Q3 2019 Earnings Call
My name is Lawrence and I will be your conference operator today.
At this time I would like to welcome everyone to the very global earnings call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session.
If you would like to ask a question. During this time Superstar then the number one on your telephone keypad.
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Thank you.
Mr. Dustin Stilwell, you may begin your conference.
Thank you good morning, everyone welcome to various third fiscal quarter 2019 earnings call.
Throughout this call.
We will refer to the third fiscal quarter ended June 2019.
We'll begin our call Mike you mentioned 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 and very global Dot com under our Investor Relations section.
Joining me from the company I have Berry's Chief Executive Officer, Tom Salmon.
And Chief Financial Officer, Mark miles.
Oh, and 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 follow up or 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.
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, including but not limited to those described in our earnings release.
Our annual report on Form 10-K , and other filings with the FCC.
Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward looking statements now like to turn the call over to Barry CEO Tom Salmon.
Thank you Doug and good morning, everyone. This morning, we'll be discussing several topics, including an update on our recently closed acquisition of RPC, our financial results for fiscal third quarter. Our recent divestiture of our seal for life business as well as guidance for fiscal year 2020.
Afterwards, Mark and I'll be happy to answer any questions you may have.
On July Onest, we completed our acquisition of RPC Group plc on a welcome our employees from RPC and reiterate my excitement about this transformational combination.
The integration process is well underway with multi disciplined teams working together to identify incremental opportunities to create value for our customers and shareholders.
Barry is now a leading global supplier of value added protective solutions.
Our global footprint consists of over 290 locations worldwide well over 40000 employees across six continents, providing combined pro forma sales of 13 billion.
We're excited to move forward together as a global plastics and recycled packaging industry leader, serving thousands of customers with our high quality innovative and protective solutions, along with the industry's most diversified and expansive manufacturing platforms.
The acquisition of RPC gives us the opportunity to leverage our combined know how to create significant value for our shareholders through the shared approach and as we previously communicated we anticipate $150 million in annual cost synergies.
Additionally, I'm happy to report that volumes sales operating EBITDA on a constant currency basis for RPC were modestly up in the most recent six month period ended March 2019, we remain highly impressed by the tremendous depth of talent and resources embedded within our PC and are looking forward to the opportunity to strengthen our combined platform with a wealth of experience and expertise. This team has to offer.
Next on July 20, Threerd, we completed the sale of our feel for like for SFL business to Arsenal capital partners for approximately $330 million. The NFL business has annual sales of approximately $120 million. The decision to sell assets that was made as part of our ongoing portfolio analysis and decision to provide resources to further focus our efforts to deliver growth in targeted markets would advantage product as we remain firmly committed to this objective.
I want to thank the NFL team for their years of commitment and dedication to Barry and our customers. We have used the proceeds of the sale to repay debt and expedite our primary goal of improving our balance sheet.
Turning now to our overall financial results and highlights for the quarter on slide four.
Net sales in the quarter came in at $1.94 billion, and we generated operating EBITDA of $348 million.
Contributions from all the non acquisition and continued growth in our consumer packaging business. Unfortunately.
Were more than offset by base volume weakness in our engineered materials and health hygiene and specialty businesses.
Our adjusted earnings per share was 90 cents in the quarter, we generated $136 million in free cash flow, bringing our four quarters ended free cash flow to $665 million.
Now looking at some detailed specifically by segment.
Our consumer packaging business reported strong volume growth in the quarter of 3% led by our foodservice containers and closure products.
We continue to be encouraged by the momentum of the division delivered five consecutive quarters of positive volume growth.
Our health hygiene and specialties Division has continued to see weakness in the North American baby care market and while our near term demand outlook for this market remains soft we're pleased with the progress our team made in the quarter towards securing a strong pipeline of new business Awards.
Insider engineered materials division, while overall demand was softer I'm pleased to report, we regained share with local and regional distribution customers. Additionally, we continue to be pleased with the growth of the left on acquisition and made progress in the quarter a moving other berry products that are suitable for this E Commerce model brought to us from this acquisition.
