Q3 2022 Berry Global Group Inc Earnings Call

August 3, 2022

Hello, and thank you for standing by my name is Regina and I will be your conference operator today at this time I would like to welcome everyone to the Berry Global third quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer.

Sachin if he would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If he would like to withdraw your question Press Star One again I would now like to turn the conference over to Dustin Stilwell. Please go ahead.

Thank you and good morning, everyone.

Welcome to various third fiscal quarter 2022 earnings call throughout this call we refer to the third fiscal quarter ended June 2022 quarter.

To begin our call I would like to mention that on our website. We have provided a slide presentation to help guide our discussion. This morning. After todays call. A replay will also be available on our website at very global Dot com under our Investor Relations section.

Joining me from the company I Am Barry <unk>, Chief Executive Officer, Tom Salmon, and Chief Financial Officer, Mark miles.

I'll, let Tom and Mark's comments today, we will have a question and answer session in order to allow everyone. The opportunity to participate we do ask that you limit yourself to one question at a time.

And then fall back into the queue for any additional questions.

As referenced on slide two during this call will be discussing some non-GAAP financial measures most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP measures are available in our earnings release.

After presentation on our website and.

And finally <unk>.

Mind, you that certain statements made today may be forward looking statements.

These statements are made based upon management's expectations 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 SEC.

Therefore, the actual results of operations and financial conditions of the company could differ materially from those expressed or implied in our forward looking statements now I'd like to turn the call over to Berry's CEO , Tom Salmon. Thank you Dustin and welcome everyone and thank you for being with US today and safety is our top priority and most important value let me start on slide.

For keeping all of our teammates healthy and safe as our highest priority.

We're very proud of our industry leadership on safety performance and as you can see we delivered an osha incident rate below one for fiscal 2021 and expect fiscal 'twenty two to deliver another year of improvement with an expected rate of 0.8, which is significantly better than the industry average of $3 seven.

Our entire global teams emphasis on working safely and servicing our customers in what has been a challenging environment that has made us a stronger better and safer company.

Turning to our key messages for the quarter on slide five.

First our business delivered solid quarterly results, including record revenues for any June quarter and record adjusted earnings per share for any quarter in our history.

Secondly throughout the last two years, we've seen significant inflation and have taken aggressive pricing action and invested in cost reduction projects across our businesses.

Our team has done an exceptional job and continues to make additional progress on both fronts.

Third.

Our ability to provide a one stop shop for our customers on a global basis with local supply chain is unique and differentiated.

We are investing for long term growth with a focus on faster growing product categories and geographies, along with innovation sustainability led opportunities for additional growth and value creation.

We've made great strides towards our sustainability goals and we will continue to be ambitious with our commitments, which are being driven and led by the needs and demands of our extensive global customer base and.

And finally, we continue to return cash to shareholders as we repurchased $285 million, representing another 4% of our total shares outstanding in the quarter.

This puts our total of nearly 11 million shares or approximately 8% of our total shares outstanding through the first three quarters of fiscal 2022, returning almost $640 million of capital to shareholders.

As we stated on our last earnings call, we anticipate repurchasing at least $700 million of shares in fiscal 2022 with a plan to use the remaining cash towards debt reduction.

Given our top priority of driving shareholder value, we were fortunate to repurchase our shares and take advantage of the attractive return opportunity at prevailing prices.

Turning now to the financial highlights on slide six.

Our June quarterly performance was in line with our expectations, including an improvement in our price cost relationship offset by modest softening demand and the stronger U S. Dollar.

For the quarter, we delivered June quarter record net sales of $3 7 billion.

Which is a 6% improvement versus the prior year on a comparable basis adjusted for foreign exchange and recent divested businesses.

On a two year basis organic volumes were up 3% and in line with our normal volume expectation as we've reported strong organic volume growth of 5% a year ago compared to a 2% decline in this quarter.

From an earnings perspective, operating EBIT was up 2% from the prior year quarter on a comparable basis in line with our expectations, including a favorable price cost recovery of $41 million when excluding the prior year Covid mixed benefits.

As we've demonstrated historically and during this most recent quarter, we remain committed to passing through cost increases and believe we are well positioned given our scale along with our ability to service our customers from our facilities in close proximity to their locations, which provides both cost and sustainability advantages.

We continue to work collaboratively with our customers to pass through inflation as our selling prices were over $300 million higher than the prior year quarter and up a substantial $2 $3 billion over the last four quarters, the highest ever recorded in our company's history.

To put it into context, our average selling price inflation since our IPO was 3% contrasted to our recent LTM change of 16%.

We've nearly offset all of this unprecedented inflation.

I'll still expected to deliver significant free cash flow for our full year.

Finally, adjusted EPS increased 10% on a comparable basis versus the prior year, driven by solid earnings and opportunistic share repurchases.

