Berry Global Group Inc. Q2 2023 Earnings Call
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Okay.
Good day and thank you for standing by welcome to the second quarter 2023 Berry Global Group earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during this session.
You'll need to press star one on your telephone you will then hear an automated message advising you. Your hand is raised to withdraw your question Press Star One again please.
Please be advised that today's conference is being recorded.
I'd like to turn the conference over to your Speaker today Dustin Stilwell. Please go ahead.
Thank you and good morning, everyone welcome to Berry's second fiscal quarter 2023 earnings call.
Throughout this call we will refer to the second fiscal quarter as the March 2023 quarter.
Before we begin our call I would like to mention that on our website. We have provided a slide presentation to help guide our discussion this morning.
After today's call a replay will also be available on our website at Berry global Dot Com under our Investor Relations section joined.
Joining me from the company I have Berry's 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 we do ask that you limit yourself to one question at a time and then fall back into the queue for any additional questions.
As referenced on slide two during this call.
We will be discussing some non-GAAP financial measures the most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and Investor presentation on our website.
Please note that in our commentary today and within our presentation. When we compare our results to the prior year quarter or for year. We have adjusted you presented 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 of our presentation.
And finally, a reminder that certain statements made today may be forward looking statements. These statements are made based upon management's expectations and beliefs concerning future events.
In the company and therefore involve a number of uncertainties and risks, including but not limited to those described in our earnings release.
Our report on Form 10-K, and other filings within 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.
And now I would like to turn the call over to Berry's CEO , Tom Salmon. Thank you Dustin and welcome everyone and thank you for being with us today.
Turning to our key takeaways for the quarter on slide four.
Our business delivered solid second quarter, and first half results with adjusted earnings per share growth of 4% and 7% respectively.
For the past several quarters, we have seen supply chain constraints continue to ease and have prioritized structural cost reductions and improved our mix of high value growth products.
Throughout the last several years, we've made concentrate to Nevada.
Our portfolio into higher growth markets in several areas, such as food service health and beauty dispensing and pharmaceutical markets, including sustainability focused customer life projects.
Furthermore, we continue our focus on returning capital to shareholders in the first half of this fiscal year, we have repurchased over five 5 million shares or four 4% of our total shares outstanding and continue to expect share repurchases of $600 million or more in fiscal 2023.
Right.
As we stated last call. We have continued our commitment to strengthening our balance sheet by further lowering our long term leverage target to two and a half to three and a half times.
We expect to be at three seven times at the end of fiscal 'twenty three.
Our new target range by the end of fiscal 'twenty four.
And finally, we believe 2023, we'll see a challenging overall market demand in turn we're making long lasting structural cost improvements while advancing our strategic initiatives to exit 2023 are much stronger and more focused company.
We remain confident in our ability to sustain earnings growth and are reaffirming our earnings and cash flow guidance for the year.
Turning now to the financial highlights on slide five.
The March 2023 quarter performance for both earnings per share and EBITDA were ahead of our expectations, including strong price cost spread from inflation recovery cost reduction and mix improvements.
These internally driven actions were partially offset by a 6% volume decline from weaker end market demand, which was in line with what our global customers have reported thus far.
Demand in the quarter had been negatively impacted by price inflation on consumer purchases destocking in small pockets of continued supply chain issues.
From an earnings perspective for the comparable prior year quarter, and half EBIT was up 1% and 2% respectfully and Etfs increased 4% and 7% respectively.
Additionally, we delivered sequential EBIT improvement from Q1 of over 100 million with three of our four segments generating significant improvement, while EPS grew 50% sequentially.
As we've demonstrated historically and during the most recent quarter, we remain committed to driving cost improvements 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 their locations, providing both cost and sustainability advantages.
Yeah.
During the quarter, we performed well delivering strong operational performance and took additional actions to reduce our cost structure optimize our asset and further automate our facilities, which will bring our total annual statements from recent cost initiatives to $115 million $70 million of which will be real.
In fiscal 'twenty three.
In line with our long term strategy to provide strong capital returns to our shareholders. We have returned nearly $400 billion to shareholders through both share repurchases and dividend in the first half of fiscal 'twenty three.
Before I hand over to Mark I want to review slide six and what we continue to focus on in both the near and long term.
We remain focused on driving consistent dependable and sustainable organic growth and 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 long term growth such as <unk>.
Care personal care beauty and food service markets.
We've grown the select markets over the past 10 years from 20% to now more than 30% of our portfolio.
Additionally, we will continue to invest and expand our emerging market position and support our commitment to global growth.
Longer term, we are committed to growing our businesses need regions and believe our emerging market prices can be 25% or more of our total company revenues.
And 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 we.
We continue to grow the number of sustainability focused products meeting, our customers' needs and expectations.
We have grown our total sustainable Palmer purchases by nearly 70% over the past several years with the expected growth rate of 20% to get to 30% circular materials by 2030.
These drivers when combined with our ability to deliver continued cost improvement by leveraging our scale advantages and capability gives us great confidence we will continue to consistently deliver solid earnings growth from our stable portfolio of businesses now I will turn the call over to Mark will review Berry's financial results Mark. Thank you Tom.
