Q4 2022 Berry Global Group Inc Earnings Call
Okay.
Okay.
Good day and thank you for standing by welcome to the fourth quarter 2022, Berry Global Group earnings Conference call.
At this time all participants are in a listen only mode.
After the Speakers' presentation, there'll be a question and answer session.
Ask a question during the session you'll need to press star one one on your telephone.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your speaker today, Dustin Stilwell Investor Relations. Please go ahead.
Okay.
Thank you and good morning, everyone welcome to various form.
For 2022 earnings call throughout this call we were part of the fourth fiscal quarter September 2022 quarter.
We will begin our call I would like to mention our website we have provided.
To help guide our discussion this morning.
After today's call replay will also be available on our website at very global Dot com under our Investor Relations section.
Joining me from the company I have Berry's Chief Executive Officer, Tom Salmon and.
<unk> financial Officer Mark miles.
I'll have Tom and Mark's comments today, we will have a question and answer session.
One of the opportunity to participate we do after you limit yourself to one question at a time with a 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 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 our website.
Please note that in our commentary today within our presentation when we compare our results to the prior year quarter or for year, we have adjusted to present on a constant currency basis and remove the impact of divested businesses to provide the appropriate comparable results.
Reconciliations to reported results have been provided in our earnings release and the appendix.
<unk> of our presentation.
And finally, I remind you that certain statements made today, maybe forward looking statements.
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, 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 or financial condition 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.
Welcome everyone and thank you for being with US today, turning to our key takeaways for the quarter and fiscal year on slide four.
First our business delivered solid full year fiscal results, including record results for both revenue and earnings per share growing, 10% and 7% respectively coming off another record year in fiscal 2021.
Secondly throughout the last two years seeing significant cost inflation, I've taken proactive pricing actions and investment and cost reduction projects across our businesses. Our team has done an exceptional job and continue to make progress on both fronts.
Third during the year, we generated a substantial $876 million of free cash flow and returned $709 million to shareholders via share repurchases or approximately 9% of our total shares outstanding.
When you invest for long term growth, while making great strides towards our sustainability goals and will continue to be ambitious with our commitments, which are leading to consistent opportunity to expand our relationships with our global customer base.
Additionally, as you saw on our press release issued this morning, Barry has decided to initiate a quarterly cash dividend, which is a significant milestone for the company.
I'll also be increasing our capacity under our stock repurchase program to over $1 billion.
Finally on today's call, we will review our fiscal year 2023 goals and commitments, which include a continued focus on organic growth inflation recovery and reducing our costs along with the opportunity to deliver strong returns on cash to shareholders through further share repurchases taken advantages of our <unk>.
<unk> undervalued share price.
Turning now to the financial highlights on slide five our September quarterly performance was modestly below our expectations on revenue and EBITDA, which was primarily impacted by continued inflationary pressures and pockets of supply chain challenges, which resulted in softer customer demand along with the strengthening of the U S dollar the.
A company again demonstrated its ability to generate substantial cash delivering record free cash flow in the quarter.
From an earnings perspective, EBIT was up over 9% and adjusted EPS increased an impressive 18% from the prior year quarter, including an improved and price cost spread of $58 million.
We've demonstrated historically and during the most recent quarter, we remain committed to passing through inflation and believe we are well positioned given our scale along with our ability to service our customers from our facilities in close proximity to the locations, which provides both cost and sustainability advantages.
For the full year.
We delivered revenues of $14 5 billion, a 10% increase in fiscal year record and we met our adjusted earnings per share target of $7 40.
And finally, we exceeded our most recent annual free cash flow guidance by $125 million driven by strong working capital management.
Also we were able to delever for the third consecutive year ending the fiscal year at three seven net debt to EBITDA, which is our lowest leverage ratio as a publicly traded company. Additionally.
Additionally, as you saw in this morning's announcement, our board of directors has authorized an additional $700 million for share repurchases. In addition to our current program, which has approximately $340 million remaining putting in a new total authorization over $1 billion. We believe our shares are significantly.
<unk> undervalued and this increased authorization reflects our confidence in the outlook of our business, our long term strategy and the strength of our operating model and cash flows.
Before I hand over to Mark I want to cover a couple of slides.
Specifically slide six details our original fiscal 'twenty two guidance to where we ended the year fiscal 'twenty two provided some unique hurdles from an operations and demand perspective, not to mention forecasting challenges throughout the year.
We are very fortunate to have such a dependable and diversified portfolio, which only saw modest headwinds on demand and enabled us to meet or exceed our guidance for cash flow and earnings per share.
On slide six we have provided a comparison of our original guidance to actual fiscal 'twenty to results as you can see the majority of that headwind was a result of foreign currency due to the strengthening of the U S dollar along with softer customer demand, which despite our very stable and diversified portfolio, we weren't entirely immune to.
In our consumer businesses, which represents 70% of our portfolio demand remained steady.
Our scale global end markets and product diversity provides a rather insulated demand profile for Berry.
Those distribution and industrial market did see some modest headwinds throughout the year in areas, such as automotive and building and construction.
We anticipate these to recover as overall global markets improve.
Lastly, I am proud of the agility of our teams working with customers as costs were consistently increasing throughout the fiscal year as a result of inflation.
To put it into perspective cost increase over one $6 billion during the fiscal year, and we were able to offset these inflationary pressures.
While we did end the year improved and price cost spread.
Have more inflation, you recover and expect additional improvement in cost reduction benefits in fiscal 'twenty three.
On slide seven.
In both the near and long term, we remain focused on driving consistent dependable and sustainable organic growth. We continue to invest in each of our businesses to build and maintain a 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 <unk>.
Pharmaceutical. 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 to invest in emerging market regions. We will further enhance our ability to provide consistent dependable.
And sustainable long term growth.
