Q1 2023 Berry Global Group Inc Earnings Call
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Good day and welcome to the Q1 2023 Berry Global Group, Inc. Earnings Conference call. At this time, all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one.
On your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker Mr. Dustin Stilwell. Please go ahead.
Thank you and good morning, everyone welcome to Berry's first fiscal quarter of 2023 earnings call.
Throughout this call we will refer to the first fiscal quarter as the December 2022 quarter.
Before we begin the call I'd like to mention 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 very global dot com under our Investor Relations section.
Joining me from the company I have Barry Chief Executive Officer, Tom Salmon, and Chief Financial Officer, Mark miles.
Following Tom and Mark's comments today, we will have a question and answer session in order to allow everyone. The opportunity to participate you have the younger 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'll be discussing some non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and Investor presentation on our website.
Please note that our commentary today and within our presentation. When we compare our results to the prior year quarter full year. We have adjusted that you presented on a constant currency basis and remove the impact of domestic business is to provide the appropriate comparable results.
Reconciliations to reported results have been provided in our earnings release and the appendix of our presentation.
And finally, a reminder that certain statements made today maybe forward looking statements. These statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks.
But not limited to those described in our earnings release, our annual report on Form 10-K, and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company to differ materially from those expressed or implied in our forward looking statements and now I will turn the call over to Berry's CEO Tom Salmon.
Thank you Dustin and welcome everyone and thanks for being with Us today.
Turning to our key takeaways for the quarter on slide four our business delivered solid first quarter results.
Including 3% operating EBITDA growth and strong adjusted earnings per share growth of 11%.
Throughout the last few years, we have made concentrated investments to gradually pivot our portfolio into higher growth markets and regions.
We have a robust pipeline of investment opportunities ahead of us in several areas such as food service health care dispensing and pharmaceutical markets, including sustainability folks Oh, good customer link project.
Also we have seen significant cost inflation taken proactive pricing actions invested in cost reduction projects and work diligently on cost productivity across all of our businesses.
During the quarter those cost reduction efforts, along with a modest easing of inflation helped offset short term soft market demand across our businesses.
The more we continued our focus on returning capital and repurchased another $178 million of shares outstanding we have 3 million shares or two 4% total shares outstanding and expect to repurchase at least $600 million of shares in fiscal 2023.
Additionally, we lowered our long term leverage target two five to three five times net debt to adjusted EBITDA.
Finally, we are confident in our ability to sustain earnings growth as we reaffirm our guidance provided on our last earnings call, which includes an 8% EPS growth target at the midpoint and strong free cash flow generation.
Which will continue to support our focus on investments for long term earnings growth along with strong capital returns to shareholders.
Turning now to the financial highlights on slide five.
The December 2022 quarter performance for both earnings per share and EBITDA met our expectations, including strong price cost spread primarily driven by our cost reduction efforts.
These internally driven actions were partially offset by a 6% volume decline, primarily driven by short term softer market demand, which was in line with what our global customers have reported.
From an earnings perspective, operating EBITDA was up over 3% and adjusted EPS increased 11% from the comparable prior year quarter included a $55 million benefit from positive price cost spread.
As we've demonstrated historically and during the most recent quarter, we remain committed to driving cost improvements package through inflation and believe we are well positioned given our scale along with our ability to service customers from our facilities in close proximity to their location, which provides both cost.
And sustainability advantages.
During the quarter, we've taken additional actions to reduce our cost structure optimize our assets and further automate our facilities, which will bring our total savings from cost initiatives for the fiscal year to over $100 million.
In line with our long term strategy to provide strong capital returns to our shareholders, we returned $211 million to shareholders through both share repurchases and dividends in the quarter.
Now before I hand over to Mark.
I want to review slide six and what we're focused on in both the near and long term.
We remain focused on driving consistent.
Tangible and sustainable organic growth.
Can you invest in each of our businesses to build and maintain our walk world class low cost manufacturing base with an emphasis on key end markets, which offer greater potential for differentiation and long term growth such as healthcare and pharmaceutical markets.
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 new emerging market regions. We will further enhance our ability to provide consistent dependable and sustainable long term growth we've.
We've 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 25% or more of our total revenues.
Lastly, innovation and sustainability are increasingly embedded in everything we do and we continue to believe this represents a great opportunity for growth and differentiation.
These drivers when combined with our ability to deliver continuous cost improvements by leveraging our scale advantages.
Billy give us confidence we will continue to consistently deliver solid earnings growth from our stable portfolio of businesses now I'll turn the call over to Mark Who'll review Berry's financial results Mark. Thank you Tom.
I would like to refer everyone to slide seven for our quarterly performance by each of our four operating segments. Our businesses continue to perform well keep focus on inflation recovery and generating cost productivity, while driving long term sustainable revenue and earnings for our.
Our consumer packaging International Division.
Reported modestly lower revenue dollars, primarily driven by softer demand from our customers, partially offset by higher pricing from the pass through of inflation.
Demand was relatively stable across our consumer facing categories, such as retail food and beverage with weaker overall customer demand and discretionary markets, such as automotive and surface coatings and the outbreak of Covid in China also negatively impacted volumes and earnings in the quarter.
Operating EBITDA was essentially flat as positive price cost spread offset softer customer demand.