Before I hand over to Mark I want to cover two slides seven and eight.

Which touch on some of our investment growth opportunities as well as our resiliency during a softening recessionary economy.

Barry has the top two market position in over 75% of our product category, which collectively generated over $10 billion of annual sales are.

Our business model is very resilient through any economic cycle and includes the broadest portfolio of packaging solutions with strong dependable and stable free cash flows as you can see on slide seven.

In addition, we have consistently driven top tier results in nearly all key financial metrics generated strong compound annual growth rate for revenue earnings and free cash flow and have grown our adjusted earnings per share every year as a publicly traded company.

Through past recessions are volumes were modestly negatively impacted given the demand for our products are primarily non discretionary and stable.

Both earnings and free cash flow increased as raw material cost historically dropped given that cyclical markets, which use similar materials typically fall sharply.

And finally on slide eight we continue to invest in each of our businesses to build and maintain our world class low cost manufacturing base with an emphasis on key end markets, which offer greater potential for differentiation and growth such as healthcare and pharmaceuticals.

Additionally, we will continue to invest and expand our emerging market position in support of our commitment to global growth.

We believe that by increasing our presence in faster growing end markets, along with continuing divest into emerging market regions. We will further enhance our ability to provide consistent dependable and sustainable long term growth.

Longer term, we believe our emerging market presence can be 25% or more of our total revenues.

And lastly, innovation and sustainability are increasingly embedded in everything we do we continue to believe this represents a great opportunity for growth and differentiation.

By making these deliberate choices on these higher value growth markets and regions over time, they will represent a larger portion of our sales mix and become an increasingly more relevant driver of both earnings and volume growth now.

Now I'll turn the call over to Mark will review Berry's financial results Mark.

Thanks, Tom when we compare our results to the prior year June quarter, we have adjusted the prior year to present on a constant currency basis and remove the impact of divested businesses to provide comparable results.

Reconciliations to reported results have been provided in the appendix.

I'd like to refer everyone to slide nine for our quarterly performance by each of our four operating segments.

Overall, our businesses continue to perform well and focus on both our near term priority recovering inflation, while driving long term sustainable organic growth.

Specifically for the quarter, our consumer packaging International Division delivered a 12% increase in revenue over the prior year, primarily from the pass through of inflation on a two year basis organic volume growth was 2%.

In the quarter, we saw relatively flat demand across our consumer facing categories, such as food and beverage and healthcare, while industrial categories experienced some softness now.

A lockdown in China also had a modest negative impact on our volumes in the quarter.

Operating EBITDA improved 6% driven by pricing actions to recover inflation, along with cost productivity, partially offset by modestly weaker demand primarily in our industrial markets.

Next on slide 10, our consumer packaging North America Division delivered a 9% increase in revenue over the prior year, which included higher selling prices from the pass through of inflation and flat volumes in the quarter coming off a very strong 6% organic volume growth delivered in the prior year.

On a two year basis organic volume growth was 3%.

From a market perspective, we continue to see strong demand from food and beverage markets, including strong demand for our clear polypropylene fully recyclable drink cups used by quick service restaurants and convenience stores.

Supported by our pipeline and non discretionary end markets, we expect to deliver organic volume growth in fiscal Q4.

Operating EBITDA increased an impressive 21% on a year over year basis as we have continued to progress on recovering inflation, along with cost reductions from recent capital investments.

Next our health hygiene and specialties Division delivered revenue was down modestly primarily as a result of the moderation of advantaged products related to the COVID-19 pandemic benefit a year ago.

As we are lapping the majority of the impact from the pandemic driven inventory correction along with continued strength in demand we are anticipating a return to organic volume growth in fiscal Q4.

Operating EBITDA was down 32% in line with our expectation as a result of the benefits from the pandemic related mix a year ago and the lag in recovering inflation.

And on Slide 12, our engineered materials Division delivered a 5% increase in revenue over the prior year, primarily as a result of the higher selling prices from pass through of inflation, partially offset by lower volumes.

The volume decline as expected versus the prior year was primarily related to our focused effort to mix up in certain categories, along with softer demand from the distribution market, which we believe included some destocking in anticipation of lower polymer costs.

On a two year basis organic volume growth was 4%.

Additionally, we expect volumes to sequentially improve as we continue to onboard new business and lap the strong prior year over year comparison.

Operating EBITDA was up an impressive 22% compared to the prior year from our focus on improving our sales mix to higher value product categories and recovery of inflation.

Next as you can see on slide 13, we are now targeting adjusted earnings per share of $7 40 for fiscal 'twenty, two which would be another fiscal year record and our 10th consecutive year of delivering EPS growth.

The updated estimate assumes reaffirming our outlook for operating EBITDA of $2, one $5 billion as improvements in price cost is off have offset expected foreign currency headwinds from the strengthening U S dollar.