Done a great job since our IPO in 2012 growing our emerging markets from less than 2% to now 15%.
Longer term, we believe our emerging market presence can be more than 25% of our total revenues.
And lastly, <unk>.
Innovation and sustainability are increasingly embedded in everything we do and we continue to believe this represents a great opportunity for growth and differentiation as I'll discuss in our later prepared remarks now I'll turn the call over to Mark will review Berry's financial results Mark. Thank.
Thank you Tom.
I would now like to refer everyone to slide eight for our quarterly and fiscal year performance by each of our four operating segments. Our businesses continue to perform well and focus on inflation recovery and generating cost productivity, while driving long term sustainable organic growth.
Our consumer packaging International Division increased revenue by 8% over the prior year quarter and 11% for the year, primarily from the pass through of inflation and improved product mix.
In the quarter, we saw relatively flat demand across our consumer facing categories, such as food and beverage while demand in more discretionary markets, such as automotive and surface coatings experienced some softness along with the lockdown in China, having a modest negative impact on our volumes.
On a two year basis organic volume growth was 2% driven by capital investments in growth categories, such as closures dispensing systems and healthcare.
EBITDA improved 10% in the quarter over the prior year, driven by product mix improvements inflation recovery and cost productivity.
Next on slide nine our consumer packaging, North American Division delivered growth in the quarter and a 14% increase in revenue over the prior fiscal year, which included pass through of inflation and flat volumes coming off a strong 4% organic volume growth delivered in the prior fiscal year.
We were able to offset softer customer demand with organic volume growth from recent capital investments on a two year basis organic volume growth was 3% as we continued to see strong demand from food and beverage markets, including strong demand for our clear polypropylene fully recyclable drink cups used by quick service restaurant.
<unk> and convenience store.
EBITDA increased by an impressive 27% and 13% over the prior year quarter and fiscal year, respectively. As we made continued progress on inflation recovery, improving our product mix and generating cost productivity.
On slide nine our health hygiene, and specialties division and a modest reduction in revenue for the quarter from the pass through of lower polymer prices on flat volumes.
For the year revenue increased 3% over the prior fiscal year, primarily from the pass through of inflation, partially offset by the moderation of advantage products related to Covid.
On a two year basis organic volume growth was 2% with continued market growth in nonwovens.
EBITDA was down around 25% for the quarter and fiscal year as expected due to the benefit from the pandemic related mix a year ago and the lag in recovering inflation on costs other than polymer.
We continue to pass through these cost increases to our customers and expect earnings will improve sequentially and we'll be back to a positive price cost spread on a year over year basis in the third quarter.
And on slide nine revenue in our engineered materials division was down 7% for the quarter due to lower volumes and finished 10% higher for the fiscal year, primarily from the pass through of inflation the volume decline as anticipated 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.
EBITDA was up an impressive 28% over the prior year quarter and 13% over the prior year from our focused effort on improving sales mix to higher value product categories, along with cost inflation recovery.
Next our fiscal 'twenty three guidance and assumptions are shown on slide 12, we are expecting to generate between $7 30.
The $7 80 of adjusted earnings per share, which at the midpoint would be another fiscal year record and our 10th consecutive year of delivering EPS growth, which I am proud to report that we have done every single year as a public company.
For comparison purposes fiscal 'twenty, two adjusted for divestitures and recent currency rates was $7 per share.
And our 23 midpoint, we will deliver another strong year year over year growth of 8%.
Given the timing lag of inflation recovery seasonality and timing of cost reduction actions, we expect earnings to be stronger in the second half of fiscal 'twenty three similar to 'twenty two.
Our comparable EBITDA at the midpoint is expected to grow approximately 5%, which includes continued inflation recovery along with continued cost reduction benefits.
Additionally, we expect free cash flow to be in the range of $800 million to $900 million.
With cash from operations of one four to $1 5 billion less capital expenditures of $600 million.
Our cash flow outlook includes headwinds from foreign currency and higher interest rates than fiscal 'twenty, two and some incremental nonrecurring costs from cost reduction initiatives.
Our cash flow year in and year out has been a dependable.
Key strengths and core value of our company.
Provides us the opportunity to invest in our businesses to grow and become more efficient while returning capital to shareholders.
As you can see on slide 13, our capital allocation strategy remains consistent and return based and includes continued investment in organic growth and cost reduction projects share repurchases.
Debt repayment and a new quarterly cash dividend.
In fiscal 'twenty, three we expect to return $700 million reward to shareholders via share repurchases and dividends.
Putting an approximate 2% dividend yield while further reducing our shares outstanding by nearly 10% at current valuation levels.
We believe we are well positioned for continued value creation through both our dependable and consistent free cash generation and strategic portfolio management opportunities, which would provide us additional capital for opportunistic share repurchases and further debt repayment.
This concludes my financial review and now I'll turn it back to Tom Thank you Mark.
Our fiscal 'twenty two results are yet. Another example of our proven operating performance over many different and sometimes challenging economic cycles.
As you can see on slide 14, we have consistently driven top tier results in nearly all key financial metrics, including strong compounded annual growth rates for revenue earnings and free cash flow, including growing our adjusted earnings per share every year as a publicly traded company.
This year, we grew adjusted EPS by 7% and we expect fiscal 2023 to grow by approximately 8% are.
Our business model has proven resilient, including a broad portfolio of plastics packaging solutions with strong dependable and stable cash flows to allow us the flexibility to drive strong returns for our shareholders.
From our current viewpoint global market demand for our industrial markets will create a choppy demand environment. We will continue our focus on inflation recovery, while also driving strong cost benefits through efficiencies and asset optimization throughout our global footprint to offset any demand challenges.
Next on slide 15.
Since the RPC acquisition in mid 2019 over the past three years, we have reduced our net debt by nearly $3 billion, including over $1 billion this past quarter.