The positive price cost spread was driven by cost productivity inflation recovery, our focused effort to improve our product mix by increasing our presence in health care packaging pharmaceutical devices in dispensing systems.
We continue to recover cost inflation through pricing actions and cost reduction initiatives, while driving revenue growth from our sustainability leadership.
Next on slide eight revenue in our consumer packaging North American Division was down 10% from the prior year quarter from lower selling prices as a result of the pass through of lower resin costs in the U S and softer overall customer demand primarily in our industrial markets.
We continue to deliver strong growth in our foodservice market as we continue to see conversion from other substrates to our clear polypropylene costs.
We continue to add incremental supply for comps and putting on additional manufacturing location for this technology as demand continues to outpace supply.
Operating EBITDA increased by an impressive 23% over the prior year quarter, primarily driven by our internal cost reduction efforts, along with continued inflation recovery and improved product mix.
And on slide nine revenue in our engineered materials Division was down 15% for the quarter due primarily to volume declines and lower selling prices from the pass through of lower resin costs.
The volume decline was related to soft overall customer demand, including our European industrial markets.
Were also impacted by our focused effort to mix up in certain categories like shrink and transportation films, along with customer Destocking as supply chains normalize.
Operating EBITDA was up an impressive 15% over the prior year quarter, primarily from our focused effort on improving sales mix to higher value product categories and internal cost reduction efforts.
On slide 10 revenue in our health hygiene and specialties Division was down 17% due to volume declines along with lower selling prices from the pass through of lower resin costs.
We continue to see stable demand and tighter hygiene markets, while portions of our business continue to see ongoing inventory destocking, along with softer demand in our specialties markets such as building and construction.
Operating EBITDA was down 21%.
Percent for the quarter as expected due to a timing lag in recovering inflation on costs other than Palmer.
We continue to pass through these cost increases to our customers and expect earnings will improve sequentially.
Next our fiscal 'twenty three guidance and assumptions are shown on slide 11.
Today, we are reaffirming our guidance for both adjusted EPS and free cash flow.
We have a strong track record of EPS growth improving every single year as a public company and continue to expect between $7 32.
So $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.
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.
<unk> capital expenditures of $600 million.
Our cash flow year on and you're out there has been a dependable core strength and core value of our company.
So what's the opportunity to invest in our businesses to grow and become more efficient while returning capital to shareholders.
As you can see on slide 12, our capital allocation strategy as return based and includes continued investment in organic growth and cost reduction projects share repurchases debt repayment and a growing quarterly cash dividends.
In fiscal 'twenty, three we expect to return $700 million or more to shareholders via share repurchases and dividends.
Adding further reducing our shares outstanding by 8% at current valuation levels.
During the quarter, we repurchased another $178 million of shares or two 4% of shares outstanding and paid our first quarterly dividend, thus returning $211 million back to shareholders in the first fiscal quarter.
As Tom mentioned earlier, given our strong dependable cash flows and earnings we have moved our long term leverage range down to two and a half to three five times as we continue to focus on driving long term value for our shareholders.
We believe we are well positioned for continued value creation through both our resilient business model and strategic portfolio management opportunities.
My Financial review I'll now turn it back to Tom. Thank you Mark our business model has proved resilient, including a broad portfolio of polymer based packaging solutions is strong dependable stable cash flows to allow us the flexibility to drive strong returns for our shareholders. Our in house designed footprint and ability to serve local and regional customers and.
Markets, all while being both a top five global toolmaker the top five recycler in Europe provides us with scale advantages and differentiation capabilities unmatched by our competitors.
While the demand environment has remained choppy, we've been able to offset softer customer demand was stronger price recovery and productivity improvements from our current viewpoint. We believe our industrial markets will be in line with our global customers demand remained challenged throughout much of fiscal 2023.
We will always our internal cost reduction efforts and inflation recovery, while also driving strong cost benefits through efficiencies and asset optimization throughout our global footprint offset any demand challenges.
We believe very stable and dependable portfolio will allow us the ability to provide earnings growth and demand stability as.
As we have historically demonstrated.
As you can see on slide 13.
We have consistently driven top tier results in nearly all key financial metrics, including strong compound annual growth rate for revenue earnings and free cash flow, including growing our adjusted earnings per share every year as a publicly traded company.
The targets, we set over the past several years, including our focus on driving shareholder value.
He used to be our top priority.
Starting several years ago in each of our four segments, we began investing more heavily and grow with the emphasis faster growing markets and regions, while working to improve the mix of our product portfolio.
As you can see on slide 14, we delivered results at or above the peer average from these strategies in commitments.
Historically, we have used the majority of our cash to reduce our debt and improve our balance sheet post an attractive acquisition opportunity now we've chosen to make a concerted effort to keep our leverage in a lower range, providing us the opportunity to return the majority of our cash to shareholders via share repurchases and now similar to.
Our peers initiated a quarterly dividend.
We believe our new long term leverage range of two five to three five times will further strengthen our balance sheet and be rewarded in the equity market over time and believe these strategies will continue to close our valuation gap, which provides a very attractive opportunity for investors.
Next on slide 15.
Since the RPC acquisition in mid 2019 over the past three years and including our expected use of cash in fiscal 2023, we've reduced our net debt by nearly $3 billion.