Next on Slide 14, we are now targeting free cash flow of $750 million for fiscal 'twenty to.

This includes cash from operations of $1 5 billion less capital expenditures of $750 million.

Our updated cash flow expectation includes the strengthening U S. Dollar continued inflation and our proactive decision to carrying higher inventory levels for our customers to mitigate potential supply chain risks and challenges, which continued to impact our business.

We expect these higher inventory levels to be temporary and will therefore increase future cash flows as we returned to normalized levels as supply chain improve.

Excluding these uses of cash for working capital due to inflation and supply chain challenges our free cash flow for fiscal 'twenty, two is expected to exceed $900 million.

Our cash flow year in and year out and has been a dependable key strength and core value of our company that provides us the opportunity to invest in our businesses automate and become more efficient while returning capital to shareholders.

Our capital allocation strategy remains clear and opportunistic and includes continued investment in organic growth and cost reduction projects share repurchases and debt pay down.

Our guidance here included includes returning $700 million.

To shareholders via share repurchases and ending the year in our targeted leverage range of 3.1 to three nine times as we have previously committed.

We believe we are well positioned for continued value creation and returning capital to our shareholders through both our dependable and consistent free cash generation and strategic divestiture opportunities. This.

This will allow us additional capital for opportunistic share repurchases and further debt repayment.

This concludes my financial review and I'll turn it back to Tom.

Thank you Marc as you can see on slide 15.

The strategic choices, we've made guide how we prioritize our investments in our business, which is why we're investing in several markets and product categories that we expect to drive long term organic growth, including a few of those which we've highlighted on this slide.

We continue to invest in each of our business system build maintain our world class low cost manufacturing base with an emphasis on key end markets, which offer greater potential for differentiation growth like health care personal care and pharmaceuticals.

As you can see these recent strategic investments expected contribute over $300 million in revenue over the next two years and are not only in faster growing end markets, but are largely focused in regions, such as China, and India with growth rates expected to be in the mid to high single digits.

We will continue to focus on global Megatrends and believe there will be considerable demand for our protection products and regions with rapidly increasing populations.

We are well very well positioned to continue to deliver significant value for our customers and shareholders through investments like these presented here with an unmatched global footprint and design capabilities to support circularity.

And lastly, as pictured in the center of the Slide we have recently invested in our second mechanical recycling facility located in Europe that will enhance our capacity for post consumer recycled products that are more and more demanded by our customers.

Our investments in both innovation and sustainability provide us a competitive advantage and are increasingly embedded in everything we do.

Those advantages include our ability to both produce and source recycled resins globally, along with our manufacturing capabilities to innovate design the necessary protection from a more sustainable solution and our scale to produce sustainable packaging solutions desired by our customers.

We will continue to invest in the global innovation capabilities and centers of excellence to capitalize on what we believe is one of our strongest growth opportunities that being the overwhelming demand for sustainable packaging solutions.

Moreover, as you can see on slide 16, we are committed to minimizing product impacts by enabling 100% of our fast moving consumer packaging products will be reusable recyclable or composed by 2025, we are continuously innovating and investing to work toward the global goal of a net zero economy.

Additionally, I would like to highlight Barry has been recognized as one of the 100 best corporate citizens by <unk> media. This benchmark is widely recognized by assessing public traded publicly traded company in the United States on their fundamental environmental social and governance transparency and responsibility.

<unk> commitments. This recognition reflects the huge strides we've made to prioritize ESG at every level of our business further.

Furthermore, from a collaboration standpoint, we have recently begun our partnership with both clean farms and polyol recycling on a closed loop approach to advanced candidates circular economy.

Also we recently announced our collaboration with Mccormick, which leverages, our expertise and access to provide a new mccormick assorted and neon food color bottle made from 100% post consumer recycled material.

Lifecycle assessment compared to their current offering estimates and Mccormick will realize and $86 eight metric ton or 59% reduction of Cotwo emissions. When this new Pcr bottle.

Barry continuous improvement is at the heart of everything we do.

Three areas of note are important to consider.

Material.

Continue to make investments that give us access to quality streams of recycled content to help our customers meet their sustainability goals.

Labor, we have recently invested in projects that will help our annual target of reducing 2 million labor hours from our operations and have tripled the capacity of our internal automation teams to execute our growing productivity pipeline at a faster pace.

Energy, our third largest cost category and nearly 90% of our scope one and two emissions.

Plastic products in most applications enjoy the lowest greenhouse gas footprint alternative substrates, we intend to build on this advantaged area to meet our annual target of removing 100 million kilowatt hours from operations.

Like the innovation as mentioned earlier, our intense focus on sustainability, we will continue to commit resources and thoughtful advances to improve the overall footprint for our products through their life cycles.