Furthermore, in fiscal 2022, we returned an additional $709 million to shareholders via share repurchases.
Totaling over $3 $5 billion of value returned to our shareholders, while growing our adjusted earnings per share more than 70% since the RPC acquisition.
Fiscal 'twenty two marks the third consecutive year, we've reduced our leverage ending the year at three seven net debt to EBITDA next I wanted to quickly highlight the news we announced earlier today, we are proud to initiate this new quarterly dividend and authorized supplemental buyback program. This.
This announcement is clear evidence of the work that Barry teams across the globe have completed to position the company to succeed today, Barry is stronger than ever has been and this dividend initiation underscores our commitment to enhancing long term value for all stakeholders.
Another element to our value creation has been a strategic investment choices, we've made and how we prioritize our investment in our business. We are investing in several markets and product categories that we expect to drive long term organic growth and complements our ongoing efforts are building and increasing resilient portfolio of products, including a few of those.
We've highlighted here on slide 16.
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 like health care personal care and pharmaceutical.
As you can see we expect these strategic investments contribute over $300 million in revenue over the next few years.
We believe we are well positioned to continue to deliver significant value for our customers and shareholders through these investments like those presented with an unmatched global footprint and design capabilities to support circularity.
Our second dedicated mechanical recycling facility located in Europe , and pictured in the center of the slide will be operational in Q1.
As a top five Palmer recycler in Europe . This new facility will enhance our capacity for post consumer recycled products that are demanding more and more by our customers globally.
This site is the world's first closed loop system to mechanically process domestically recovered household waste polypropylene back into food grade packaging with the ability to handle 200000 tons of material annually.
Our investments in both innovation and sustainability provide us a competitive advantage in our increasingly embedded in everything we do.
Innovating circular and sustainable solutions remain a key aspect of our long term de carbonization and global growth strategy.
We see increasing demand for these products, which include attractive design. The sustainability advantages that we believe will support longer term higher growth opportunities.
Our advantages include the ability to both produce and source recycled resin globally, along with our manufacturing footprint footprint and capabilities to innovate and design a necessary product protection from a more sustainable packaging solution desired by our customers.
We will continue to invest in 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 17, we continue to make great progress on our sustainability targets.
And are committed to minimizing product impacts by enabling 100% of our fast moving consumer packaging products to be reusable recyclable or compostable by 2025, we are continuously innovating and investing to work towards the global goal of a net zero economy.
Next we are proud to highlight the Berry has received the 2022 energy project of the year from the association of energy engineered for our milestone goal to eliminate 100 million kilowatt hours of electricity from global operations. The admissions say from this remarkable reduction in energy use or equal to <unk> emissions required.
<unk> to power over 16000 homes for one year.
Further from a collaboration standpoint, we've partnered with ingredients to launch a bottle of its hair care product line made from 100% post consumer resin. We also recently announced our launch of a new Mars jar for the well known products, such as Eminem, skittles, and starboard, which will be lighter in weight and include.
15% post consumer resin and lastly announced recently at pack Expo Barry received a prestigious sustainability Technology Excellence award for our tethered closure with a tamper evident band this innovative packaging solutions cut down our waste by securing the closure to the bottle and improving <unk>.
Ability.
In summary, our strategic priorities remain unchanged our entire global teams emphasis on working safely and servicing our customers remains our number one priority and has made us a stronger better and safer company we.
We will continue to operate with agility as we navigate current market dynamics to drive sustainable growth, while recapturing inflation.
At the same time, we remain focused on executing our long term strategy of driving shareholder value expanding our competitive advantages and delivering on our financial priorities to position Berry for long term success.
I'm very pleased with the hard work of our employees delivering solid results in the face of persistently higher cost and a dynamic global economy.
Thank you for your continued interest in Berry and at this time, Mark and I'll be glad to answer any of your questions.
As a reminder, if you'd like to ask a question at this time. Please press star one one on your telephone.
Our first question comes from the line of Ghansham Panjabi with Baird. Your line is now open.
Okay.
Ghansham Your line is now open.
Thank you sorry about that good morning, everybody.
Hey, Tom just on your comments on driving cost benefits through automation and asset optimization can you just give us a better sense of just expand on those comments is it target towards any specific segment across your portfolio and then just a follow up question for Mark in terms of the variances on price cost for fiscal year 'twenty three versus 22, I mean anything you can share there.
Ghansham automation is a priority across the entire portfolio throughout the company. We've got over 125 dedicated technician supporting automation.
Automation projects as well as our internally.
Terry fabrication capability, we're partnering as well with third parties to help us Similarly execute those programs at a faster pace, we're making capital investments to support lower cost assets.
For example, electric machines in Europe to ultimately reduce our energy cost.
<unk> and increased throughput and yield as a result, so it's all part of that up to and including what we've been doing around global asset optimization that meaning moving more and more business tied to more higher productivity asset that we have throughout the chain to lower our conversion cost reduce energy dependence.
While at the same time been able to successfully serve our customers.
Good morning, Ghansham with respect to price cost and as you probably noted we have about $100 million of growth embedded in our EBITDA guide for 'twenty three on a constant currency.
Adjusted for divestitures.
Assumed for the year.
That growth is coming from price cost.
Little more weighted towards.
Towards the cost side as.
As Tom mentioned, we've got a lot of capital driven cost reductions that are coming through and then we've got some price recovery.
From inflation that we havent yet recovered from customers.
Making up the rest of that $100 million.
Okay, and then just last quarter, you talked about perhaps carrying higher inventory levels, just based on issues with rail freight movement and so on and so forth that things normalize I'm just trying to understand how you outperformed from a working capital standpoint.
Things have.
Clearly normalize we're keeping an eye on the.
The rail negotiations that are underway right now.
We've got a backstop should anything materialize in that regard as well pivoting from rail to more.