Furthermore, in fiscal 2022 and fiscal 'twenty three we will have returned over $1 $3 billion to shareholders via share repurchases, while also paying our first ever quarterly dividend.
These uses of cash and debt reduction share repurchases and dividends will total $4 $3 billion of value returned to shareholders, while growing our adjusted earnings per share more than 70% since the RPC acquisition.
We believe our capital return model underscores our commitment to enhancing long term value for our stakeholders and the stability and consistency of our portfolio.
The RPC acquisition has provided substantial cost and revenue synergies over the past several years and we believe there are additional attractive opportunities ahead.
The ability to leverage our combined know how includes sustainability and innovation product development and technology has created significant value for shareholders.
Slide 16.
We're excited to announce a new international center of excellence in certain of our innovation hub that will be located in Barcelona, Spain.
This new location is designed to foster our one Barry spirit and demonstrates <unk> commitment to global growth sustainability and talent development.
Well locations were considered for the New center with Barcelona, being the preferred option due to its high scoring and international talent sustainability diversity and economic indicators Barcelona was elected recently as one of the best cities to live in the World. This new innovation hub will housing it interactive and learning customer experience.
Center, a showpiece for various designs and innovation capability.
Local point for Circularity sustainability underlining, how various products are part of the solution and achieving a net zero economy.
Furthermore, as you can see on slide 17.
Through our strategic customer linked investments innovation and sustainability has been a strong part of our value creation.
We believe we are well positioned to deliver significant value for our customers and shareholders through investments like these recent innovations presented here with an unmatched global footprint and design capability to support circularity.
Now to highlight a few recent innovation Scarlet very super lot container that provides healthy spreads and innovated a reusable packaging solutions, combining improved imaging and longer shelf life.
Next as you might've seen in our recent press release I am pleased to announce our collaboration with Coca Cola should provide tethered cats in the European Union markets.
Barry was recently given a prestigious sustainability award at pack Expo International for the circular solutions.
We became the first plastic packaging manufacturer in Europe to supply the Coca Cola company with a lightweight hazard closure for its carbonated soft drinks and p/e bottles, new tethered closure for Coca Cola is designed to remain intact with the bottle, making it less likely to be littered and more likely to be recycled.
And finally, we worked together with a leading German dairy customer.
Bill working Swabbing.
Their sustainability needs and goals by providing a 19% weight reduce product offerings, while at the same time, providing smart logistics and efficiency improvements for their filling lines.
Innovation and sustainability of our core strengths and Barry.
We have leading R&D material science capabilities and considerable expertise.
When coupled with our unmatched scale and geographic reach these capabilities provide unique ongoing opportunities to develop differentiated products to meet the needs of our global customers.
Next on slide 18.
I wanted to Scott key investment highlights for Berry, along with our long term targets for our key metrics. We are a global leader cross several manufacturing platforms with extensive innovation technologies design capability with.
With our more than 255 locations around the world are scale benefits from both procurement proximity to our customers provide us with a low cost platform providing products the largest CPG customers in our primarily stable non discretionary market.
We have a proven history of earnings growth as shown earlier on slide 13, along with exceptionally stable and consistent set of cash flow businesses.
Additionally, we've taken a sustainability leadership role as one of the largest PACU manufacturers in the world evidenced by a portfolio of products innovative with our customers and our focus on reducing greenhouse gas emissions supporting a net zero economy.
Our long term targets further evidence that consistency and dependability of our model, which includes operating EBIT growth of 4% to 6% EPS growth, 7% to 12% and total shareholder returns of 10% to 15%.
As you can see over the past three years, we've met or exceeded these long term growth targets and expect assembly do so going forward.
Additionally, we expect our New addition, newly initiated dividend grow annually, we've updated our long term leverage target to be in the range of two five to three five times.
We believe we can achieve similar metrics will operate the business with lower leverage and providing consistent capital returns to shareholders.
In summary, our strategic priorities remain unchanged, our entire global team emphasis on working safely and servicing our customers remains our number one priority and has made us 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.
And shareholder value.
Fannie 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.
Okay.
Thank you for all for your interest continued interest in Berry now before we turn to Q&A I want to note that we announced today I plan to retire at year end as we make the transition throughout 2023. The company remains very well positioned to continue to deliver significant value for all stakeholders with that mark and I will be glad.
To answer any questions you may have.
Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced so withdraw. Your question. Please press star one again due to time restraints. We ask that you. Please limit yourself to one question and one follow up question. You May then return to the queue. Please standby.
While we compile the Q&A roster.
Next question will come from <unk> Panjabi with Baird. Your line is open.
Yeah, Hey, guys. Good morning, Tom Congrats on your announcement on your retirement.
Yeah, I guess first off on just the volumes down 6%.
Based on your December quarter, it's very very similar to volumes being reported by the major CPG companies.
A sense as to where we are on the inventory destocking cycle across your core end markets.
If you split that between consumer and also some of the industrial markets as well.
Yes, I think certainly from a consumer side anytime there is uncertainty.
Proved measure they take is to reduce the inventory count frankly.
Have higher expectations that we can deliver in smaller quantities on a more regular basis I expect that to continue.
Until there is greater certainty in terms of specific.