Our businesses continue to perform well and focus on price recovery and generating cost productivity, while driving long term sustainable revenue and earnings growth overall as Tom referenced earlier, we delivered sequential EBITDA improvement in Q2 from Q1 of approximately $100 million, where three out of four segments.
Generating significant improvement.
I'd like to refer everyone to slide seven for our quarterly performance by each of our four operating segments.
The second review review will focus on a year over year changes for Q2.
Our consumer packaging International Division reported a 2% higher revenue dollars driven by higher pricing from the pass through of inflation in Europe , and improved product mix to higher value products, partially offset by softer demand.
EBITDA was up 5% driven by our cost reduction efforts, along with improved product mix by increasing our presence in health care packaging pharmaceutical devices and dispensing systems.
We continue to recover cost inflation through pricing actions and cost reduction initiatives.
Driving revenue growth from our sustainability leadership.
Next on slide eight revenue in our consumer packaging North America Division was down 10% from the prior year quarter, primarily from lower selling prices as a result of the pass through of lower resin costs in the U S and softer overall demand mainly in our industrial markets.
We continue to deliver strong mid single digit growth in our foodservice market as we continue to see conversion from other substrates to our clear polypropylene comp inlet.
We continue to add incremental supply for Carson lids, including our additional manufacturing location in Florida for this technology as demand for our product continues to outpace our ability to add supply.
EBITDA increased by 10% over the prior year quarter, driven by improved cost productivity from structural cost reductions and our focus to higher value products, such as foodservice closures and dispensing systems.
On slide nine revenue in our engineered materials division was down 15% for the quarter due primarily to lower selling prices from the pass through of lower resin costs in the U S and volume softness primarily in European industrial markets, along with customer Destocking.
Volumes were impacted by our focused effort to mix up in certain categories like consumer and transportation.
Consequently, our sales and advantaged higher value products has moved from around 25% of engineered materials portfolio in 2018, So now 45% and for the quarter. These categories grew 2%.
As a result of these actions EBITDA was up 9% over the prior year quarter from our focused effort on improving sales mix to higher value product categories and structural cost reduction initiatives.
On slide 10 revenue in our health hygiene and specialties Division was down 17% due to volume declines on the lower selling prices from the pass through of lower resin costs.
Business has continued to see inventory destocking, along with softer demand in many of our specialties markets such as building and construction.
EBITDA was down 24% for the quarter, which was roughly in line with our expectation as our improvement initiatives were offset with weaker demand in some of our higher value specialty markets.
Outside of contractual pass throughs in the quarter, our selling prices improved sequentially as we continue to recapture inflation on costs other than red.
Overall for the company through the first half of 'twenty three demand was modestly below our expectations as we've stated from the beginning of the year, we will take proactive structural cost reduction actions to offset.
As part of this initiative, we are in the process of rationalizing 15 facilities across the world moving the business to more efficient cost facilities. In addition to other labor cost reductions from improved productivity.
As Tom mentioned these cost saving measures are expected to provide annualized cost savings of $115 million and we expect to realize $70 million of these savings in fiscal 'twenty three.
Our personal 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.
We have a strong record of Etfs for us improving every single year as a public company and continue to expect 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.
We continue to 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 plus capital expenditures of $600 million.
We are reaffirming our free cash guidance in spite of higher interest rates as we took action to increase our fixed rate debt to over 90%.
Over the last four quarters, we generated record free cash flow of $1 $1 billion.
At the close of the quarter, we completed a bolt on acquisition of pro Western plastics were $88 million, which will be part of our consumer North America segment.
We believe this will provide us growth opportunities for geographical expansion in Canada, where we can further penetrate the market with complementary berry products in the pro western product portfolio will create additional opportunities within berry's existing customer base across North America.
In turn we are focused on strategic of estimate opportunities and while we do not have details to share today. We expect this bolt on opportunity will be fully offset by divestiture proceeds by the end of the calendar year.
Our cash flow at year end and year out there's been a dependable core strength and core value of our company.
It 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 12, our capital allocation strategy as return base and.
<unk> continued investment in growth markets share repurchases debt repayment and the growing quarterly cash dividend.
In fiscal 'twenty, three we expect to return $700 million or more to shareholders via share repurchases and dividends, including further reducing our share by 8% at current valuation levels.
During the quarter, we repurchased another $155 million of shares or two 1% of shares outstanding and paid our quarterly dividend, thus returning $187 million back to our shareholders in the second fiscal quarter.
As Tom mentioned earlier, given our strong dependable cash flow 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 expect one.
At the end of this fiscal year and within our long term range by the end of fiscal 'twenty four.
We believe we are well positioned for continued value creation through both our resilient business model and strategic portfolio management opportunities.
My financial review and now I'll turn it back to Tom.
Thank you Mark our business model has proven resilient, including a broad portfolio of consumer staple in industrial packaging solutions with strong tangible and stable cash flows to allow us the flexibility to drive strong returns for our shareholders are.
Our in house designed footprint in a build to serve local and regional customers and markets all while being while the top five global toolmaker in a top five recycler in Europe provides us with scale advantages and differentiation capability unmatched by our competitors.