Traditional means over the road hauling, but nonetheless, not a concern it's certainly normalized for us and we were happy to make it through the hurricane season relatively unabated.
I would say Ghansham with respect to your question on working capital.
Volumes as we mentioned came in slightly lower than we expected and that obviously not the way we want to get there, but certainly that help working capital.
The year closed out and I would say our teams did a nice job of adjusting both purchases on materials as well as our finished good quantities of the year closed out.
As part of these challenges we've had on the supply chain.
Okay very good thank you.
Our next question comes from the line of Anthony Pettinari with Citi. Your line is now open.
Hi, good morning.
Tom or Mark just following up on Ghansham question.
Free cash flow guidance for 23 does that assume that the I think the $150 million inventory headwind that you referenced earlier reverses or do you get that back next year and then just in terms of the guidance for 'twenty three are there any underlying volume assumptions for the for the.
Company, and then Directionally as we think about the four segments any SEC.
Segments, where you would expect volumes might be stronger or weaker in 'twenty three.
I'll start with the overall no doubt about it when you think about 2022 is a very dynamic and challenging year and frankly quite proud of the team on a two year basis, delivering 2% volume growth given that 'twenty. One was a very very strong year for us.
We see that similar dynamic and economic backdrop, as we enter our fiscal 'twenty three as well.
Continues to be inflationary pressures there is pockets of supply chain challenges are out there and frankly.
Our end customers are pointing to a near term outlook that is little softer customer demand.
Nonetheless, we believe that the capital investments that we're making.
<unk> position us versus the market and position us well for the long term for low single digit growth.
And clearly as it relates to demand and that outlook any deviation, we see in terms of demand across the fiscal year, we will address with cost and productivity initiatives.
Im working capital Anthony we typically assume zero in.
Impact obviously the year is just getting started here. So so we will see as the year progresses.
We start the year polymers, a tailwind in the U S, which is our largest cost category, but obviously with the situation with energy in Europe .
We have a long road here ahead of us for the year. So we'll see how the year plays out what we've assumed zero.
In total for working capital in 'twenty, three which is consistent with how we've done in the past.
Okay. That's helpful. And then just the return of capital announcements are really really welcome in terms of the dividend and your approach there.
Can you talk about the approach to the dividend and maybe possible dividend growth in the future are you targeting a certain payout or a certain yield or is there sort of a benchmark or peer set that youre looking at just any thoughts there.
Well first and foremost we're thrilled to make this historic announcement today. The first dividend in 10 years as a publicly traded company really driven by the confidence in that we have in our operating model and the resiliency of the portfolio and its ability to consistently deliver strong operating income and cash flow from <unk>.
Operations, and that's given us the confidence coupled with feedback from our investors.
Which theres been a percentage of our customers that have been interested in the initiation of a dividend. It's similarly gives us access to a new shareholder base as well that ultimately may look at that as a precursor for investment that we have otherwise not been able to take advantage for <unk> and given that we believe our stock is tremendously undervalued right now.
That coupled with the share repurchase authorization.
We think it's a great combination for both existing and new shareholders for our company with.
With respect to I guess, the quantity Anthony certainly we have more than adequate cash flow to support this dividend and obviously a much larger dividend. We thought it was the right starting point given it's in line with kind of the broader market S&P.
And with respect to future announcements on increases I would say stay tuned on that nothing yet to communicate in that regard.
Okay. That's helpful I'll turn it over.
Our next question comes from the line of George Staphos with Bank of America. Your line is now open.
Hi, This is actually cash killer on for George This morning, Thanks for taking my questions. So just building upon some of the prior questions can you just comment on what your growth trajectory has kind of the first quarter and I guess relative to 2023.
The company had some challenges in hitting its growth outlook in 2022, so what's your ultimately give us confidence or comfort.
In 2023 that this pattern will repeat.
Yes.
Appreciate the question as I stated earlier, our continued investment that we've made in Capex alongside our customers. We believe puts us in a better position relative to the market and given that it's customer language gives us great confidence going forward.
Yes.
We're not immune to the dynamic economic backdrop that you've heard from a lot of folks and.
Considering that barry's coming off of a record 2021 and.
On a two year stack basis to be plus 2%.
Given that environment.
The model has proven itself out.
Not to mention the resiliency of our portfolio.
70%.
Tied to very steady resilient businesses that people buy regardless of the economic environment that theyre facing and this business has performed incredibly well in those environments that coupled with our ongoing investment in our low cost manufacturing base and footprint and ongoing investments.
Sustainability can ultimately offset any type of weakness that the market may provide in terms of demand, but as we've said, we clearly have a near term outlook will round softer customer demand based on our end customers with a stronger back half.
But we clearly will pull the levers necessary to deliver on the results and again longer term, we continue to view the business.
Low single digit growth.
Business, we continue to pivot to.
To markets that are higher growth like health and wellness.
<unk> care.
And certainly investments around sustainability, we think are going to be is going to be a future growth driver for our company no change in that regard.
Okay, great and just barely trends here in the first quarter.
Software some are similar to know more about how we exited 2002.
Sure.
The market continues to be challenging and the team is performing very well as we said in our prepared comments.
The commitment offset fully.
All inflation that where we're exposed to continues to be front and center as we start our fiscal 'twenty three.
Okay. Thanks, and just one quick follow up just relative to that $300 million of revenue from those growth investments over 2023 and 2024.
How can we think about the cadence of that.
Kind of layering in there.
Yes, I don't have the exact granular detail in front of me I don't think Theres, a big hockey stick because I think about those projects that are outlined on those pages. Some of those are coming online as we speak. So I don't think if you just model that ratably.
Over the next eight quarters, I don't think that would be significantly different.
Okay. Thanks.
Our next question comes from the line of Phil <unk> with Jefferies. Your line is now open.