While plastics can and will continue to improve recycling rates, our primary raw materials plastics has the best environmental footprint versus alternative substrates in almost all applications reviewed in the recent Mckinsey <unk> Company Research paper published in July 2022 titles.

Climate impact of plastics shown here on slide 17.

This study concluded that in almost all applications reviewed plastic solutions had a lower total greenhouse gas contribution than alternatives.

Greenhouse gas emissions are increasingly important given the need to dramatically reduce anthropogenic carbon emissions to limit global warming to one five degrees Celsius above preindustrial levels to avoid the worst impacts of climate change the role of plastics packaging enhances use efficiencies.

I can help de carbonization efforts, particularly in terms of reducing food spoilage and improve energy efficiency.

The debate on materials choice should take a balanced and science based perspective and include the emissions profile is one factor in.

In summary, we are pleased with the hard work of our employees delivering solid quarterly results in the face of persistently higher costs and tough year over year comparisons.

As we stated earlier and have demonstrated in the quarter. We are confident and we will continue to recover inflation to generate cost productivity and.

And to close utilizing our dependable and consistent cash flow complemented with strategic divestiture opportunities. We will continue to focus on driving organic growth, while providing more consistent return of capital to create maximum value for shareholders.

And thank you for your continued interest in Berry at this time, Mark and I'll be glad to answer any of your questions.

Okay.

Ladies and gentlemen, thank Mike you ask a question simply press star followed by the number one on your telephone keypad again that is star one our first question will come from the line of Ghansham Panjabi with Baird. Please go ahead.

Hey, guys good morning.

Tom just given all the acquisitions over the past few years, including Adventive in RPC. How do you think the portfolio is positioned to navigate a broader macroeconomic slowdown globally, including a higher degree of consumer elasticity, given all the inflationary pressures.

Good morning, Ghansham, 70% of Berry's portfolio continues to be in non discretionary products.

Products, whether it's food and beverage health care personal care, and we think that positions us very well and history demonstrates that debt in prior economic downturns, a recessionary periods.

The company performs exceptionally well and we anticipate no change should that materialize to a greater extent.

In the coming quarters.

Our next question will come from the line of Karen Debruin with Mizuho. Please go ahead.

Karen Your line may be on mute hi, good.

Sorry about that.

Just wondering if you can dial in a little bit into the demand youre seeing by end markets if.

If you could touch a little bit on the industrial consumer and kind of foodservice side of things and the trends you're seeing into the fourth quarter and maybe just following up on the prior question some of the expectations, even if preliminary that youre seeing in 23. Thank you.

Yes.

Say this.

On a two year basis that we noted here our business continued to perform very well.

CPA HHS CPI in both engineered materials frankly, we've made great progress on price recovery.

Setting and frankly more cost in place anytime in our history and in that regard. We do anticipate Q4 showed some sequential improvement clear.

Clearly the 70% of our portfolio.

Tied to food beverage personal care, specifically, both in <unk> and CPI continue to be very consistent.

And stable.

We noted that the industrial portions of our business specifically the pieces associated with CPI and in some of the more industrial focused categories inside engineered materials, where were somewhat negatively impacted from a demand perspective.

But all in all we think the portfolio is very well positioned and as I said in the previous response historically.

<unk> has performed very very well given that.

These are products that people consume every day.

Thank you.

Your next question comes from the line of George Staphos with Bank of America. Please go ahead.

Hi, everyone. Good morning, Thanks for taking my question and thanks for all the details.

Tom My question is largely around growth and the investment program.

Then along with investment the investment in working capital.

I want to say going into fiscal third quarter, the expectation was for a bit better volume growth and what you ultimately saw yet in your remarks today, you generally said things were as expected.

Can you give us a bit more color in terms of why it was as expected even though volumes were off I'm guessing it was the price cost battle at Youre fighting.

Why you are comfortable that fourth quarter will be better despite.

The fact that you have easier comps, which is true.

What gives you confidence you're going to get growth out of the $300 million.

Growth.

On the slides on what the cadence is on that.

And then lastly, if I can.

Why are you holding working capital strategically to the tune of $150 million going into next year when raw material prices now look like they are coming down is that just a reflection of your customers see their demand backing up.

We have an inventory issue in the pipeline. Thank you very much and good luck in the quarter.

Sure George.

I'd say a couple of things one.

The industrial impact inside of our businesses.

Probably eroded a little more than we anticipated in the quarter, which was somewhat of a negative offset.

As we said the food based businesses continue to perform well and inside our engineered materials business. We made a concerted effort in that business to focus on price recovery as well as taking various opportunities to drive mix change inside that business when the opportunity presented itself.

So I think we're striking the right balance between both growth opportunities and the opportunity to fully offset our inflation as I said, we anticipate sequential improvement from Q3 going into Q4 in terms of our price realization and.

And we are fully committed to.

100% offset that inflation impact that we have realm.