The consumer demand. So I don't expect that to change dramatically. We are certainly seeing some green shoots I would describe it as demand improvement being seen now in January and as there's more certainty on the destocking will become less prevalent in People's up in People's Prince If you will from an industrial basis, we've showcase that we expect.
Industrial mass remains.
Relatively sluggish.
For a better part of fiscal 'twenty three.
Okay. Thank you and then maybe a question for Mark on the EBITDA bridge for the first quarter. It looks like price cost was about a $55 million benefit what are you sort of embedding for that number for fiscal year 'twenty three relative to your EBITDA guidance and I'm, just asking because it looks like resident will start to be heading higher.
Yes.
Correlating with the typical early year seasonality.
Sure Yeah. Thanks, Ghansham I'd say on the price cost side, we have gone into the year thinking a $100 million.
We're now feeling better about that number I think were.
Thinking now more like 125.
For fiscal 'twenty, three and Thats driven by.
By the cost reduction activities of the company.
That's taken action on.
Perfect. Thanks, so much.
Thank you one moment for our next question.
From the line of Anthony Pettinari with Citi. Your line is open.
Good morning, and Tom Congratulations and best wishes on the next chapter.
Thanks.
Just following up on <unk> question on the last call you talked about full year EBITDA guidance, assuming flat volumes with earnings growth coming from cost recovery and cost reductions.
So the accelerated cost reductions, which I think are now a $100 million should we think about that as maybe offsetting.
<unk> a bit weaker than expected or maybe weaker than expected view on volumes for.
The fiscal year, and if so where is that.
Maybe where is that concentrated among the four segments.
Yes.
Consider the operating plan for 'twenty, three primarily incorporate two areas one cost reductions that are offsetting inflation with price and clearly any type of deviation. We see on the demand front will leverage will variable is our cost structure to get it done.
I'd say the filing the company is performing on all cylinders right now operationally.
We have made in the last three years alone over $250 million in capital improvements to remove.
Over $5 million labor hours from our operations.
Through deploying more automation.
From our energy efficiency and sustainability perspective, which is a huge component of cost.
That's over $100 billion to remove over 200 million kilowatt hours from our operations. So not only are we making the right financial messaging and decision, but we're also doing the right thing for sustainability actually improving what is ultimately.
The material was best carbon footprint, making it that much better.
And not to mention what we continue to do it.
In terms of safety and again safety is our number one priority, but keeping our people safe and keep them in the game.
Yes productive inside of the site those are some of the areas that we've had a heavy focus in.
When you think about the scale of our company overall can have some some really significant benefit so thats where market quoted that were estimated to be in the range of.
Plus about $125 million.
And we've taken the right actions and investments to get that done and make that happen.
Okay. That's very helpful. And then just on the updated two and a half to three five turns of leverage target.
That definitely makes sense I think in the slides there is a reference to 'twenty three leverage potentially staying at three seven times, which is unchanged.
Unchanged from last year.
Understanding it's not too far from your target range, but I was just wondering if you can talk about.
Debt paydown versus repurchases as sort of a priority for 'twenty, three and how you balance those.
Yes.
Great question, we do anticipate being within that target range at the end of fiscal 'twenty four and the reason is that the compelling opportunity to repurchase our shares right now given the dislocation in our valuation takes precedent. We believe it is a unmatched opportunity for us. So we're going to continue to focus on.
Buying back our shares as part of our capital allocation program.
In 'twenty, three and certainly as we see it.
Proven and evaluation.
Those shares we can ultimately pivot further to debt reduction, but again, we believe we'll be in that range by the end of fiscal 'twenty four yes, I think the stability.
And just quantum of cash that we generate and the earnings growth of the business. We can we can do all three.
Continue to grow our dividend, we can buyback a substantial portion of our shares and repay debt.
So I think we haven't we have a great opportunity for us.
So to do all three.
I think Anthony one of the enablers is.
We're starting to see some <unk>.
Improvement in the financing markets out there, we clearly are showcase that we have.
Opportunities inside our portfolio.
Perhaps look at businesses that are better suited for other other operations as such that should get easier to do as the financing markets improve and we would expect that to be a big component.
All of our energy and focus here.
Year throughout 'twenty, three and beyond big opportunity for a portfolio of our size and that clearly allows US then to pivot some of those proceeds to the capital allocation that we built if you will.
Okay. That's very helpful I'll turn it over.
Thank you one moment for our next question.
That will come from the line of Kieran de Brun with Mizuho. Your line is open.
Hi, good morning.
Maybe just to follow up on the capital allocation. When we think past 2023 into 2020 for like how do you think about M&A now fitting into kind of your longer term growth strategy and where are the areas, where you'd like to kind of see that focus I think going forward I mean should we be thinking about that more focused on the circularity side of things which seem.
To be a big opportunity or.
Any thoughts on that front would be helpful. Thank you.
Yes.
The berries any spot right now.
No.
Large scale acquisitions that we have to do to create scale. The real focus is on how we ultimately utilize bolt on acquisitions as a means to accentuate organic growth, we clearly believe that.
Some of the more attractive market that we articulate in the past like health care pharmaceutical dispensing solutions.
Sustainability solutions are all right not mentioned at least of which.
Growing our access to emerging market. So while we just recently announced a greenfield site in Bangalore.