Hey, guys any update on any potential divestitures certainly the credit markets have gotten a little tougher has that made it a little more challenging to execute and on the flip side do.
The move that you've kind of now today in terms of returning cash back to shareholders limit your ability to kind of pursue bolt ons I'll call. It 'twenty 'twenty three.
It doesn't impact the <unk>.
Our ability to pursue bolt ons, we're going to operate the company within our targeted range of between 3% and three nine times relative to prospective divestments.
And we have nothing to report for this call. It continues to be an area of opportunity for us and as you said, Phil as the as the markets ultimately provide those opportunities and we believe that we will have assets. It ultimately can contribute to that.
That strategy and ultimately be deployed in other areas of the company.
Got you and then Mark if I heard you correctly for 2023 guidance Youre, assuming $100 million price cost tailwind can you kind of unpack how much of that is cost as it relates to potentially deflation versus some of the good stuff you guys are doing on the self help side, taking costs out and then on the pricing side.
And then potentially falling resin environment do you have the ability to get more price, especially on the non resin piece, which.
Taking you up a little bit this year, but.
Made pretty good progress to kind of wrap up last year. Thank you.
Yes, sure Thanks, Phil I mean I.
I guess, the good news and the Bad news is we've done an excellent job of tightening up our lag on.
Resin pass through as you as I'm sure you saw the last fiscal year resin was very volatile up and downs and kind of record movements and yet you saw our earnings.
I have very little impact on our earnings. So team has done a great job of mitigating the impact of of RASM on our earnings. That's also again kind of the bad news and that adds RASM drops.
We passed that through very efficiently to your point, though it certainly provides a good backdrop relative to passing through.
Cost increases outside of resin.
And we're certainly active in doing that and as we said about.
I'm going to call it about fourth of <unk>.
Improvement, we're expecting an earnings next year to come from.
Improved price cost with our customers with the remaining coming from cost reduction efforts. The company is initiating which would include.
Moving getting more efficient on material usage, which could involve changing suppliers for example.
Thanks, a lot appreciate color.
Our next question comes from the line of Josh Spector with UBS. Your line is now open.
Yes.
Hi, its Chris Perrella on for Josh.
Just wanted to follow up on the engineered materials.
How much of the volume decline in the quarter was due to Deselecting and when do you see the portfolio.
The product portfolio.
Set at this point.
Yes, we would anticipate in the back half of our fiscal year, we will begin to see sequential improvement.
On the on the demand front. This has been a conscious effort inside this predominantly distribution serve business to <unk>.
<unk> to refine our business mix.
<unk>.
Alongside of some of the capital investments that we've made specifically around areas like multi layer converted films and transportation films now in distribution clearly there has been impact throughout the year just from general Destocking efforts that are underway periodically just based on distributors trying to anticipate.
Lower input cost, but I'd say the back half of the year will be in a more normalized rate couldnt be prouder of the work that this team has done in offsetting inflation, while at the same time refining.
And improving our business in this product catalog product line mix, so really happy about the group.
No.
Just to clarify that so the product line mix is that is that said at this point and then you are just waiting for the market to grow or do you still have more bottom slicing to do.
In the in the unit.
There'll be still some work to do in the front half of the fiscal year, Alright, and then a quick one on Capex.
Bit lower than what it's been the last couple of years.
How does that.
Lower capex.
Breakout between growth and sustaining.
Versus what you initially expected.
Sure, yes about half of our Capex, maybe a little more than half.
That's what I would refer to as maintenance or sustaining.
As you mentioned.
We've done a great job of increasing the output of our existing assets. So we've got plenty of capacity to grow with them.
Within the system. So we're going to continue to invest in growth as Tom said behind our customer commitments.
But we've got we've got room to grow we are focused on selling the assets.
Production capabilities that we have but.
It's about half and half reiterating what I said earlier about half maintenance and the remaining half split between cost reduction and growth in many of those projects contain both elements right. Many of our capital projects are adding capacity and also reducing cost on our base business.
Alright, Thank you very much.
Yes.
Yes.
Our next question comes from the line of Kyle White with Deutsche Bank. Your line is now open.
Hey, good morning, Thanks for taking the questions on the Destocking impacts are we fully cycled through the impact and HHS deaths from Covid advantaged products and then you called out some destocking impacts in engineered materials, but are you seeing any other impacts from.
From Destocking in the consumer segment as well.
Yes.
I know thats been pointed to a lot in a lot of the earlier calls and communications.
We look at it nothing has been to.
To the point that we would say is dramatically unusual however, and HHS.
Destocking was specifically tied to the Covid benefited areas and again that business had more benefit net tied to COVID-19 and engineered materials.
Regular aspect of that business, given its distribution nature and people trying to time benefits in.
In terms of inflation and deflation.
Does that help.
That does I guess on the mix impact in HHS is that fully cycled through though.
Right.
Mark.
I think were are effectively cycled through that on a year over year basis.
Got it and then just wanted to follow up in consumer packaging North America can you provide a bit more details on the volumes there called out softer customer demand, what exactly was that related to and our inflationary pressures, having any impact on your foodservice demand there.
I would compare both CPE M&A as well as CPI I mean overall in the food and beverage basic personal care businesses. They continue to demonstrate their resilience certainly versus.
Other discretionary spaces.
Those teams have really done a nice job in terms of execution both on price.
Given the.
The stable demand in the United States and even in Europe , given where theres been some softer customer demand Nonetheless, both those businesses are.
Arguably to the most stable pieces of our portfolio, making up 70% of what we do and our overall demand in those businesses. It looks very much like the large CPE Glee CPG global customers that we serve from a foodservice perspective.
The advantage nature of our portfolio, specifically around all polypropylene recyclable clear drink Cups continues to be a winner for us both in terms of consumer acceptance as well as the sustainability advantage and we are we.
We continue to be pleased with the progress inside that space.