As Mark mentioned, we will focus on our internal cost reduction efforts and inflation recovery, while also driving strong cost benefit through efficiencies and asset optimization throughout our global footprint.
We believe very stable and dependable portfolio will allow us the ability to provide earnings growth and demand stability 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.
Our annual adjusted EPS CAGR of 23% from 2015% to 20 to hold the leading position amongst our peer set and well above the average CAGR of 10%.
We are proud of our consistency to grow annual adjusted EPS every single year through that period.
The targets, we set over the past several years, including our focus on driving shareholder value continues to be our top priority.
Starting several years ago in each of our four segments, we began investing more heavily in growth with the emphasis in faster growing markets and region.
While working to improve the mix of our product portfolio.
As you can see on slide 14, we have delivered results at or above the peer average from our strategies. 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 chose to make a concentrated effort to keep our leverage in a lower range while also.
Turning cash to shareholders via share repurchases and a growing quarterly dividend.
We believe our new long term leverage range of two five to three five times, we 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 investment.
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 'twenty three we have reduced our net debt by nearly $3 billion.
Furthermore, in fiscal 2022, and 'twenty three we have returned over $1 $3 billion to shareholders via share repurchases, while also paying our first ever quarterly dividend.
These uses of cash from 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 at.
The ability to leverage our combined know, how including sustainability and innovation product development technology has created significant value for shareholders.
On slide 16.
We are excited to announce the recent opening of our lending to spy UK facility at this new Barry circular polymers facility, we will deliver Europe's first approved recycled material at scale for contact sensitive applications.
Our proprietary clean stream technology process will be the world's first closed loop system to mechanically process recovered household waste polypropylene back into food grade packaging.
Similarly, as you can see on slide 17, we cut the ribbon on our new state of the art healthcare manufacturing facility, a global center of excellence in Bangalore, India.
Our investment in the second factory in Bangalore further strengthens our ability to support health care company with both regional expertise and global capability in the development of modern healthcare solutions.
This will help meet band throughout Asia, and beyond for patient centric health care products.
Among the latest innovations that will be manufactured in the factory is a new Barry breath actuated inhaler with dose indicator that helps reduce asthma and COPD patient coordination errors and breathing variability.
And the award winning activated respond recyclable multi dose anti microbial dropper that is designed to help prevent infections.
These two new locations Lamington Spa, and Bangalore, along with our incremental savings in our foodservice business located in Florida gives us confidence and excitement in our growth pipeline heading into 2024.
Next on slide 18, we.
We've provided our key investment highlights along with long term targets for our key metrics. We are a global leader for consumer staple products with a proven history of earnings growth with a sustainability leadership role as one of the largest packaging manufacturers in the world. Our long term targets further validates that consist of.
And dependability of our model, which includes EBIT growth of 4% to 6% EPS growth of 7% to 12% and total shareholder returns of 10% to 15%.
As you can see over the past several years.
We have met or exceeded these long term growth targets and expect a similarly do so going forward.
Additionally, we expect our newly initiated dividend to grow annually and we have updated our long term leverage target to be in the range of two five to three times two five to three five times, which we expect to achieve by the end of fiscal 'twenty.
We believe we can achieve the similar metrics, while operating the business with lower leverage and providing consistent capital returns to shareholders.
In summary.
In the near term our entire global teams emphasis on working safely and servicing our customers remains our number one priority has made us a stronger better and safer company. We will continue to operate with agility as we navigate current market dynamics to drive sustainable growth while recapture inflation.
The recent recent creation of our capital allocation Committee has been a positive addition to our board and enlist the full participation of all our directors as a board we continue to evaluate our entire portfolio for ways to maximize shareholder value as we consider various options.
We remain committed to deleveraging our balance sheet, returning cash to shareholder and pursuing attractive growth opportunities across our entire portfolio.
And finally as you can see on slide 19, our business model is predicated on consistent and dependable free cash flow. We believe our strong cash generation provides us the ability to continue to drive strong returns for our shareholders through four key areas, including first utilize our broad global portfolio of which provides us.
Access to large global company and faster growing emerging markets second we have an abundance of investment opportunities in high value attractive end markets, such as healthcare foodservice and beauty along with a leadership position in sustainability led product offerings.
Thirdly, we have demonstrated historically, we have an ongoing opportunity to consolidate a fragment set of high value end markets to drive significant revenue and cost synergies and board all while returning ample capital to shareholders.
<unk> strategy is focused on driving long term shareholder value.
Spanning our competitive advantage, it and delivering on our financial priorities to position Berry for long term success.
And finally, we are improving our cost structure and day to day operations, along with advancing our strategic priority.
<unk> taken the necessary actions to move very forward, we are dedicated to building on our progress delivering greater value for our customers and shareholders and exiting 2023, a stronger more focused Barry.
When I close with how pleased I am with the hard work of our employees delivering solid results in the phase of persistent higher cost and a dynamic global economy.
You all for your continued interest in Berry with that Mark and I would be glad to answer any of your questions.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again, please standby, while we compile the Q&A roster.
Yes.
Our first question comes from Anthony.
<unk> from Citi. Your line is open.
Hi, good morning.