Clearly at some point it will provide the opportunity for bolt ons to complement that healthcare and pharmaceutical sites to take advantage of that growth and again all of that can be supported by as well.
Look as I, just mentioned, we look inside our own portfolio.
Having opportunities to dispose of pieces of that.
The portfolio today that could be better utilized by others can allow us to deploy some of those proceeds against those objectives. That's why as Marc said, it's a balanced approach. We really believe we can operate the company at a lower leverage range.
Our balanced capital allocation between buybacks and dividends.
And we continue to invest in organic growth two to reaffirm our commitment.
As growth as a priority for us.
Great. Thank you.
And then just just maybe a quick follow up on China, specifically I mean, it seems like the rebound in China has been gradual throughout the first quarter I'm just curious on your thoughts on what Youre seeing are you seeing kind of that acceleration post the Chinese lunar new year or is that something that you still expect to kind of gradually increase throughout the year and how that impacts here.
Your volume outlook for the fiscal second quarter in the back half of the year.
China is a relatively small part of our portfolio overall that said there was some impact relative to the COVID-19.
<unk> shutdowns, but as those normalized inside China I think it will provide.
A steadier and more consistent glide path for.
Core growth in the.
Coming quarter, so that would certainly be be a tailwind for sure.
Alright, thank you.
Thank you one moment for our next question.
And that will come.
George Staphos with Bank of America. Your line is open.
Thanks, very much higher one good morning, Thanks for all the details and Tom ill Echo everyone else's comments, congratulations to company's evolved significantly over your time, so congratulations on that.
Couple of questions first on targets in the last on on price cost.
So in terms of the targets you talked again to the deleveraging target have been two and a half to three five times.
We certainly would agree with that view.
In your view what changed most in terms of why this is the right target now is it.
Where various mature it too in terms of you don't need to do acquisitions anymore to continue the growth is it the cost of capital do you see being applied to companies with higher leverage was there anything that changed in your view in terms of why this is now a better place to be Relatedly, you mentioned a number of targets on <unk>.
Slide 18, and that's that's terrific I don't see a return on capital target will you expect to have one.
In the near future and do you have a view in mind in terms of what recurring capital growth could be over the next several years.
No doubt George we're maturing as a company we've doubled in size in a relatively short amount of time as Mark mentioned, the robustness of our cash flow gives us an amazing amount of flexibility and we're fortunate that the company has grown to the point that scale is not the predominant focus for us what is the prominent focus is.
How we ultimately can add.
Pieces to the portfolio that accentuate our global growth and then allow us to scale those.
Given our global market presence and that that's the real driver.
Relative to the larger target are the lowered our leverage range and again. It also is consistent with.
Some shareholder feedback that we've received as well.
The drivers.
On the return of capital Georgia.
Our return of capital over the last several years, it's been around 14% as a company.
That's pre tax.
As we look for incremental investments.
To target something north of that so we're looking into.
Obviously to grow that number, but I don't think 14 plus.
A bad way to think about it because obviously that that number includes a lot of different things, including acquisitions, but.
We're larger in size and therefore, just naturally have a little bit lower.
Return of capital on them. So I think 14% is a good spot overall for the company, but our incremental investments I think we can drive to 20%.
Thanks for that Mark and then the other question kind of nearer term or more micro so your other segments other than HHS.
<unk> had a real good job on price cost again, congratulations to you on that in the quarter.
<unk> there was a lag but was there anything else going on that made it a more difficult price cost period, and when do you expect HHS to be positive on price cost over the course of this year. Thank you and good luck in the quarter.
Yes, yes.
On your first part of your question.
Relative to what impacted the quarter mix certainly was a factor as we mentioned some of our more specialty product categories that carry a little higher margin.
<unk> impact on the results so as those as those markets improve over the course of the year I would expect that that component of the relationship to get better.
You also got as mentioned in the prepared comments incremental price.
Impacting that business.
Ongoing over the course of.
The next several quarters. So I think we're going to continue to make progress.
I think the so when we go to positive outside of something changing relative to inflation, we would expect the back half of.
Of 23.
Inflect positive.
In Georgia, the hygiene piece of that that business continues to be very stable.
Some of those niche spaces that ultimately there were some discretion areas like dryer sheets filtration house wrap. These are all really very solid franchises in any improvement in terms of customer.
Outlook or demand or customer confidence is only going to benefit those business itself.
But as Mark said, we'll see sequential improvements as contracts are renewed and implant.
Thank you very much.
Thank you one moment our next question.
Will come from the line of filling with Jefferies. Your line is open.
Hey, Tom Thanks for all the help over the years and you'll certainly be missed so so we really appreciate it.
I guess first off how do you guys see volumes tracking this year by segment is flat volumes still a realistic goal at this point and do you kind of see the declines in volumes in <unk> being less bad than potentially inflect in the back half like how should we think about the progression this year.
I would first start by saying that.
The demand that we're seeing is pretty consistent with our customers.
Around the world frankly and for the for.
For the print we had in the quarter I think we fared really quite well.
In that regard based on some of the other other peer reports that are out there that said.
Certainly would anticipate the front half being softer than the back half.
But as we've demonstrated we've got plenty of irons in the fire that should that not materialize. We can further verbalize our cost structure.