Relative to the inventory decision that we made.

In the period.

Data <unk>.

Pre fact and that is in North America George.

The predominant way that we receive our goods.

Is through rail.

Today employment challenges in the railroads have led to a 14% drop in railroad average manifest speed.

So for us ultimately to be comfortable.

In the quarter, knowing that dynamic exists and we don't have any near term visibility of when it will be rectified, we're betting on making certain that we can serve our customers and given that dynamic coupled with the reality that we're going into a hurricane season, we thought was a prudent choice to prioritize our.

<unk> first and foremost.

We anticipate we will return to a normalized $900 million of free cash flow profile for the company.

And we're confident and comfortable with the decision.

Hey, George its mark.

I think you also asked about the growth capital I mean, we continue to feel good about those.

Projects as a reminder, those are customer backed investments.

While some of them have been slightly delayed due to the supply chain challenges.

Issues, our customers, we continue to feel good about those projects on delivering.

Our committed results.

We had expected.

Another supply chain example, George in that category.

Many of those high performance films in one instance that we're onboarding right now.

<unk> is the primary raw material component that had been in short supply while it continues to be an allocation allocations are beginning.

To improve and we're hopeful with some additional capacity coming online that will return to a more normalized basis, but as Mark said.

All of our Capex that we have spent as customer directed none of it's tied to our berry ambition or idea without the express partnership and alignment with an end customer.

Thank you.

Your next question comes from the line of Anthony Pettinari with Citi. Please go ahead.

Hi, good morning.

For HHS, you discussed a lag in recovering inflation and just based on raw material prices today, and specifically polypropylene coming down can you talk a little bit about the timeline for that recovery and maybe how much of a benefit could be seen and just broadly as you exit the fiscal year, how much will you have.

Potentially unrecovered or to recover in 'twenty three.

The Hh business and.

The opportunity will come relative to the renegotiation of purchase and sales agreements with those customers. So the lag in recovery is tied to contractual obligations that we are under today over the next several months, we will be in the process of renegotiating those agreements.

In alignment with their exploration both related to both volume and price recovery.

Okay. That's helpful. And then just exiting the year any view on total kind of unrecovered costs that you might be able to get back in 2003 or.

Yeah. Thanks, Thanks, Jayne finance, Mark I mean, obviously the inflation is a moving target.

So we're continuing to.

Seek inflation recovery and also drive our costs down right. I mean, we've got a lot of great capital projects have been implemented and continue to be implemented to drive down cost.

To drive profit improvement.

It's a little bit of a moving target, but I would say all four of our segments have made good progress we expect that price cost relationship to improve again here in Q4.

And I would say that relative to a number again, it's a little bit of.

Of a moving target, but all four behind I mean, we still have to recover we saw some inflation recovery in all four segments.

We're making good progress and I think an.

And after that Anthony was in my commentary we've.

Dramatically expanded the number of resources to support our internal productivity.

Tied to automation the quarter saw strong benefit from cost reduction projects the benefit was in excess of $12 million.

For the quarter and that continues to be a focus area of concentration for us.

Okay. That's very helpful I'll turn it over.

Your next question comes from the line of Angel Castillo with Morgan Stanley . Please go ahead.

Hi, Thank you for taking my question.

Just wanted to focus in on slide 14, just a couple of pieces. There that I think are notable changes from from the kind of the way that we're thinking about capital allocation strategy in the past.

I guess, we have the dividend future potential would love to hear some comments around how you're perceiving that as kind of if its changed in any way, but more importantly, maybe when we look at kind of acquisition. It seems like maybe that's kind of gotten pushed out.

And share repurchases has moved up a little bit so as we think about maybe normalizing free cash flow next year, and just kind of going forward. If you could give us a sense for maybe how we're thinking about the level of buybacks.

Agitation is potential for dividend and maybe quantifying the divestitures that'd be very helpful. Thank you.

Sure.

It's really intentional.

The focus in terms of how we're going to disperse our cash flow from operations is prioritized around first and foremost organic growth.

And given the fact that.

We have unique opportunities that we've executed.

Pretty aggressively against that repurchase authorization.

We'll continue to do that especially at at at current levels. The third piece clearly is divestitures, where our broad and extensive portfolio.

I will tell you it's an active process that we engage in on a regular basis and we will hopefully be able to make any type of public commentary should something materialize that.

Puts us in a position to discuss and speak to but it is it is a specific intent for us to look at the portfolio examine opportunities too.

To potentially.

Re prioritize one piece of the business in exchange for another and again, we'll update you as soon as we can should something materialized in that regard, but it was intentional.

Acquisitions piece again and dividend side.

From a shareholder value creation perspective.

The opportunity to repurchase our own shares right. Now we think is an exceptional value and we think invest in the organic growth of our business is similarly.

A huge priority and if we can leverage divestitures to help.