Tom in consumer you sell into a lot of different markets, but I'm just wondering when you look at the volume declines in the quarter do you have a sense of how much of it was driven by sort of destocking versus real underlying demand weakness and then without slicing. It too thin when you look back at the kind of three quarters.
Our three three months of the quarter and then into April May do you get a sense that trends have.
Worsened or stabilized or improved just any kind of commentary you can give there.
There's been a lot of discussion relative to the stickiness of this destocking phenomena.
We would we would estimate that approximately 50%.
It's tied to Destocking initiatives right now and clearly with the focus on working capital. Many of our end customers are putting huge priorities on the inventory levels that they're carrying right now so for Berry given the proximity of our sites to key end users around the world It could be an advantage, but it certainly puts more pressure on us to turn the product.
Faster.
I would say that in terms of our consumer packaging space food and beverage continue to be what I would describe as relatively stable theres certainly been offset by some weaknesses in our industrial businesses, but I would also concur that.
This phenomenon Destocking can't last forever, but in our guide we are assuming no real change in that market growth dynamic in the back half of the year with the exception of us.
Benefiting from some more favorable comps on a quarter three and quarter four.
Okay, that's very helpful.
And then just in April may.
Any stabilization improvement.
Further weakening just any comment there.
Nothing we can comment other than in the prior quarter. Just completed we clearly saw a degradation in the back half of the quarter versus the front half.
But again, our guide is that basically assuming no real change we chose to take that path gives.
Given the given the lack of transparency in terms of that longer term outlook.
Okay. That's very helpful I'll turn it over.
Thank you.
And we have a question from.
Adam Samuelson with Goldman Sachs. Your line is open.
Yes. Thank you good morning, everyone.
I guess, maybe firstly, thank today as I'm thinking about the moving pieces in the quarter and then the outlook is it fair to calibrate that volume expectations for the back half of the year have moderated and imagine as well as the second quarter volumes themselves were softer.
Mitigating that with the cost actions that you have.
We have announced and expect to realize decent chunk of the savings from this year.
And as well price cost is maybe prevent stickier and a little bit more of a tailwind than you'd previously calibrated to get to the full year outlook unchanged I just wanted to make sure Ive got the key moving pieces there.
Kind of balanced properly.
From a demand perspective.
In the quarter just completed.
Overall, our demand is going to look very similar to the large CPG global customers we serve.
And we saw that in the quarter just recently completed.
Anthony just share with Anthony we expect similar customer demand.
In the back half of the year with the exception again.
The more favorable comps and some startup of new assets that will benefit from in the last quarter last two quarters.
<unk> two.
Price and inflation.
There is still more work to do clearly the majority of our resin is tied to escalator de escalators, but on the other raw materials side, there continues to be opportunities.
We have taken the proactive stance so earlier on the year as we noted relative to sharpening our pencil in terms of our overall footprint.
With the shutting up 15 facilities continuing to invest further in automation and then our ongoing focus and attention as a company.
On continuous improvement.
And all things, especially <unk>.
Service cost quality and the likes to optimize those cell.
I think <unk> got it right.
Okay. That's.
That's very helpful. And then just by by region as we think about that demand and point taken on your matching your customers.
And then maybe.
Distinction between some of your consumer CPG.
Oriented businesses versus more industrial cyclical areas and changes in order patterns or distinctions on growth and demand between that between some of the different.
Different channels that you have.
So what we saw in the first half year and what we're anticipating the back half of the areas again relatively more stable food and beverage demand.
Offset by weaknesses in what would be described as more of the industrial market. If you will.
<unk>.
Okay, Alright, that's all that's all helpful. I'll pass it on thank you.
Thank you.
Our next question comes from.
Kieran de Brun with Mizuho Securities. Your line is open.
Hey, good morning.
Okay.
Maybe.
Just on it seems like the pricing to value and improving mix is starting to flow through the portfolio now and maybe just talk a little bit more about that I think you mentioned that growth from 25% to 45% of higher value products, but as we think forward to the back half of the year understanding that there is destocking and some volume weakness.
There, but as we think about the back half of the year and maybe it's preliminary but 2020 for like how do you perceive that kind of growing and trending over the next.
12 to 18 months. Thank you.
Well first we're very proud of the work engineered materials is done with a concentrated effort both commercially as well as through capital investment to pivot more of our products.
Quote higher valued in that move from around 25%.
To now 45% is significant it's interesting when you breakout engineered materials, the North American base of the business performed very similar to our CP North America business in terms of demand.
The European business with more pressure tied to what is ongoing restructuring that we're doing.
And the paring off of lower margin business that we serve in that geography will continue our investment focus around higher performance films mix improvement in the business as demonstrated in fantastic ability to offset inflation with price and remember this is one of our more transactional businesses. So we talk.
About the Destocking phenomena. It plays a role in this business because 60 plus percent is served through distribution again, similarly, our customers put a little more burden on us to make certain that we can have quicker turnarounds. So they can focus on their working capital we've been able to do that well and as you saw both from our cash outlook.
As well as our earnings outlook for the full year I'm very comfortable with engineered materials in the areas of focus that theyre, making to change the mix of business to a greater percentage of higher performance films smaller.