Next I am excited to discuss our announced commitment to eliminate plastics pollution and source.
On June 24th we signed the new plastics economy Global commitment, which is led by the Ellen Macarthur Foundation in collaboration with UN environment.
Our involvement with this global commitment is complimentary to our efforts with the alliance and plastics weight and furthers our commitments to our recently announced sustainability strategy impact 2025.
And Barry we stand behind the power of plastics and are placing a priority on creating a more sustainable future.
We are innovating our products to encourage recyclability more use of recycled content and light weighting.
By signing the global commitment we are pledging to take action to eliminate problematic or unnecessary packaging strive for 100% of plastics packaging to be reusable recyclable or compostable, a target of 10% post consumer recycled content across all packaging and to take action to increase reusable packaging.
In conjunction with the Ela Macarthur Foundation, we are proud to accelerate the transition towards a more circular economy.
The bottom line is that plastics has become an indispensable part of all of our lives and makes our lives better and safer we must work together to take the necessary steps to drive sustainability throughout the value chain.
And finally before I turn the call over to Mark will review, our financial results in more detail I'd like to highlight that the company is well positioned to achieve our historical track record of growing our fee free cash flow and delivering on these commitments commitments just as we've done every single year as a publicly traded company.
So today Im happy to announce that we are committing to free cash flow of $800 million in fiscal 2020, Mark will provide more detail in his remarks, and then I'll come back to discuss our strategy and new business structure, and then open the call for questions Mark.
Thank you Tom and good morning, everyone.
Turning to slide five now.
As Tom referenced third quarter sales were $1.937 billion.
Continued strength in our consumer packaging business, along with Celadon acquisition volume was more than offset by decreased selling prices from the pass through of lower resin costs, along with weaker volumes in our engineered materials and health hygiene and specialty segments and an unfavorable currency impact.
From an earnings perspective, the June quarter operating EBITDA came in at $348 million.
Contributions from the lid on acquisition and cost reduction efforts were more than offset by lower organic volumes unfavorable price cost and engineered materials and an unfavorable currency impact.
Looking at the results of each operating segment starting on slide six.
Sales in our consumer packaging division were $652 million in the quarter, which was 1% lower than than June 2018 quarter. As a result of the pass through of lower resin costs.
Sales volumes grew 3% as the business has continued executing its long term strategy focusing on advantaged products in targeted markets.
Operating EBITDA for consumer packaging in the quarter was $126 million compared to $122 million in the prior year quarter.
The 3% increase was primarily driven by the continued organic volume growth within our food service closures and container products.
Next on slide seven.
Sales for our engineered materials division were $639 million for the quarter compared to $687 million in the prior year quarter.
The decrease was primarily attributed to the pass through of lower resin prices and lower organic volumes, partially offset by lower end on acquisition.
During the quarter Ascom expected, we made progress regaining share with local and regional distribution customers and non distribution accounts.
However, during the quarter, we did not anticipate the softening of overall demand.
Operating EBITDA in our engineered materials division was $113 million, a decrease of $16 million compared to the prior year, primarily as a result of the lower organic sales volumes and unfavorable price cost spread.
Turning to slide eight our health hygiene and specialties division delivered sales of $646 million in the quarter compared to $726 million in the prior year quarter.
The decrease was primarily attributed to weaker volumes the pass through of lower resin prices and an unfavorable currency impact.
Specifically the sales volume decline was primarily driven by weakness in the North American baby care market and the customer product transition and hygiene, we referenced on our last earnings call.
We remain focused on leveraging our scale and low cost position to secure incremental demand.
We have worked hard to foster great relationships with the leading end users on the hygiene category and our capabilities know, how and low cost global platform position us well for the future as these blank brands will lead the way in terms of innovation and differentiation.
Operating EBITDA decreased to $109 million in the quarter compared to $123 million in the prior year quarter.
The decrease in operating EBITDA was primarily a result of the lower volumes in the base business and an unfavorable currency impact partially offset by cost reduction initiatives.
Slide nine provides a summary of our income statement for our fiscal third quarter.