Facilitate that will do it.

Very helpful. Thank you.

Your next question comes from the line of Kyle White with Deutsche Bank. Please go ahead.

Hey, good morning, Thanks for taking the question I wanted to go actually back to George's question is on the working capital.

Should we expect you to hold this level of working capital for the foreseeable future until the supply chain and the rail environment improves.

Or do we expect that working capital based on what you see going forward into next year could potentially come down next year.

Yes, I think Carlos Mark Good morning, it's totally dependent on the supply chains.

<unk> referenced it's taking longer for Mattel.

Material to arrive to our sites, we think it's prudent.

Make sure we're providing the appropriate service to our customers and so if that means we need to carry a little bit higher inventory to take care of our customers. We think that's the right thing to do long term for our business.

As things normalize hopefully sooner rather than later.

Certainly readjust those inventory levels, but at this point I think.

I would be guessing quite honestly to try to predict when that's going to happen.

And if I could just follow up is this mostly the North America supply chain that we should be monitoring or is it more on a global basis I know you called out the North American rail so just curious there.

Yes, I mean, I would say, it's a global dynamic, but largely north onto North America factor.

Your next.

<unk> will come from the line of Adam Samuelson with Goldman Sachs. Please go ahead.

Okay.

Yes, thanks, good morning, everyone.

I guess I'm trying to just make sure I'm squaring the fourth quarter.

Commentary right it looks like it implies a 588 million of EBITDA.

On the number.

The two 1% for the year.

And.

In that scenario.

So you are up about 60, a little over.

$60 million year over year to up low single digits.

Volume.

Kind of low double digit.

Kind of EBITDA contribution, we think thats largely offset by FX.

I guess im just to make sure is the right thinking that price cost would be kind of that big bridge item to get you up to that.

To hit to hit that guidance number.

It implies a pretty meaningful step up sequentially on earnings.

Traditionally in the last few years, there's not usually that big of a step up in the in the fiscal fourth quarter.

Okay, how do we think about that price cost tailwind as it would carry into the early parts of fiscal 'twenty three.

Yes, no no. Thanks, thanks very much mark.

Got the math right.

It will be our expectation is to drive EBITDA on a comparable basis up approximately 15%.

On a year over year basis, and Thats largely driven by the factors you just discussed which is a continued.

Improvement in price cost.

We continue again to take pricing actions.

To offset inflation.

And then there has been some modest moderation.

Our primary raw material that will that will benefit the quarter as well.

Okay.

Your next question will come from the line of Jefferies <unk> with J P. Morgan. Please go ahead.

Thanks very much.

In terms of demand for plastic products.

Recycled material or lower carbon emission material is really growing at a much faster rate.

Traditional plastics.

Because of your access to.

Lower carbon plastics is that.

It's something that can increase your growth rate over a longer period of time.

You have more access or do you see it more as a trade off between.

Recycled part.

Growing faster in that business being cannibalized.

From that date.

The other side.

Standard carbon emission plastics.

Yes, great question I'm going to answer it two ways one from a traditional resin perspective.

The industry continues to grow.

As an example.

There is an additional 2 billion pounds of polypropylene coming online and 6 billion pounds of <unk>.

Polyethylene coming online.

Berry's ability to design for circularity and.

And innovate from a design perspective.

We will continue to enable Virgin based materials, who as you heard relative to the Mckinsey study in most instances have.

An equal or better carbon footprint, and youre going to see carb and becoming an increasingly important component.

The sustainability discussion for the world to get to net zero by 2050 in terms of recycled content. Both in terms of mechanically recycled bio based advanced recycle materials.

There is not sitting back idly, we announced and showcased in the earnings release and expansion of our post consumer recycled capability.

That will be commissioning in fiscal 'twenty three two.

To complement what we already have to support incremental organic growth based on the value that that total portfolio between both access to Virgin materials that can be.

Responsibly designed and managed in addition to how we can incorporate both mechanical recycling advanced recycling and bio based materials into that portfolio with a global customer base that we serve.

All supported by plants that are in close proximity to those end users.

And that should not be minimized given that transportation is a significant component from a carbon perspective, and berry footprint is uniquely positioned to ultimately be in closer proximity to our end users to reduce that transportation cost.

Great. Thanks, so much.

Your next question comes from the line of Mike <unk> with <unk> Securities. Please go ahead.

Hi, Tom Mark and thanks for taking my question.

Just wanted to get your thoughts on given some of the issues that are experienced in rigid packaging substrates. So if you look at Cannes and magnesium aluminum issue yoga class and the issues with European natural gas have you seen or experienced any increase in demand from existing customers or new customers that may want to you to look for Apache and <unk>.

Great with maybe a little more stability.

Can you also talk about some initiatives that the company may be pursuing to totally exploit some of the issues at these other with.

With these other packaging substrates.

Each and every day.