The team has done and again I'm really excited that these investments that have been concentrated.
And they have been made over the last several years.
Put us in a really good position.
Going forward, both in terms of soft demand as well as enhance productivity and profitability as demand ramps up.
All pieces of that puzzle difficult ultimately call it exactly but again.
Our performance is very consistent with our customer base, which we would expect.
Gotcha and.
And I guess a question for Mark.
I think you called out $125 million of price cost. This year, so up $25 million is that largely from like self help productivity stuff and then how are you thinking about.
Inputs, whether it's resin from here and maybe some of your non resin.
Cost profile are you seeing any deflation there that could be potentially a good guy and provide some upside to that number.
Sure Yeah, I would say I think Tom mentioned, the breakout, but 100 of that 145 is on the cost side.
Obviously, our largest cost is materials. So anything we can do to drive down material costs, our sourcing and operations teams are working diligently to.
Cros.
Cross improve different products.
<unk> cost savings so.
We've got a long pipeline of cost reduction projects.
Tom mentioned some of the labor is our next largest cost category. So we've got a lot of great productivity improvement initiatives, including investments in automation that are driving reductions in our labor costs. So.
As Tom said, we've got a number of levers we can pull obviously.
Getting on the largest cost categories of material and labor.
Generate the largest savings, but certainly energy falls right behind that.
And we've got a lot of initiatives across the company to reduce our energy usage.
Okay.
As Mark said, rather than being the biggest part of it.
I mentioned the teams are operationally are working at a very high level right now just to give you a sense since 2020 alone.
We've seen an over 20% improvement in our net yield across our sites me generating that type of efficiency, so you're reducing your scrap youre generating more efficiency crush operations and that provides as I said near.
Near term benefit as well as a long term opportunity as you're at your volumes continue to grow and ramp.
Okay. Thank you I appreciate the color.
Thank you one moment for our next question.
Okay.
Angel Castillo with Morgan Stanley Your line is open.
Alright, Thanks for taking my question and again congratulations.
Question.
On your retirement.
What should not.
So just a quick question on the long term targets I wanted to I was hoping we could break those down a little bit more give us a little bit more color as to how you are seeing particularly if you think about.
EBITDA growth of 46%.
How are you thinking about that in terms of the <unk>.
Sales breakdown, how much of that is organic versus inorganic potential bolt on opportunities and then.
Beyond that how much what are the kind of EBITDA margin expansion.
And then lastly kind of on the EPS line, how you're kind of breaking that down in terms of underlying gorilla.
Hi, Max.
Sure I think I missed that.
Aggregate, we think our business is around a low single digit range. We've got a lot of focused effort to.
As we've talked about in the prepared comments and have now for many quarters pivoting to higher growth markets. So certainly over time, we're looking for them for a higher results, but at the moment, our current mix of business. So.
The port slow single digit growth on the volume side.
We can again deliver something higher than that on EBITDA as we get the benefit of leverage on our fixed costs as well as mix improvement opportunities.
Bolt on acquisitions, how to predict those year to year I think is very difficult obviously it depends on market conditions.
Sellers in the market is at a price that is attractive to the company that meets our return thresholds et cetera et cetera. So those those targets are meant to be long term targets year to year. The contribution of bolt on acquisitions is going to vary it could be higher than one year and lower than another.
Low single digit volume growth should provide something incremental on the EBITDA side.
Supplemented by <unk>.
Acquisitions.
And then on the EPS side, I'm curious to kind of a lot of kind of how you're thinking about it.
Just kind of 4% to 6%.
More buybacks or anything else, we should be mindful of that.
Yes. Thanks.
The market is going to provide us with different opportunities in different times right. Now are our share price was very attractive and so it is providing us.
Very great investment opportunity that we are taking advantage of and Thats bolstering our EPS results certainly.
But depending on the.
The situations and what the market provides us.
We will be able to respond accordingly to drive.
Those results.
Okay got it that's helpful. And then just lastly on the Destocking question earlier, you mentioned seeing some green shoots in January could you give us a little bit of color as to what youre seeing or hearing from your customers, maybe what the expansion might be and how are those kind of conversations with customers evolving it sounds like frequency and size of orders maybe.
It changes a little bit, but yeah, just any incremental color would be helpful. Yes.
Yes, it's not an uncommon.
Strategic path, that's been taken whenever there's uncertainty demand they take their inventories down it ultimately it requires us to be more agile relative to meeting peaks and valleys relative to that demand. We would expect that to continue to play out here in the coming months with an improvement as we get into the back half of our fiscal year.
We're in regular conversation with our customers and have as much visibility to that consumer demand is possible, but has changed and it's evolving and they're learning what that means in terms of our order patterns and what type of inventory levels. They need to meet that demand. So we will be flexible with them. While that gets worked out nonetheless, we will be in a really good position.
Given the proximity of our plants to their locations.
To meet their needs as expeditiously as possible.
But we feel very good though that as part of those discussions the pipeline of opportunity that we have from a growth perspective continues to be very very robust you heard mark mentioned.
Some of his commentary relative to the success and advances that we're seeing inside of foodservice with additional investment forthcoming.
To meet demand that continues to be incredibly robust.
Certainly in North America.