Thank you I'll turn it over and come about sorry.
Parallel my comment on <unk>.
On adding capacity.
I would exclude that product line from my comment, we're essentially sold out and our foodservice product line.
And we've got more demand than supply at the moment, we're adding supply.
Chunk of our Capex.
We committed to here in the last 18 months and we're continuing.
To add supply to meet the customer demand in that area.
Sounds good I appreciate that Mark.
Our next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is now open.
Yes. Thank you good morning, everyone.
Maybe mark just following up on the comments you made on capacity.
And then understanding kind of the point on the drink Cups in North America and <unk>.
Can you just frame what.
Volumes could grow over a two year period, two to three year period inside the organization.
With the capacity you have without really needing a market.
More investments.
I'm just trying to think in the context of fiscal 'twenty, two where volumes were down slightly versus your initial expectations of up it doesn't look like there's much volume growth really embedded in the fiscal 'twenty three plan in <unk>.
Okay again taken the capex, a little bit lower than I might have thought previously, which all would suggest that there is scope to grow into the current network without putting a lot more capital to work.
Sure Yeah, obviously mix is important we have.
We have asset flexibility on many of our assets.
Some some have less flexibility.
So foodservice, we mentioned on that particular asset platform. We're sold out we have other asset platforms that have <unk>.
Capacity and we're out actively selling in those markets to the extent, we don't see demand improvement. We are certainly prepared to take actions on the cost side.
We're doing that and we will take more if necessary, but I'd say we have adequate.
Capacity to meet our low single digit growth objective certainly.
Here in the midterm.
But again a lot of it will be determined by the mix of where the demand comes from so hard to give a.
On an absolute number on axa depends on where the volume growth comes from.
Okay, and then if I just think about the fiscal 'twenty three outlook.
Again, it seems like as a total company level. There is very kind of modest if any kind of volume growth embedded.
And the plan can you maybe just maybe provide any color.
On expectations by the different segments for volume more or regions, where it makes sense just to help us think about how you're framing kind of the different parts of the portfolio from a growth perspective.
Not a significant change what we've communicated before the 70% of our portfolio tied to areas like food beverage.
Spirits personal care.
Our continuing demand remained very resilient, we've spoken in the past relative to our industrial based businesses that have been more negatively impacted.
By the economic downturn or softness that you've seen in parts of the world.
And we don't see a significant change in that regard.
At this point.
Okay Alright.
Helpful I'll pass it on thanks.
Our next.
Question comes from the line of Angel Castillo with Morgan Stanley . Your line is now open.
Alright, Thanks for taking my question I, just wanted to unpack a little bit more of the 2023 as you think about a second half that showed a bit more backend loaded.
Could you just talk about other than Destocking, perhaps abating in some pockets, where what are the aspects of the business. How you would anticipate to kind of accelerate as we move to the.
Second half <unk> improvements that you had kind of anticipated.
On the price cost side or is there some end markets.
We expect better results.
Yeah.
In general.
And if we anticipate improved.
The improved dynamic backdrop versus what we're coming into the year four youre going to see all boats rise as a result of that clearly we've got a more stable raw material environment right now.
And clearly if we see any type of improvement in terms of FX and currency, that's a net benefit for the company as well and.
And even now given that we've done a very good job in passing on inflation throughout the year I would definitely described the materials and input cycle that being better and certainly more stable in 'twenty three and we started 22.
That's helpful. Thank you and then.
Do you think about your capital structure or capital allocation.
Clearly you and the board are working hard to kind of fine tune and as you think about leverage in particular can you just talk about why is three to three nine times kind of the right range and as we think about potential for kind of further deleveraging from the $3 seven.
I think a lot of it.
Peer group is maybe below three five so why not delever further kind of near term just given the macroeconomic environment. How are you thinking about that.
Capital structure.
From a strategy perspective.
Well first we're thrilled that the company is not the lowest leverage level in its history as a publicly traded company we demonstrated our ability based on our cash flow since the RPC acquisition dramatically de lever. The company quickly. We can continue to do that said given the current environment and the fact that our valuation is incredibly low.
And that the stock is undervalued, we wanted to take the opportunity to first buyback stock as quickly as we can taking advantage ultimately have that opportunity to recognize that there is another component of our shareholder base that desires, a dividend and can expose us to a new pool of investors.
At this time those are the two absolute right investments to make coupled with the continued investments that we're making in organic growth should we choose to do so as we see the valuations improve we can clearly and as we've demonstrated delever the company quickly.
Okay fair enough. Thank you.
Our next question comes from the line of Mike <unk> with Truest. Your line is now open.
Thanks, Tom Mark Dustin I appreciate you taking my questions.
Just wondering if you could comment about the cadence of volume growth during the quarter. It seems like a number of your peers have pointed to a particularly weak September as a consumer sort of retrenched during that month and just wanted to follow up Tom in your comments also.
Pointing to some softer demand.
What type of can you comment as to the line of sight. They have and they were talking about October or are they talking about November December just trying to figure out where demand goes as you met trajectory is headed.
Okay, I know what you referred to it was.
Very interesting in and what is our fiscal fourth quarter the calendar third quarter.
There was a real change or perturbation in demand.
That last week in August and in September It was quite.
Quite pronounced and you've heard that referenced by a number of other companies inside this space.
And the reference point in terms of the ongoing dynamic backdrop that we're facing customers or end customers. Specifically are just being really cautious in terms of what their current inventory, how they're actually measuring in metering consumer demand. So theres not going to be a lot of fluff in the supply chain in terms of excess inventory.
The Tories given the rationale around that softer customer demand outlook for what is our fiscal first quarter calendar fourth quarter.
Got it and then just one quick question this quarter and last quarter, you mentioned mix changes with the engineered materials trying to quote unquote your mix up certain categories.
Can you provide us a little bit more color.