Overall operating income was essentially flat compared to the prior year quarter, as lower depreciation and amortization, along with lower business optimization costs related to prior acquisitions offset the operating EBITDA declined just discussed.
Our net income for the quarter was down $97 million from the prior year quarter as the June 2019 quarter was negatively impacted by a $138 million pre tax expense related to derivative instruments and our NEM two as part of the RPC transaction to protect the purchase price from foreign currency movement and match the financing to the ongoing cash flows of the business from a currency perspective.
Next on slide 10, the company generated $240 million of cash flow from operations in the quarter compared to $271 million in the June 2018 or.
The $31 million decrease included a $36 million pre payment of accrued interest as part of the RPC financing, which was recovered on July onest upon closing of the RPC acquisition.
Net capital expenditures in the quarter were $104 million as we incurred spending on cost reduction initiatives as well as growth related projects.
Our free cash flow for the last four quarters of $665 million represents a free cash flow yield of nearly 10% using our quarter end market capitalization.
Our consistently increasing dependable and substantial free cash flow provides us the opportunity to quickly improve our balance sheet as we have demonstrated historically.
Today, we are reaffirming our fiscal year 2019 free cash flow guidance and are providing our fiscal year 2020 free cash flow guidance and assumptions shown on slide 11.
We are targeting fiscal 2020 free cash flow of $800 million, which represents our free cash flow yield approaching 12% using our quarter end market capitalization.
The $800 million of free cash flow includes $1.400 billion of cash flow from operations, partially offset by capital expenditures of $600 million.
This guidance also includes a use of cash for working capital and other restructuring related costs related to the RPC acquisition of $90 million, along with cash taxes of $160 million and cash interest of $500 million.
This concludes my financial review and now I will turn it back to Tom.
Thank you Mark as I previously discussed I am very pleased the progress of our integration of RPC for the business generated improved results for the six month period ended March 2019 for sale.
Volumes and operating EBITDA compared to the prior year period.
On slide 12 commercially this transformative acquisition has created one of the world's largest dispensing solution provider supporting our healthcare and pharma portfolio with worldwide value delivery capabilities.
Similarly, RPC presence in emerging markets compliments various growth objectives in multiple industry segments.
The rationale for this transformative acquisition remains strong.
Strategic Merit.
Long term benefits and financial impact of this combination represents an extremely exciting opportunity for Barry its customers suppliers employees and shareholders.
Being able to leverage our combined know how material science supply chain product development and manufacturing technologies gives us confidence that this was the right franchise moved for Barry.
The pro forma combined franchise has revenue of $13 billion in over $2 billion of EBITDA.
We look forward to updating you and discuss in more in future calls.
On slide 13, you can see the new structure and how we've organized our new four operating divisions, consisting of consumer packaged international.
Consumer packaging, North America, engineered materials, and health hygiene and specialties.
This new structure will allow us to further develop our presence and best serve our customers in key geographic regions.
Weve appointed John Markel that to lead the newly formed consumer packaging International Division and Bill Norman to lead our consumer packaging North American Division.
John Mark previously served as the president of our consumer packaging Division and build those from his role of executive Vice President of consumer packaging commercial operations.
John Mark and Bill have been instrumental in developing a growth strategy promoted advantage products and targeted markets, resulting most recently in five consecutive quarters of volume growth for the consumer packaging Division.
Continuing to lead our engineered materials division as my killed and continue to lead our HHS Division is Curt vaguely.
I'm extremely excited about the transformation ongoing and Barry and I'm confident that this will accelerate our growth and create the value that our shareholders expect.
We remain committed to applying our extensive human and capital resources towards stable markets with the greatest opportunities innovate and generate sustainable growth by leveraging our manufacturing know how aligned with material science and application development, we will generate consistent dependable free cash flow, while maintaining a strong balance sheet as a leading global supplier in the markets we serve.
As you can see on slide 14.
We have a proven track record to rapidly de lever post acquisition to our committed targets with sustained with substantially more free cash to continue to invest and grow our businesses on enhancing shareholder returns.
