end of that three to three 9% range and then go above that on acquisitions or do you intend the even with acquisitions and try to operate within that three to three nine range.
And on the scale of the company Mark and I think that's actually an earlier question I can't remember, who asked it which analysts but I would say another difference is just the scale of the company right I mean acquisitions for us now.
To the extent, we do anything going forward it will be relatively small compared to the overall size of the company and just.
Just given the market and.
The fragmentation. So we would intend to continue to operate and that three point out of three nine times leverage range, including any on.
And bolt on acquisitions that the company May do and as Tom said, it's not on <unk>.
Very focused on creating value.
The organic growth.
And certainly we'd be looking to.
Other methods to return value to shareholders, including.
Return on capital and Mark out I was remiss and not pointed this out but in terms of the capital investment certainly closures dispensing solutions has been a.
A cornerstone of where we focus a lot of our growth capex as well sort of on a variety of markets.
Okay and just finally.
Would you expect that we could see some sort of more targeted divestitures and the last nine months of the year.
And that's something obviously, we can comment on obviously, we've got big portfolio of lot of businesses is something we review on a regular basis should something come up the oil well.
We get something out there nothing I can report now the but it's part of our.
The portfolio management process, and you've seen us take some action and various businesses and over the last 12 months 12 months or so.
Yes, I really wasn't asking you to get too specific I was just trying to figure out whether this was still an active part of the strategy.
Perhaps accelerate the deleveraging.
We continue to look at the portfolio for opportunities that might be.
And have more value elsewhere, yes.
Okay, Alright, that's helpful. Thanks, Tom and good luck and the year.
Thank you.
The next next question is from Gabe <unk> from Wells Fargo.
Good morning, Tom Mark Real quick I appreciate you wait and the Paul.
Two if you will.
And the $50 million and I apologize, if I missed it but the $50 million that kind of came out and the new EBITDA bridge of procurement savings.
Or tightening cost synergies and thats called out.
And if you talked about that and again I apologize, but can you tell us kind of what's driving a lot of that and then your ability to kind of on you talked about in the past.
The leverage kind of of global procurement network.
I'm, assuming part of that relates to RASM, but just your ability to continue to do that given the port congestion and ocean freight availability.
Yeah.
And the first part of your question gave the $50 million that was simply we broken out separately it was combined and.
On the last call so that.
It had not come up so thanks for asking that.
So it was and we had volume growth and synergies combined we simply.
Pulled those out this time, so no change to that the $50 million.
What we had expected on our last call and we continue to expect $50 million of energy sourcing would be of component of that there is obviously some other categories that are.
Providing for that $50 million of incremental synergies and that simply just.
Getting the full year benefit of actions that we took.
In fiscal 2020 or in some cases fiscal 2019.
<unk> 19.
<unk>.
With respect to the second part of your question, obviously, we've got a global sourcing organization and that's always working too.
Minimize the impact of inflation on our company and our customers.
RPC brought us obviously a lot.
More scale to be able to move product internationally.
We're continuing to look at those opportunities as those markets.
Potentially get disconnected, so I think we're well positioned from a scale and.
Capability perspective to minimize the impact of inflation relative to our competition I think we're advantaged in that regard.
Okay, and then real quick somewhat of a housekeeping question. There is the other expense line item of $25 million and the income statement I think it was $13 million last year and.
It looks like it's included for EPS purposes, but excluded for EBITDA.
I know you guys call off of the $21 million and I think it's mostly stock option expense, but can you describe what the 25 million as mark.
Yeah, it's almost all of some non cash.
FX movements on intercompany loans.
Loans and it has been added back to both EPS and.
Adjusted EBITDA is related to the RPC transaction and some of the structuring of considerations when we completed that acquisition.
And it's all FX on intercompany activity.
Great. Thank you and good luck in the quarter guys.
Thank you again.
And again, if you'd like to ask a question Press Star then the number one on your telephone Keypad next question is from Salvatore Tiano from Seaport Global.
And the other very very good quarter.
One question on sustainability, we see the.
You talked a lot of about the buyer of resins and the.
Chemical recycling all of these things one another each hovering a little of the product, perhaps would be made to be recycled them.
I understand this is the challenge we're flexible from a lot of the films that you may make kind of you talk a little bit about some initiatives to make and lot of the products of just cannot be recycled even if theyre made with post consumer resin.
What are you doing there to actually make them recyclable and beyond.
We've talked about some.
The success stories, we've had and pivoting and customers to for example, all polyethylene solutions to support on <unk>.
Cycling and standup pouches.
We've made significant investments and our engineered materials business and I'm pleased to say that the assets that will support more like products to what we announced previously with the bare naked product line.
We expect to be.
Fully committed for.
By the end of our fiscal year.
That gives you the sense of type of some of the energy and momentum around that space right now so.
I think where possible youre going to see customers look to pivot to those more recyclable materials.
And the and it is kind of also why we're getting behind advanced recycling and.
And the recycling of somewhat of an umbrella if you will in the recycle of world It will allow.
And those materials that are typically and traditionally considered difficult to recycle.
They ultimately are converted and the liquids and also the become new petrochemicals and the mass balance process and.
As such that's something that.
I think is going to get a lot more attention going forward.
You might have a follow up and say Gee, Tom how do they ultimately certify that and how do they keep track of that and those mass balance as Berry actually now has 14 sites.
Around the world that are whats called IFC international sustainability carbon and certified.
Which which ultimately allows for certification of circular polymers too.
Assure that the the.
Mass balance equation is correct and that claims can be supported by our and use yourself. When you look at the holistic range of solutions that Berry has and material science to make films thinner and will not impact and physical properties to make substrates that are fully recyclable like the polyethylene pouch and then ultimately having means like advanced recycling.
Support difficult to recycle materials, where the really good spot and I think when we talk about this being a growth component for us.
The initial interest and the materials is is very high so we're bullish going forward.
Okay, perfect and the very quickly.
Also a little bit about volumes and what has changed.
From this 2% bump this year, what do you expect to be more transitory and could be reversed in fiscal 'twenty sort of wanted to and what do you think can actually speak because of let's say higher demand for wipes and masks and other products.
Yes, I think and as we've said, we've got some incremental benefit and our HHS business related the PPE products I mean, I think the diversity of our portfolio and we've got.
Things that are doing well and things that have been pressured by.
Certainly.
The pandemic.
And as things normalize.
The items that are negatively impacted by the pandemic will improve like our can liner business that we referenced and engineered materials and our industrial businesses.
And vice versa may happen and some of the products and have an advantage, but I think net net.
It should be a pretty small impact on the company.
And the diversity of our product portfolio, we think we think the megatrends, we're investing around half.
A lot of legs. If you will in terms of continue and their ability to deliver that consistent dependable growth we're looking for.
Whether that health and wellness, whether that food safety of whether that's E commerce, and we're well invested and I think the regions that we target to make those investments.
And we'll certainly benefit us for years to come Nonetheless, Berry is committed to be.
Distant predictable growth so.
We're pleased and confident our outlook for 'twenty one.
Yeah.
Thank you very much.
Thank you.
Well, if there's no further questions I want to thank you all for the interest and Berry. We think we think the company is at and.
And at a great point, right now and its ability to deliver on and strategic commitments.
Balance sheet has improved the organic growth.
It's certainly been delivered and the global footprint that we've been able through targa.
And targeted investment as well as transformative acquisitions.
It's very very and a very unique spot right now and and.
Certainly one that.
And very confident and poised to continue to grow and deliver the results of that that we're committed to thanks very much.
This concludes today's conference call. Thank you all for participating you may now disconnect.
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