Component of more Commoditized transactional products.
They've made great progress as you can see from the move from 25 to now 45% from 2018.
Great. Thank you.
Okay.
Okay.
Yeah.
Thank you.
And it looks like our next question comes from.
Michael <unk> from <unk> Securities. Your line is open.
Thanks, Tom Myles nothing congrats on a very good corner.
Yes.
Thanks.
Wanted to get your thoughts on.
The weaker demand environment and obviously, that's led you to become more aggressive with your cost reduction between closing facility.
How much more runway do you think.
It makes it differently, how many more similar types of opportunities do exist in the current portfolio similar to what you just 15 facility.
Yes, we have an additional pipeline of facilities that we are giving consideration to some of which will.
Be able to execute on here in 2015.
But were large portfolio and as I stated in our prepared comments.
I couldnt be more excited about actually the addition of our capital allocation Committee and to our board of Directors. Our company has always had.
Hence focus on shareholder value creation and is even that much more intense now with the full board participating on that committee exploring opportunities across our portfolio to do what we've talked about which is if there is aspects of our portfolio that we ultimately.
See less value and as Barry but proceed there may be more value elsewhere, and if we can use those proceeds to drive our capital allocation strategy relative to either deleveraging accessing faster growing end markets or geographies.
That's all ahead of us and I have nothing to report today in terms of.
Where we're at with that that I can share, but suffice to say, it's a focus we've just completed our last board meeting and I am confident that this will be an area of opportunity for our company that again exponentially supports our objectives around consistent predictable growth earnings and free cash flow.
<unk> prepared.
Got it and just one quick question on resin costs, obviously, they increased during last quarter. You did you guys did a good job thanks very much.
Cost.
Wondering if there was a larger acceleration RASM gave you ended the quarter. So I'm just going to help me frame how revenue should flow through.
P&L for the duration of the year.
Low flow through of the resin increase that Oh, yes, yes, yes no.
Straight we saw one of our primary raw materials being polypropylene.
I am pretty dramatically over the last several months.
It's still early.
SaaS that but it appears as though that that.
That increase is going to come back out pretty quickly just as quickly as it has that went in but needless to say that will move a little bit of our earnings quarter to quarter.
All of that is assumed in our guide that we just provided but yes certainly.
Certainly it might provide some timing from.
From Q3 into Q4 positively into Q4 and.
A little bit of headwind just from timing of pass through here as we said in Q3, but typically Q3 of our seasonally strongest quarter Q.
Thank you.
Thank you and our next question.
Sure.
Comes from Arun Viswanathan with RBC capital markets. Your line is open.
Yeah, great. Thanks for taking my question.
Good good good quarter this quarter just wondering.
It won't necessarily able to raise guidance.
That much. So is it is the volume is still on track for the rest of the quarter do you see a recovery in the second half.
Yes.
We budgeted in our outlook assumes relatively consistent volume from the front half to the back half with the exception of.
The benefit of a <unk>.
Comparable and prior year that will benefit us in the back half coupled with the introduction of new capital investments that that will become commercial.
Benefiting us but yes.
We are comfortable in the outlook.
And the guide on it is not.
We chose the path to not assume anything changes significantly from a market dynamic perspective that which we can't control, we're going to look and we're going to perform a lot like our global brands that we have up to this point.
And I'm confident that we'll execute here in 'twenty, three and I think what was probably.
More encouraging for me is just a setup we have.
Terms of 24 and beyond both in terms of our structure, our capital investment or capital allocation priorities, what we've done and what we're doing and what we're executing against and I think as you saw mark referenced.
Both in terms of EPS over the last 10 years as well as what we're doing around <unk>.
Earnings and free cash flow generation as we have consistently.
It should give investors great confidence that regardless of the economic environment.
<unk> delivers and we've delivered it consistently as a publicly traded company.
And just as a quick follow up.
Yes.
One.
One moment.
Alright.
Are you in a position to return to low single digit volume growth next year. Thanks.
To change and to ultimately grow consistently in the low single digits.
Thanks.
Thanks.
Thank you our next question comes from.
And Joe Castillo from Morgan Stanley Your line is open.
Hi, good morning, and congrats on the strong quarter.
Thanks for taking my question, just maybe I want to start out on price cost I just wanted to double check I guess you have two strong quarters of price cost performance I think on <unk>, you indicated $125 million was kind of expectation for the year could.
Could you just I guess update.
Peter I don't know if I missed it earlier, but what that stands out in terms of kind of the assumption for the year will be now for price cost.
Yes sure. Thanks. Thanks for the question, Yes, we've increased that roughly $50 million to about $170 million as a result of additional cost actions that the company has taken.
Since the last earnings call and ask Com.
Big part of our cost save will hit here.
Here in 'twenty, three but there will also be.
$40 million or so carryover into into 'twenty four.
That's very helpful. Thank you and then just I just wanted to follow up on the discussion around volumes for the year and Destocking.
Just wanted to clarify if I'm understanding this correctly I guess the assumption is that you don't anticipate destocking to abate just given maybe some of our second half the first half.
Market conditions.
One did I hear that correctly.