With our quick serve focus on Carryout with are all polypropylene lift and growing in Europe is around reusable cups.
Cups that are ultimately being marketed by some of the largest <unk> in the world and the various participating as a creation of those programs and execution of those programs as well so lots going on in the pipeline lot of compelling reasons for us to continue our targeted investments to lock that our customers to support growth as we work through this choppiness.
The demand.
Very helpful. Thank you.
Thank you one moment our next question.
And we will come from the line of Kyle White with Deutsche Bank. Your line is open.
Hey, good morning, Thanks for taking the question.
How are you thinking about your portfolio of assets here, obviously, you're improving the mix of engineered materials you have the new newly established capital allocation Committee is there any more pruning to be done and where do you see the most opportunity for optimization within the portfolio.
Yes.
Our diverse portfolio of businesses around the globe as we shared on previous calls.
Alrighty.
Key area of concentration by our board.
Relative to the opportunity to dispose of certain assets and then redeploy those proceeds towards.
Opportunities that can support our growth our other capital allocation needs and that continues to be front and center.
For our teams and for our board, we disposed of three businesses in fiscal 2022.
That to be.
As financial markets begin to improve and we are seeing some of that I think it's going to create an opportunity for.
For greater velocity in those types of dispositions.
That will continue to be an area of concentration and focus for us and again all of these ultimately allow US then to take those proceeds and redeploy them against our capital allocation wheel based on what's going to maximize shareholder value.
Got it and then on engineered materials, where are we in the purposeful shedding the lower margin business as you improve the mix there how many more quarters should we expect that.
These actions impacting topline, but obviously improving returns.
Yes, the business has done a fantastic job.
Hyperinflationary market offsetting.
That inflation with price as well as <unk>.
Enhancing their mix of business, which did two things one that was already supported by capital investments, but then the opportunity to further supported throughout this inflationary period.
Curious a nicer mix of business inside.
Same thing as the year plays out I think you'll see more of the same in the front half of the year an improvement towards the back half of the year.
And no different as we see the consumer and the industrial network start to improve they will similarly benefit from that.
Got it I'll turn it over thank you.
Thank you one moment for our next question.
And from the line of Arun Viswanathan with RBC capital markets. Your line is open.
Great. Thanks for taking my question congratulations on the retirement announcement time.
So I just wanted to I guess to ask a couple of questions. So.
You know you provided some long term targets.
That 4% to 6% EBITDA growth in the 7% to 12% EPS growth.
Just wondering if we do need to see organic growth in the low single digit level.
To achieve that kind of operating leverage.
I know, it's been a little bit of a challenging environment. The last couple of years and theres been some.
So I'm, calling a business.
Inflation and so on so.
Assuming that the environment kind of stays a little bit challenging for the next 12 months to 24 months.
Would you still be able to achieve that kind of growth in say, a flat volume environment or what are some of the the law.
You have to still hit those long term targets in may.
It may be more sluggish environment.
Yes.
Unfortunately, right Youre seeing that right now with with weaker demand and we're delivering on those commitments. So.
When the when the market's weaker it gives us more opportunity on the materials side.
To do exactly what we're doing is executing on.
Hi.
Optimizing our costs on materials.
And so while we would certainly rather get there through incremental volume.
Certainly in a good spot that we think we can drive.
Positive results, even in a weaker economic backdrop.
Okay. Thanks, Mark and then just on that.
On some of the outlook items on free cash flow so.
Assuming that you deliver the eight to 900 million.
In fiscal 'twenty three.
How do you expect.
How should that evolve and 24 and 25 I mean, maybe you expect a little bit greater free cash flow growth from here going forward just given the potential pivot in the strategy to less M&A in more internal focus would that help working capital and potentially accelerate your free cash conversion.
Just wondering if that if that algorithm has changed as well thanks.
Yes look we're always trying to improve our results, obviously theres a number of different things that.
Can impact, yes, certainly earnings and capture ultimately the same thing outside of changes in working capital. So.
We gave earnings target goals and we're looking to continue to achieve those.
If I could just ask one more quick one so just on the strategy now for.
For the two and a half to three five times leverage.
Are you effectively saying and you made the point that you're not necessarily looking for scale from here on so are you effectively saying that there arent as many attractive consolidation opportunities in the market any more and you can deliver.
Better growth by investing organically.
I would still think that there's potentially some scale advantages on the procurement side that.
You could reap from from potential acquisitions, but has that changed as well it.
It has not changed at all.
The markets still remain fragmented.
Still presents an opportunity.
But for our portfolio.
And again, given the number of acquisitions, we have done we understand where we have scale and its significance in certain pockets as such we feel very comfortable that the right approach for us is targeted bolt on acquisitions that support our organic growth investments again to get.
To access the faster growing markets faster growing geographies, which is consistent with.
What we've been doing.
We're very bullish because again as these financing markets begin to improve.
To facilitate more of those dispositions and opportunities.
Like we said for US. It's we've got we've got a circle and it provides a number of opportunities and more of those as the opportunities to look internally at our own portfolio find opportunities to market dose external and used proceeds then to support our various out capital allocation needs.
<unk> that maximize shareholder return.
Thanks.
One moment for our next question.
Will come from the line of Michael <unk> with <unk>. Your line is open.