Furthermore, we will continue to work diligently across all of our businesses and have been able to demonstrate organic volume growth by providing advantage products and targeted markets exhibited by our consistent growth within our consumer packing division.
What are we doing specifically to drive growth.
Within our engineered materials Division, we are focused on lightweighting numerous products, while not compromising physical properties enabled by all of that material qualifications recently completed.
In addition, we have recently modified our commercial organization, leading to a substantial pipeline of business opportunities of $120 million in new revenue that will be onboarding over the next several quarters.
As I stated earlier, we made progress toward our objective of regaining lost share with our local and regional distribution accounts during the quarter and remain committed to sequential improvement towards our continued objective of positive low single digit growth in the March 2020 quarter subject to relative market demand.
Within our health hygiene and specialty Division, our previously announced investments in China in a state of the art technology for premium hygiene and air filtration applications, along with our North American investment in our proprietary spend less technology for the white market all remain on target.
These capital expenditures reinforced our commitment to invest in growth regions and segments to further strengthen our leadership position and provide additional momentum for sustainable growth in these global markets.
Also we are well positioned with our asset base and product solutions related to discretion and comfort, which was augmented by our full pay acquisition to build on our leading market share positions in the faster growing in cotton segment.
Without question the decline in the North American Baby demand has been a challenge by pivoting our resources in a more attractive markets such as adult incontinence feminine care biopharmaceutical and specialty applications, we expect to reverse a negative demand trend.
We believe for the next three quarters that we will experience improvement in our comparative organic volumes and expect to achieve year over year growth in the second half of fiscal 2020.
And within our consumer packaging, North American business, our value proposition a recent success around productivity sustainability and cost innovation has led the innovative packaging solutions, which address unmet needs.
The division is making excellent progress towards replicating our successful strategy within our closures and containers product offerings.
Both which contributed to the positive growth inside consumer packaging in our recent quarter.
We continue to have a strong pipeline of growth opportunities, including recent wins in blood diagnostics and infection control markets and expect further continued success generating positive volumes.
With respect to our newly acquired consumer packing International business, we're excited about the potential.
Of our new dispensing portfolio with unique airless pump technologies and specialty valves.
Global dispensing solutions will become a key focus for Barry and complement nicely our closures products. Our pharma business growth potential is also a key highlight of our acquisition and positions Barry as a growing global healthcare patchy market player.
RPC brings niche and specialty healthcare products innovative respiratory devices among others.
Sustainability is also a great opportunity our onsite recycling facilities will help close the end of life loot.
And brings our sustainability leadership to the next level with plastics ways as a true valuable resource.
Barry is uniquely placed to help customers with their recyclable PCR base and reasonable packaging solutions.
And finally Berry will continue to take the steps necessary to remain a leader in the markets, where we participate.
Through a relentless focus on building and strengthening our competitive advantages to ultimately maximize shareholder value.
The management at Berry continues to be laser focused on finding ways to extract more value for our shareholders by reinvesting our leading low cost position leveraging our resources around the businesses with the greatest opportunity to grow and create value for our customers all on doing our part to protect our environment.
A cornerstone of very success is our people and our objective is to remain an employer of choice in all our geographies given the tightness in the labor market that manufacturing companies are facing around the world I am confident that the people of Berry will continue to drive positive results and achieve our goals and mission of always advancing to protect what's important.
Thank you for your continued interest in Berry and at this time, Mark and I will be happy to answer your questions.
At this time I would like to ask a question. Please press Star then the number one on your telephone keypad.
I guess that is our one on your telephone keypad.
We'll pause for just a moment to compile the couponing roster. Thank you.
Your first question comes from the line of gave hedge your line is open.
Good morning, gentlemen.
Morning.
Tom I was hoping maybe you could confirm for us that in fact, the material qualification issues that you experienced earlier in the year are in fact resolved and then to the extent that you can comment at all about it theres been a competitive response.
You know as you went out to go re win business in the market.