And then I guess what are you hearing from your customers I guess that maybe it doesn't indicate that destocking abates, and then kind of as a follow up.
I'm, just a little more color on the commentary around operating perhaps need to be more real time, just given the proximity with customers and maybe what the pressures are in the business and kind of implications of that that'd be helpful. Thank you.
You are right, we anticipate little change in the behavior relative to Destocking, but frankly, we also realize that can't continue forever.
We will get to a normalized demand environment. So I think as that happens you'll.
You'll see more of an order inventory balance that said, we are a short cycle business.
We deliver with short lead times today, and we do believe clearly that.
The benefit of our plants being in close proximity to our customers. It is an advantage both from a service perspective, and frankly as well as a sustainability perspective, the whole dynamic on Destocking has changed right through the pandemic. It was more is better to give me what I need when I need it and.
Shortages drove those overstock and today, it's more around <unk>.
Customers and understanding by our brands, what exactly they're going to want what's going to have to sell through what's going to be promoted.
And in some instances people just were having a very heavy focus on working capital.
To close on their inventory levels and if it ultimately is.
It's something we've seen before and we will manage through comfortably.
But I wouldn't describe it as a pressure it's up just a hell of elevated heightened awareness of that being a requirement to delight, our customers, which will do.
Very helpful. Thank you.
Thank you our next question will come from.
Yes.
Philip <unk> with Jefferies LLC Your line is open.
Good morning, Mark Good morning, Tom This is John Dunigan on for Phil I appreciate the insight and congrats on a solid quarter I. Just wanted to first go back to your comments about the new business wins that are going to be flowing through in the second half on the buying side are you able to quantify the impact of that and provide some more.
Details on what segments those will be flowing through and then maybe you can.
Just comment on confirming those.
New business wins are locked in and that firm customer commitments and maybe what kind of level those are.
Saw data what kind of percentage that is thank you.
Sure Yeah, I think Tom Tom referenced a couple of those in his prepared comments, but as a reminder, we've got a new site for health care packaging and India in Bangalore that.
Commercial now.
We have a new healthcare nonwoven <unk> line in China.
Also commercialized recently.
Foodservice capacity is going in over the balance of calendar 'twenty three so it's coming on in increments as opposed to.
On a more aggregate basis.
Our new recycling facility in the UK also recently commercialized so.
Unfortunately, we're already halfway through 'twenty three hard to believe.
These are mature.
Commercializing now.
But obviously the impact on 'twenty, three will not be significant and will be more substantial in 'twenty four 'twenty five.
But we're excited we've got a lot of great new assets.
Coming online literally now and over the next couple of months and quarters.
And so yes, those are going to all be significant contributors contributors to both our topline and bottom line as we look forward you could see in the.
The presentation materials, just a snapshot of some of the customers that we will be supporting these facilities.
With Lendingtree Spa in Bangalore.
I would frankly anticipate are over the next <unk>.
Several quarters early on into next year that our board will be asked to consider additional surface facilities in Europe and frankly.
And potentially in the United States as well.
Success of Lemme can spot that.
Customer receptivity the ability to link with those customers to provide them circular solutions real time with premium quality.
<unk> has exceeded our expectations similarly, the pipeline of opportunity in India.
Certainly opened facility in Bangalore to support health care and pharmaceutical primarily.
It is likely to similarly require consideration for additional expansion on that site, where we have the facility to capability to do that and as Mark said.
We continue to have just exceptional performance inside of our foodservice space.
And with our new facility in Sarasota opened up at the end of our fiscal year.
Give us more capacity to fulfill our demand on polypropylene cups lift, but I simply believe that.
The additional capacity will probably be warranted there as well. So it's an exciting time, we've got structural changes that we're making in 'twenty three we've got a pipeline of business that we're enjoying.
That's consistent with the performance of our key brands in 23, we've got opportunities to expand our footprint geographically, we're making the necessary capital investments at our customer link to ultimately again support that objective of that consistent predictable organic growth that we are firmly committed to.
And again it supports that resiliency, we talk about and that's proven track record of revenue operating EBITA adjusted EPS adjusted free cash flow.
Of the company that has enjoyed for some time and it gives us the confidence that we will execute against it.
Great. Thanks, very much I'll turn it over.
Thank you our next question comes from.
Yeah.
Ghansham Panjabi with Baird. Your line is open.
Yes, thanks, good morning, everybody.
I guess first off Tom maybe you can expand on the structural cost reduction initiatives youre executing on how would that 15 plants are weighted towards the various segments and also what does it commonality behind the plants that you are rationalizing.
We review and.
Barry One thing has a great benefit of tons of data if we have opportunities based on productivity and potentially more modern facility to consolidate business under under rooftop.
Active part of the review that we do on a regular basis.
And again. This was this has been part of our longer term plan. We were fortunate to execute against 15 sites. We've got additional plant that we're considering and it's all about what puts us in the best position geographically and from a cost perspective to serve our customer base is most effectively so for example.
Our benefit of the footprint, we have in Europe , the ability to load more business in eastern Europe , a lower cost geography to serve western Europe is a great opportunity and opportunity to build more business in India to serve Central Asia is simply a great opportunity for us and using plant in Mexico to serve parts of north.