Thanks, Tom Mark and dust and then I'll just reiterate what everybody else has said congrats on you were talking about.
Yes.
Just wanted to get a little more color.
Around potential dispositions I know you spoken about it a number of times in response to somebody else.
Analysts, but would they be focused on.
More than cyclical element in your portfolio, maybe looking at your industrial exposure your automotive surface queasy highlighted in CPI, maybe some of the more of those industrial elements in <unk> in order to make your portfolio maybe less cyclical.
And more consumer oriented.
Yes, I think frankly, that's a pretty fair characterization that the more we can.
Buildup.
The stable non discretionary piece of our portfolio.
Falls in line with our strategy and.
And again now.
We're not going to be specific on which businesses are going to be divested by and when but I think the premise that you laid out is very accurate makes very good sense for us.
And again it just further helps build our value add to our customers as we do that.
Got it and just one quickly on HHS and the volume weakness there I think last quarter, you mentioned that the volume weakness was due to destocking related to Covid benefits.
Which at that point was fully cycled through.
What really occurred this quarter, where you saw destocking.
And it was certainly the consumers dialed back their purchases or were there some other factor driving the volume weakness and HHS.
Areas like filtration areas like.
House wrap.
The dryer sheets space as well was modestly destock in the period.
But we don't expect that to be a long term phenomenon as I've said these are great franchises.
Inside our HHS portfolio, we expect those to pivot.
We see a general improvement in.
And the economy.
Yes.
Thank you.
Thank you one moment our next question.
And that will come from the line of Gabe <unk> with Wells Fargo. Your line is open.
Good morning, and Echo everyone else's.
Sure Tom.
Thanks, Ken.
I.
I hate to put you on the spot here, Tom but kind of being obviously.
And Covalence and as part of the organization through the IPO process and just the Companys maturation.
As the company looks out.
For the next person in charge.
Sure.
Where would you expect some of the focus to be within the organization I mean, you talked about obviously.
Not looking for scale being more focused on maybe some bolt on M&A.
Thing that comes to mind that maybe wasn't.
Our focus our priority for the organization in the past.
Was.
I know you guys have done things in the plants to be more efficient, but footprint consolidation and things like that.
Maybe starting with more of them.
Say operational background, but just any color you can give us on sort of.
What that might look like and perhaps the answer is we're not going to tell you.
No I appreciate the question. Thanks for the kind words remember Barry has a very structured.
And our long term planning succession process that we adhere to we're incredibly fortunate to have fantastic internal candidates to consider for my replacement, which again is until the end of the year. So you guys are stuck with me for a while but we also have.
Contracted with Spencer Stuart to also take a look externally as well.
To make certain that we're making the best most informed decision and as we have more information that we can share with you along the way, we'll do so as appropriate.
But that's really all I can say at this stage the bottom line at the.
The company is in an amazing spot right now when you start to think about the changes that we've made the catalysts that we have today.
It's an exciting time.
Particularly the long term leverage ratio two five to three five times EBITDA growth of 4% to 6% of 10% to 15% CSR growth. We've established annual dividend, we're buying back our shares because it's a compelling opportunity when you consider where we trade versus our peer group and <unk>.
Contrast that with our result this is exciting time. So this is a great franchise that will be focused on how we take it to the next level.
And our targeted investments around organic growth are absolutely paying dividends and as you can see in the investor deck in terms of how we've been trending versus our peer group since 2019. This story around Barry in Berry's growth.
It's addressed in that slot we're in line with our peer group right now when you couple that with our scale, our geographic footprint our leadership position in sustainability. We're in a great spot David I'm not I am I am proud to be part of this team I am proud of what the team is doing.
And whoever has the opportunity to take the seat is in a is in a great spot to take the company doesn't next level. So we're in a great place.
Thank you very much.
Thank you one moment for our next question.
Will come from the line of Josh Spector with UBS. Your line is open.
Yes, Hey, guys. Thanks for squeezing me in and Echo My Congrats Tom.
So I wanted to ask on consumer International if I look at when you first bought that business first 12 months a bit about $650 million in EBITDA last 12 months. It has done about $650 million in EBITDA consensus is forecasting that same level for this year.
Is that FX, probably slight negative over two years, but you have synergies rolling through I guess, how much is that business or is that business under earning in your view and can you help us think about what the normal level of earnings is for that business today.
Okay.
Yes, thanks Mark.
Yes.
Exactly how all your numbers, but I would say the other thing that you've got to consider divestitures.
The divestitures that Tom mentioned, we're in that business. It has grown its EBITDA and we think it will continue to.
To be able to deliver that we've got a lot of great opportunities Tom mentioned some of the investments that.
We are making in that business healthcare dispensing solutions.
Pharmaceutical devices continue to be areas of opportunity and we've also got the global growth dynamics.
India, China et cetera, so we.
We think that business can do.
Doing the right things team is doing a great job and we're.
Opportunistic about the future of <unk>.
That business.
Yes.
Okay. Thank you.
I'm showing no further questions in the queue at this time I would now like to turn the call back over to management for any closing remarks.
Thanks, everybody for your time and attention today. We appreciate your interest in very we look forward to seeing you all inherent from Euro next call. Thank you.
Thank you all for participating in today's call. This concludes today's program you may now disconnect.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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Yes.
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