The qualifications are behind us as we noted in our prepared comments many of the calls the case, we did was on target around material science advances that allow us to further lightweight packages and products. We're pleased with that progress and we also are pleased with the fact that we did make progress sequentially in recovery in demand from the small mid size regional distribution accounts that we noted.
Clearly would generally softer demand and tied to the industrial space, we did see competitive pressures in our business, but we have been more than capable of addressing those issues and feel very comfortable with our progression of improvement that we've outlined over the coming quarters targeting a positive growth in the first.
First part of 2020.
Thank you Tom maybe and then congratulations on closing the RPC deal getting over the finish line there.
Mark maybe if you can give us a few.
Sensitivities in and around sort of the $800 million free cash flow number and or sort of the implied 2.15 billion of EBITDA.
No you have more international components if youve.
Given some thought to.
FX sensitivity or perhaps the free cash flow implication could be neutral given some where the financing was placed.
And then sort of just sensitivities around what could cause you to come in above or below and I. Appreciate it's very preliminary thanks for all the detail.
Yes sure Thanks, Dave.
Yes. So the details are obviously outlined on the slide in the materials.
Relative to the breakout of $800 million of free cash, which includes $500 million of interest which is in line with our.
Our estimate when we did the financing so everything is in line there as well as the $600 million of capital.
With about half of that being maintenance and churn related.
The EBA da puts and takes I would say with respect to our LTM numbers would be obviously.
Disposition of our seal for life business. Some continued pressure on the earnings in our base business and the first half of the year relative to engineered materials and health hygiene and specialties.
As we lap the customer product transition that we referenced on the last call, which showed in flat to positive growth in the back half in both of those segments.
As well as obviously the acquisition of.
RPC in the related synergies associated with that transaction with respect to FX synergies, which I think was part of your question as well.
We would estimate we're still working on finalizing the calculation of about.
Per cent move on the pound Sterling would be about $1 million and a half dollars a similar move on the euro would be about.
$5 million and we've assumed constant currency rates from today's rates with respect to the guidance the other currencies, but.
Impact.
The numbers are relatively small so those are the two largest currencies that impact the translation theres not a lot of transactional FX and the combined business. So most of it's just translation of earnings as most of our businesses are local make.
Local sale I would also point out I'm, sorry for the long winded answer here again, but I would also point out that $800 million of.
Cash flow assumes $90 million of transition related costs as well as working capital.
Which obviously, we would not expect to be recurring we would typically assume target zero for working capital for the year.
As well as does not have the full synergy realization.
That we expect to achieve relative to those transactions so its.
Total synergy and also.
Is impacted negatively by the onetime cost associated with achieving synergies.
And again I apologize I think long answer there gave but hopefully that helps.
No very helpful. Thank you.
Okay.
Your next question comes from the line of Mark Wilde. Your line is open.
Good morning, Tom Good morning, Mark warning, we weren't.
I wondered just on the seal of life sale.
Mark can you give us some sense of the impact of the sale from a segment EBIT or EBITDA standpoint, and then also what the after tax cash proceeds look like.
Sure, Yes that business was operated.
In our health hygiene and specialties segment.
The sales as I think was disclosed was about $120 million annually. The EBITDA margins were above.
The company average.
And the tax while we're still finalizing the calculation, we would expect the tax to be under.
The company's effective tax for the gain would be under the company's effective tax rate of 25%.
Okay, and we'd get kind of more color on that over the next quarter Mark.
Absolutely, Okay, and then Tom does this.
Potentially hint to us that there may be more portfolio moves.
Over the next year or so.
We are we're on a frequent a review of our portfolio always as you can imagine with the size of our business diversify our business Raleigh.
Evaluating a fit and we will continue to do that and this is part of a normal course of Oh portfolio analysis review that we do on an ongoing basis.
Okay, that's fine I'll turn it over.
Your next question comes from the line of Brian Maguire Your line is open.
Hey, good morning, everybody.
Tom just a question on the volume outlook I think I heard you say that you think you can get to positive volumes by the March 2020 quarter and then for HHS.
By the second half of fiscal 20, if I heard you right. Just wondering what gives you confidence in that I know you mentioned some.