America Similarly, our benefits for us so we're taking advantage of that global footprint for Berry, finding what makes best sense in terms of return service quality and the modernization of the infrastructure, that's investable to give us these opportunities to shrink that overall footprint without compromising cost.
Your service.
Okay, and just as a follow up to that but what was the last time. The company went through such a rationalized site rationalization initiative and then lastly, as you think about volumes based on your own expectations for fiscal year 'twenty, three where do you think volumes by segment will end up relative to the pre COVID-19 baseline. There's just so much noise. The last three years just curious as to.
How are you thinking about that.
Wow, Yeah, Ghansham I touched in my memory I guess on both of those.
Pre pandemic was a long time ago I.
I guess on the on the footprint consolidation I would say, it's something we've done typically associated with acquisitions.
Bob.
But maybe have.
Six locations, one of which was close.
To want to berry's existing facilities, we're able to combine those facilities to take advantage of our lower cost structure going forward. So we certainly got it many times.
My tenure, but again they tend to be more associated with with acquisitions. We're certainly in this case.
Has that same dynamic with.
The RPC combination.
Back to your earlier question all four segments are participating in this opportunity to reduce our cost structure.
And relative to volumes pre pandemic, which I think was another part of your question I, probably need to think about that.
My My quick reaction is probably pretty similar.
In the aggregate.
By business could look a little different when you Peel the onion back a little bit by my my gut would be pretty similar.
Okay fantastic. Thank you.
Thank you and our next question.
One moment.
Yes.
Okay.
Our next question comes from George Staphos from Bank of America Securities. Your line is open.
Hi, everyone. Good morning.
Thanks for the details and congratulations on the progress Hey, Tom Mark you talked a lot about on this call rightly.
On focus and the new capital allocation Committee and the benefits you hope to get from that and that focus can.
Can you talk to us and perhaps reaffirm some things I thought I heard you say about the areas of the portfolio that may over time move out of Berry.
Is it your anticipation.
Your divestitures, if you will or disinvestment in some of these areas.
To fund your growth elsewhere, Relatedly, if you can quantify to the extent possible.
What are some of the metrics that youre looking at either in terms of.
Volume growth.
Margin return how are you trying to evaluate your portfolio to see what stays and what goes again makes sense that you can quantify that would be great and as you go through that process and I look at slide 18, and those those growth targets that you have that we really appreciate that you've put back that you put into the the Jack over the last couple of quarters.
What do you think that focus and that that approach on the portfolio is going to add incrementally to your growth.
To your margin to return any quantification would be great. Thanks, and I'll turn it over.
Yes, I think George from a metric perspective, I mean, I think you're hitting a lot of the key ones I mean, I would summarize it as growth.
Returns in synergies and by synergies I guess I connect to how they tie in for the rest of the portfolio we have various products.
Markets et cetera that have various connectivity and therefore are more valuable as part of our profit.
All three of those things or are things certainly as we evaluate our portfolio and always have and then are there any sort of hurdle rates or thresholds quantification Mark you could throw there recognizing it's a broad portfolio, it's hard to be single point, but how would you help us think about the numbers.
In terms of guardrails on that sorry.
Yes.
I think we won't be too objective right in terms of communicating that.
Got we've got a lot of metrics, we look at we've got goals that we want to achieve as a company. We've just on our last call.
<unk> communicated some very broad goals around <unk>.
EBITDA growth EPS growth and we've achieved those historically and we're going to make sure we keep making the decisions to achieve those going forward.
George one of your one of your questions.
Will the proceeds or some of these divestitures ultimately fund growth elsewhere.
Answer absolutely.
This provides that vehicle for us to look at our entire capital allocation, we'll determine what's going to bring and maximize shareholder value creation and apply those proceeds against that.
And that's something that's really exciting for us and you talked about.
Influence of our board and the creation of our capital allocation Committee and the.
The intensity, we've always had around return of shareholder value creation and this heightened focus around with <unk>.
Talk about investing in faster growing markets fully supported by our board fully supported by our capital allocation Committee increased in our emerging markets presence to ultimately make our growth more consistent more further support on the capitalized allocation committee and from our board of directors. The investments we've made in sustainability innovation. The fact that we are queuing.
These investments to prime the pump if you will to make certain that the portfolio is best aligned to support our metrics that we measure ourselves against and that we have consistently delivered against well into the future has been critical I think it's been a very strong <unk>.
<unk>.
And a new addition to our very deep.
So it should add to your growth would you say.
Pardon me.
So that is that.
That process should add to the growth rates that you have on your wheel.
It should support it absolutely that can drive that consistency George for sure very.
Good. Thank you guys. Good luck in the quarter.
Thank you.
Our next question comes from Michael <unk> from Barclays. Your line is open.
Great. Thanks. Good morning, guys, just two quick ones on <unk> first and it looks like volume in the first half down about eight or 9% on negative comps. So.
Phil some COVID-19 normalization or what else is going on there and then second why was that the only system that had negative price cost spread is that because of the business is consumption of polypropylene or just what else is moving.
So the HHS business was primarily driven by the fact that the specialty markets some of which is tied to building and construction as well as things like filtration.