We have a.

They understand the requirements for end user base.

Make the best recommendation on.

Material choices that meet those needs plastics continues to be in.

<unk> opportunity for those brands to meet both their physical.

And physical requirements of the application.

Cost competitively.

And that continues to be the case.

Okay.

For the for the business.

On a two year basis, and we think that is appropriate given the pandemic nuances.

Our CP North America business was up 3%, our CPI business is up 2% engineered materials up 4%.

So the demand for the substrate and I think.

Showcase by the incremental capacity being brought to the market.

<unk>.

It provides a good level of confidence that this substrate will continue to grow.

And both in existing markets as well as developing market than berry's aptitude to design.

Possible packaging for circularity and incorporate alternative materials that ultimately can increase recycled content is a great combination and as you saw that third party.

Investigative piece relative to carbon footprint of plastics versus other materials.

Lends itself very well.

When you look at the data to support plastic that the choice relative to your carbon goals.

Your next question will come from the line of Arun Viswanathan with RBC capital markets. Please go ahead.

Great. Thanks for taking my question.

Thanks can you hear me now.

Yep.

Yes, Thanks, Hello, how are you doing.

I guess I just wanted to get back to the volume question. So.

You have a slide in there that.

Shows some of the organic investments that youre, making that should drive a couple of hundred million dollars of.

Of growth I guess over the next.

While I guess could you kind of describe.

How that plays out on a volume basis, maybe by segment and timing.

What should we expect.

Factory, so thinking about low single digit volume growth from.

From here.

We continue to believe all our businesses will be low single digit growers, we showcased <unk>.

It's a $100 million.

<unk> investment in dispensing solutions for both Europe , and United States and a sustainable alternative.

Okay. The investments that we've made in foodservice on are all polypropylene Cup and lid.

We're currently U S based Quebec capacity is all spoken for so much. So that it's just define an incremental capex spend to expand that capacity.

Pharmaceutical with a new site in India to support both a growing segment as well as the geography recycled materials in Europe with Plas Grand to being introduced.

And the introduced an introduction of a new wipe substrate to support Europe , which is a new developing market for us so yes.

The specific purpose of those capital investments aligned with customers in growth categories that in many instances are incorporating both the feature benefits of the traditional material with the benefits of recycled content or advanced recycling.

Okay. Thanks, and then if I could follow up on price as well so.

With resin costs moderating.

How should we think about and you guys have enacted a lot of price increases as as the whole industry over the last.

A couple of periods, so with resin prices moderating.

How do you expect to kind of deal with the non resin inflation.

Is there potentially some surcharges that you can implement or would you continue to implement price increases to offset that and how much do you expect to hold on to as far as price now.

Yes, potentially some of the input costs are moderating.

Yes, I would tell you that the majority of our resin, obviously has an escalator DS bettors, but theres a whole host of other materials that frankly are going the other direction still.

So we see unprecedented inflation and an area of packaging materials pallets.

We've talked about energy and labor and everything from your machinery parts.

So our ability to get that on the table relative to.

The pricing discussion is certainly warranted and.

We've used a variety of different vehicles to get that done.

And it continues to be an area of commitment that we will be we have a very strong resolve on it around and we were pleased with the progress in quarter. Three we said we will make we will make strong sequential improvement in quarter, four and well into 'twenty three we anticipate just based on.

The variety of inputs that we procure.

I would just add right I mean, obviously.

<unk>.

Our cost environment for our primary raw material does does help and the ability to get other price right.

Whether or not it's on an escalator de escalator certainly it helps to the extent you've got you.

You can assist by not going down as much as the primary raw material drop so it's definitely an enabler for sure.

And you noted that the working capital increases.

One time potentially in nature, but can you just expand on that because many companies now have been dealing with supply chain issues. It sounds like you guys are making a conscious decision to help out your customers by carrying.

Greater inventory levels.

Wouldn't that be a structural necessity wouldn't it take greater supply chain investments.

I have that or do you see that as just.

Kind of transitory here.

We see that we see that in my view as somewhat transitory, we believe that there'll be the rent necessary changes made both too.

Access to labor as well as innovation that will drive greater efficiencies.

And again, we did make the conscious choice in this period.

To support our customers with additional inventories and.

We only expect that at some point in the near term here that things will return to some normalized level.

So even if it didn't improve it still wouldn't repeat itself next year right. So it would not be a headwind that you dealt with next year or the next year, even if the environment doesn't improve.

I mean from that perspective, it's one time I suppose if you. If you made the case that it continued to get worse and worse and worse than potentially it could repeat itself, but that seems like.

Feels like an unlikely scenario.

Okay. Thanks, a lot.

Sure.

Your next question comes from the line of Josh Spector with UBS. Please go ahead.

Yes, hi, Thanks for taking my question I guess you guys.