What are you trying to do in our.
Slide aside from where you work and distributions.
Inside our engineered materials business material science is a core competency of what we do have the ability ultimately to secure more multi layer film structures to take advantage of that material science capability now building materials, making them more sustainable while not compromising physical property.
Is again, a core competency that applies to that business in an area that we continue to seek to grow and to pivot toward and it's consistent with the capital investment that we're making in applied frankly, not only inside the food categories, but also applies to the transportation films as well.
Thank you if you look in the quarter.
Thank you.
Our next question comes from the line of Gabe <unk> with Wells Fargo. Your line is now open.
Hi, Mark good morning.
Okay.
A little bit late in the call I did want to dig in a little bit on <unk> and there's been a lot of.
See noise in the numbers in terms of obviously pandemic induced benefits, but also you guys are intentionally pivoted the portfolio.
Away from diaper into adult incontinence in Fem care.
Just curious how far along you are in that if it if thats sort of in there within Europe at this point.
Then thinking about <unk>.
Diapers is what I'll call semi discretionary are somewhat convenience item.
Any input from your customers in terms of expectations for.
I know youre not going talk to you about price strategy, but volumes kind of going into the next fiscal year and then profitability was was a touch short from what we were looking at any kind of just been.
Mis modeling things you called out.
Recovering some price cost in fiscal 'twenty three.
That contractual in nature or is there anything in there that's just.
Out of pattern that you call out for us.
Thanks, Dave the ongoing efforts to pivot more of our portfolio to adult incontinence premium hygiene premium baby continues to be well underway and we will continue on that path as we look to secure more and more share in that space for our fiscal Q4, the baby care business was actually positive.
And our hygiene products were stable, which which frankly offset which was the difficult comps that we faced in and masks and wipes and drapes and gains from a year ago that were benefited from the from the pandemic along with some of the inventory drawdowns that we spoke of at.
At the end of the pandemic, we would say this though.
A performance perspective on earnings was actually in line with our expectation and.
It's more of a function of mix and lag in price recovery tied to the contractual terms with our end customers specifically on non resin cost were the primary drivers and we anticipate sequential improvement from an earnings perspective.
In fiscal Q1, and we expect to get back to a price cost positive position in our fiscal third quarter, which is the June quarter of 'twenty three.
Alright, Thank you and not to pin you down to too much you guys, obviously ramped up the share repurchase activity. This year kind of in March given the seasonal swings.
What do we kind of expect a similar cadence.
Given the initiation of the dividend and things like that or.
Would you guys kind of be more I'll say programmatic about it over the course of the year.
Yes, Thanks, Gabe our guidance has the share repurchases fairly ratable over the year, it's slightly front loaded to your point given.
The current share valuation is hopefully very temporary.
But I would say pretty ratable to slightly front loaded that's the way we've laid out the share repurchases for fiscal 'twenty three.
Great. Thank you guys. Good luck.
Thanks, David.
Our next.
Question comes from the line of Arun Viswanathan with RBC capital markets. Your line is now open.
Great. Thanks for taking my questions.
I guess first off when you look at the.
FY 'twenty three guidance.
You're pointing to about $2 1 billion of EBITDA.
$800 million to $900 million of free cash flow just wanted to see what would push you to the upper end of that range.
Is it maybe price mix or price cost or volume growth above the 2% or maybe you can.
Just elaborate on your guidance as well thanks.
Yes, sure Arun I would say certainly deflation wouldn't hurt.
Relative to getting to the higher end of the range 22, obviously was a year of inflation.
And we did a great job.
In spite of that.
Our markets as we've talked about her.
Much more stable.
Given food and beverage personal care hygiene being our largest end market. So the reality is demand volatility as you know doesn't have a large impact on our earnings the larger impact is price cost spread into.
To the extent, we can get some tailwind.
From other <unk>.
Markets, decreasing which puts downward pressure on our commodity prices.
That would be a tailwind for us and same thing on cash rates to the extent we have some deflation.
That would help as I mentioned earlier, the working capital being a zero target.
That would create a tailwind on working capital as well and obviously FX, who knows we assumed end of October as we sit here today, we've got a slight tailwind there, but obviously that could reverse tomorrow.
But FX is another factor to consider.
I would also this is kind of a.
Keep an eye on energy for sure the footprint of our plastics converters is considerably lower than other substrates from.
From an energy consumption perspective, so that will create an opportunity as you see continued pressure in certain geographies around energy inflation.
The economic feasibility of the pivot to plastics.
Will will be a value proposition that I speculate and users will begin to consider.
And thanks for that and then when you think about the leverage.
You noted that you're at $3 seven now so the lowest.
Fiscal year end.
Where do you see that kind of evolving over the next.
A couple of years would you would you want to move that down into the lower threes I think in the past you've commented three to $3 nine so how should we think about that thanks.
It's all around shareholder value creation, we want to deploy and maintain a leverage level adult make consistent with maximizing shareholder value as we said right now we think the share price.
Is a very compelling value and that the company is very undervalued and as a result, we're taking the actions that we are coupled with attracting both addressing existing shareholders interest and dividends as well as looking to attract new shareholders that may not have been attracted to the company by initiating the dividend we're very.
We're happy that we have the type of resiliency and stability of this portfolio that generates the kind of.
Cash than it does to allow us to do this so we're we're very pleased with this.
This.
Evolution in our company and paying this first dividend and re upping of the share repurchase authorization, we're pleased where we're at.
Thanks.
Our next question comes from the line of Kieran de Bruin with Mizuho. Your line is now open.
Hi, good morning.
I just had a quick follow up on the mechanical recycling side. It seems like Theres a lot of demand.
From customers for mechanical mechanical recycling.
Because from a molecular recycling how do you think about those investments forming part of your portfolio and what kind of percentage of Capex you might focus on those going forward. Thank you.