And negatively impacted both from a pandemic surge perspective to a more normalized rate and then a softening based on interest rates in terms of the.
Building dynamic in terms of new Hot New housing construction for house wrap those were very those are high margin businesses and its impacted the profitability.
Inside HHS I'd also say that HHS of all of our business as you know it enjoyed two and a half years of historic success, both in terms of growth and profitability and we all knew that at some point, we would return to a norm more normalized level of demand that was in <unk>.
Non boat recessionary high interest rate environment now that's been exacerbated by the fact that you've got return of a more normalized level and the dynamics around destocking that we've talked about that have impacted the other segment that we enjoy just to give you a sense.
During the during the pandemic pool filtration.
That business in terms of residential pools being built was up 533%.
533%, that's obviously going to come to more normalized level. This system will work through we'll get to a more normalized rate and Andy will get back to a more of a demand cycle for that business, but those are some of the factors that played into it yes. So big piece of this concept with a comparable we've got one more quarter of.
A tough comparable and then that that business will be more apples to apples to prior year as we approach as we get into Q4.
Great. Thank you.
Okay.
Okay.
Thank you our next question.
Comes from.
Josh Spector with UBS Your line is open.
Yeah, Hi, Thanks, just a couple quick ones.
So this was the acquisition you guys mentioned can you comment how much EBITDA you're getting in is that in the guidance and just when you talked about divestments funding acquisitions was that this one.
And that you expect it to close another acquisition in the next couple of quarters.
Yes on the last part it was it was at this particular acquisition that we expect to fund.
Proceeds from divestitures here in calendar 'twenty, three and $88 million purchase price. The returns were in line with <unk>.
Communicated to the market.
So in the teens.
From an EBITDA perspective, obviously this year.
We're only going to benefit from from less than half of the year or about half of the year. So.
You can do the math on that so not significant relative to the overall company and didn't warrant.
Changing our guidance range for <unk> for fiscal 'twenty, three just given the small nature of it.
Got it and then just given your comments on volumes and Youre planning basis, do you anticipate any need to cut capex or do you plan to reduce some of that growth spend if volumes don't improve.
Yes, I mean at this point, we're as you know we've reaffirmed our 600 million Capex Sky, We've got a <unk>.
<unk> line of projects, both on new opportunities like some of the ones we mentioned in categories.
Dispensing healthcare et cetera, we've also got a large pipeline of of cost reductions, but the company continues to evaluate thankfully we executed over on those over the last two years it is giving us the opportunity to.
So it takes to get the cost benefits that we're realizing here in 'twenty, three and will again in 'twenty four or so.
We've still got a big pipeline. So I don't expect a big change to our to our Capex number as we look forward.
Okay. Thank you.
Okay.
Thank you and it looks like.
Last question comes from.
Kyle White with Deutsche Bank. Your line is open.
Hey, good morning, Thanks for taking the question on the drink Cup business a lot of dynamics happening here you are talking about adding capacity for this business at the same time some of the major <unk> talked about consumers potentially pulling back and visiting less frequently.
Then another dynamic because you have some of your fiber based peers really looking at this market as a large opportunity and so can you just talk about some of them moving dynamics, there and maybe what youre seeing currently that gives me confidence to continue to add capacity here.
Yes, the strategy, we've been executed again for some time now is making customer link investments. So all the investments that we're making are linked to specific customers and committed demand.
And we believe and we're very comfortable that that capacity will meet and partially meet an existing need but the likelihood of additional investment may be required when you mentioned the fiber based substrates.
Nuance in our application.
It is.
All of them can lift fully recyclable there is nothing that can replace a clear cup and lid relative to the value add thats given when you can see the contents of what youre consuming.
Our CPR or <unk> have recognized that they see the value of that and the fact that it's fully recyclable is an ongoing advantage and I'm comfortable with the outline of the investments that we're making a new opening of our new capacity.
In Florida, so very much looking forward to that and again as with all our Capex is they are customer link.
Got it that's helpful and then our leverage this year you, obviously stepped up the return to shareholders.
Our leverage is going to be maintained or close about that year and as you think about capital allocation longer term and into fiscal 2024, how do we think about that balance between buybacks and leverage.
Should we expect leverage any excess cash to go to buybacks keeping our leverage at this rate or do you see a need to prioritize deleveraging.
We will be by the end of 'twenty four within our leverage range of two five to three five times, we'll finish this year at three seven and then relative to prioritization, it's 100% based on what's going to maximize shareholder value creation, whatever it's going to maximize and be the best return on our investment given that particular time.
Yeah.
Got it thank you.
Thank you and I'm showing no further questions in the queue I would like to turn the call back to management for any closing remarks, well I want to thank everybody for joining us today. Appreciate the time you spent the interest you've taken and Barry.
We are we're cognizant that this these are challenging markets, we feel as a company, we're taking the necessary steps.
To put us in a position to meet and deliver against our commitments and the resiliency and a proven track record of our portfolio. We believe speaks for itself, but it will going forward. We continue to believe this is an amazing opportunity for investment.
Given the entry point and the valuation for our shares today. Thanks, everybody look forward to the next call.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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