To highlight growth in emerging markets and clearly a lot of Europe .

<unk> are calling there is there a way to think about your profitability in emerging markets versus the rest of the world business significantly higher or lower or do you need more scale in those regions just any thoughts around that would be appreciated. Thanks.

Yes, I would say in general it's similar.

We are.

Our investments tend to focus around global partners.

And so the margin profile tends to be very similar I mean relative to scale I think.

We continue to develop that scale.

And the reality is most of those markets are very fragmented so.

Now we may not have scale relative to our other regions.

On a competitive basis I would say, we do have that scale and certainly our global footprint.

<unk> footprint helps provide that scale as well from a from a sourcing product capability.

Respective as well and we have the benefit also.

Expansions.

Bangalore, India as an example, we had an existing facility. They are an existing management team that we felt was capable ultimately.

Help manage through an expansion.

Another example.

Our breadth and our scale and using existing teams and capabilities that know how we operate and can take advantage of the entire berry resource mix to execute.

Okay. Thank you.

Your next question comes from the line of kill Inc. With Jefferies. Please go ahead.

Hey, guys, it's actually Phil Inc.

You highlighted a fair amount of polyethylene and polypropylene capacity coming on in the not so distant future and certainly we're seeing some signs at.

Resin prices could say, so curious how you're thinking about how that kind of trends call. It. The next six next six to 12 months and I think historically just given your scale when capacity comes on you've been able to kind of leverage that from a procurement standpoint. So it can kind of help us think.

That through and then a question for Mark I think implicit in your <unk> Guide Youre, assuming some stayed in and inflation can you expand on that a little bit what are some of the big assumptions, whether it's resin or some of the other inputs.

I'll start with we're excited that the industry continues to grow to support these capacity expansion and again whenever this amount of volume comes out of the market. We will compete openly obviously to try to secure the best pricing that that we can based on our size and scale, but I think the most important component of it is.

Supporting an existing growing industry.

We're thrilled that it's coming online here in North America.

Barry has close to 60% of its business located itself.

I'll, let you speculate on what the benefit to US maybe we wouldn't comment on what we believe it could be on this call, particularly but nonetheless, it's really about growth its about its proximity to our largest.

Region, and and we couldnt be happier.

Good morning, Phil with respect to your question about assumptions on the guide on cost for polymer which is the bulk of our cost we've assumed July pricing and as I mentioned earlier there was some moderation.

Here in recent months that will that will benefit the quarter.

To the extent polymer changes in August and September that will actually have like.

Very little impact.

On our fiscal year results, given we close out here in September and the timing lag of the cost getting through the P&L due to inventory, but as Tom mentioned the other costs were continuing to see an inflationary environment not at the same pace.

Have seen the last four quarters, but nonetheless, we still see those costs and inflationary.

Status and obviously some of those.

Outside the U S are actually accelerating like energy in Europe , and all of those.

Inflation assumptions are embedded in our guidance.

Thanks, Mark and just on that note on Europe inflation, especially NRG pretty dynamic.

Or are you managing passing that Theyre looking you did a pretty solid job there and as you kind of negotiate new contracts going forward.

The important element I know historically resin has been the biggest piece, but energy, they're dynamic, especially in Europe and stuff.

Yes, I think on the energy side, we're fortunate in that.

While we certainly do consume electricity that generate our products.

Actually use less energy.

And then competitive materials.

As Tom mentioned, we're continually working to improve our operations by reducing the amount of energy that that we consume to make our products.

Certainly we're out in the market to recover those inflationary costs.

With our customers.

As you can see in our results.

<unk> had good success in doing so and we will continue to do that and obviously procuring energy.

Our sourcing department works diligently to.

Get the best pricing.

That we can in each market that we operate it's just too significant a component.

Throughout the European market.

It's on the table.

It's not on an oddity to bring that to the forefront to get relief and recovery.

Thanks, a lot I appreciate the color.

Your next question comes from the line of Gabriel Hodge to with Wells Fargo Securities. Please go ahead.

Good morning, Tom and Mark.

And one of your responses to a question about productivity I think you referenced $12 million net.

This quarter.

And I know that Theres been a lot of discussion about labor.

<unk> ability and reliability et cetera.

<unk> talked about I'm curious kind of within your four walls, what you're beginning to see and then it's been opaque I guess.

<unk> results given a lot of disruption over the past 18 to 24 months, but based on kind of all come out of two ways. The $1 50 of spend that you have embedded in your Capex and then again kind of annualized <unk>, what you've got here in this quarter would suggest maybe $30 million to $50 million annually that you kind of expect to get out of productivity.

Hey can you confirm that and then B is that something that maybe we can start to see in the numbers again next year.

I think that range is a redo.

A reasonable expectation.

The team's done a really nice job and so think about that.

Q3 2022 Berry Global Group Inc Earnings Call

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