I would say that there's not going to be one solution that solves all the problems that said, we're the fifth largest.
Mechanical recycler, if you will in in Europe .
We're excited about our new Lamington Spa site.
That extensively is fully committed.
By our end customers and this will be the first of its kind ultimately.
Allowing us to have food safety Association approved material coming off that line, which is.
Like equivalent so we're excited and this could certainly be models for us going forward.
To drive more circularity.
To address some of our carbon goals and objectives, all while not impacting.
Both customer as well as our end customer expectations.
In terms of quality and we're very bullish on it and I am proud of this team has.
To quietly lead in this space.
And we believe this continues to be a growth opportunity for our company globally and our teams have been doing a great job and couldn't be proud of the team.
Ultimately implementing our <unk> investment as part of our CPI group.
And the alignment we have with end customers is really encouraging in that regard. It's one of those when you think about true value propositions that we can bring this as a true value proposition that we can bring that unique to our company.
Great. Thank you and then maybe just a really quick follow up when you mentioned bolt on acquisitions now that youre kind of in that 3% to three nine times range is there any area where you are.
Be focused on adding capabilities or any regions, where you would want to be more focused on when we think about kind of you potentially do M&A on a go forward basis.
I'd answer it generally we've been very clear that the areas of interest are in faster growing markets or geographies that ultimately can support our organic growth objectives company has done a great job in terms of both expose increasing its exposure to emerging markets, but also increase in exposure to faster growing markets and we didn't have it.
To speak of it today, but the expansion that we have in Bangalore, India to support health care and pharmaceutical is on track and will become fully commissioned this fiscal year for our company and we're very excited about it so those types of investments aligned with customers and faster growing markets and geographies are.
Always of interest healthcare pharmaceutical.
<unk> solutions.
Are some core areas that we've been very prominent in our in our investment.
Priorities.
Great. Thank you.
Our next question comes from the line of Adam Josephson with Keybanc capital markets. Your line is now open.
Tom and Mark Thanks, very much for taking my questions. Mark I think you mentioned, you're thinking EBITDA will be a similar split first half versus second half as it was in fiscal 'twenty two call. It 48 52, just wanted to confirm that and it just it sounds like volume you're thinking it will get better.
We're out the year and I would think currency would be a bigger drag in the first half that perhaps it would be more heavily weighted to the fiscal second half unless price cost will be a bigger benefit in the first half. So can you just help me with those how youre thinking about those components Mark.
Yes, I think Adam the way you laid it out was was accurate.
I would say to the extent to your point to the extent demand does not improve.
We are fully prepared and we'll take the appropriate cost actions to achieve the earnings outlook for the company with respect to FX. We haven't made any assumption changes there we've just assumed.
Flat over the course of the year so to your point on the <unk>.
Front half it will have a bigger headwind.
Then the back half as.
<unk> strengthened over the course of fiscal 'twenty two.
And I appreciate that Mark and just one other one it seems like you will pay out the vast majority of your cash flow in the form of buybacks and dividends next year and then you've got I think $800 million of notes.
Coming up in February of 24 to the extent that you're planning on refinancing those can you give us just some sense of I think you are paying 1% on those what at current rates.
You might refinance those that I'm, just wondering how much higher your interest rate is likely to be on those notes.
Sure, Yes, I mean in 'twenty two obviously, we're real pleased that we were able to return $700 million of capital as.
As well as Delever the company. So we'll see how 23 plays out but we've certainly proven that we can do both.
With respect to capital markets and refinancing.
That I think today's rates you can go check me on this but I think it would be in 6% to 7% depends.
Depending on the tenor.
Right.
Of the note, but I think looking at something in the seven.
Seven to eight year would be somewhere in that 6% to 7% coupon.
Yeah.
So much mark.
Mhm.
Our.
Question comes from the line of Jeff Zekauskas with J P. Morgan Your line is now open.
Thanks very much.
And the cash flow statement, there was 200 million benefit from the settlement of derivatives.
What is that what.
What would be the number for next year, if there is one.
Sure Yeah. Thanks for the question as.
As we've talked about we have a number of levers available to the company when we look at the cost.
Benefit of each of those levers and can we redeploy capital our derivative portfolio is is one of those levers similar to other working capital levers, we have such as discounted terms with customers and suppliers.
And so just depending on market conditions those.
Opportunities have different considerations that you evaluate and last year. Thanks.
Thanks.
Growing interest rates that presented an opportunity that was more attractive than some of our other opportunities. So hard for me to predict what the markets will do in 'twenty three.
But again the company has many levers to deliver consistent cash flow and mitigate the impact of.
Of different items, such as inflation on its cash flows.
In my base case assumption would be zero to answer your question, but we.
We will see how the year plays out.
For the year your price cost.
You had a price cost benefit of $95 million on EBITDA.
In the scheme of things is that a number.
That you aim to.
Try to get to a positive number each year or is it the case that in the ebb and flow of your business.
Under normal circumstances the.
Positive numbers are followed by negative numbers and it levels out to about zero.
Mark May have a view on this but.
Price versus cost enough positive as positive in a normal inflationary environment frankly.
The greater than $100 million over the last 10 years.
Yes, I would say an 80% of the years that relationship is positive thanks to our efforts.
Continue to focus on.
Cost reduction efforts, improving our material usage.
Internal productivity improvements.
The net of price and cost are again in 80% of the year. So a positive relationship.
The toughest years are the ones, who actually like last year, where you have just significant inflation. Those are usually create the most pressure unusually we have the most tailwind in deflationary environments.
Great. Thank you so much.
Okay.
That concludes.
Any other any other color operator, no further questions.
Well I want to thank everybody today for joining us for our fiscal fourth quarter call. We look forward to talking to you to report out on first quarter have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly.
As Johan during Q&A, you can dial one one.
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