The progress in the pipeline 120 million of new revenue, but.
We've we've heard the story before about get into positive volumes and there always seems to be some offsets to that so.
You know for the sake of service.
Do you think you can really get there or is this.
Yes, just the case of plugging in the new revenue and not assuming any further declines in the base business.
Fair question, the $120 million pipeline, if you consider our normal churn rate on top of the $120 million of pipe inside of engineered materials that get in and of itself to the low single digit growth rate inside of engineered materials inside of HHS. We have spoken over the last several quarters the need for the business to pivot to the higher growth regions as well as product lines and categories to deliver more consistent growth.
We committed that over the last several quarters, we've talked about the long cycle to ultimately deploy that capital is coming to fruition I am pleased to say that we are already in the phases right now a pre qualification on our our five expansion in China.
That will be sold out by the end of 2020.
The Miltec technology that we commercialize in April of 2019, we are already 60% sold out on that asset. So the actions that we've taken relative to capital deployment relative to resource allocation to pivot the portfolio.
We are on track and on schedule as we previously committed giving us confidence that we will deliver on that expectation.
Hi, just to switch gears RPC study.
Thoughts or update on the cadence of the the cost synergies.
How much what kind of run rate you expect it to be and by the end of 2020 or any.
Color on how much would be achieved in 2020.
I can't give you a specific color on on a sequencing of timing, but I will say the integration is progressing better than planned.
We are very impressed with the team inside of our PC.
I suggested on my prepared comments one of the one of the great opportunities for this combined.
Packaging powerhouses that it really has created now one of the world's largest dispensing solution providers to support healthcare and pharma businesses everything from dispensers inhalers doses control pumps.
That really gives us a lot of confidence.
We're pleased that during this process.
We have we've not disrupted customers, we've met with senior management and again we are.
We're more excited about this this transaction that we were that the day that we put a bid in to buy it and.
Very excited about the prospects going forward.
Okay, just last one for me and I apologize if I missed it any way you can give some color on the performance of the RPC business over the last couple of months or any.
LTM EBITDA.
Even pro forma for current currency rates or anything like that that you'd be able to provide.
Yes, sure brands will they were as you probably recall they run a six month reporting cycle as a UK traded company.
So their processes are centered around the six month cycle. So I think it was and maybe in Tom's prepared remarks, but March ended period, which was their fiscal year end, both top line volumes and.
EBITDA were up modestly from last LTM reported period, which would have been.
September 18, and more details to come out as the.
Audit is completed and filed by Barry here in the next couple of months.
Do you guys anticipate providing like historical.
Financials for it sometime before the next financial report.
Yes by the end of this quarter, we will have an 8-K filed with the audited financials included as well as pro forma statements Barry plus RPC.
Okay. Thanks very much.
Your next question comes from the line of Gunshots Panjabi Your line is open.
Thank you good morning, everyone.
I guess looking back at fiscal year 19, you know you started the year with implied EBITDA guidance of roughly 1.5 billion a it looks like you're tracking closer to 1.4 at this point can you can you first off confirm that and then also as it relates to your implied EBITDA guidance of 20 150 for 2020.
Can you disaggregate for us Mark what you're expecting for legacy Berry and also the volume growth expectation for RPC.
Okay. Thanks, Ghansham, yeah with respect to the first part of your question I think your numbers are generally pretty accurate obviously, the mess with respect to implied EBIT da would be centered around weakness in volume, which has led to a miss relative to volume or excuse me price cost that Tom referenced.
Not only from a pastor perspective, but also.
Negative overhead carry in our facilities from a weaker than expected volumes predominantly in our engineered materials business.
And then I'm sorry, what was the second part of your <unk> and by the way I should add to that that you know in spite of that weakness we remain committed to achieving our cash flow objective as we have every year as a public company and I apologize gone from what was the second part of your question.
It was on legacy Berry assumption for EBITDA for 2020 also RPC volume growth.
Got you Okay. So we have.
I think maybe an earlier question.
We have some modest.
Pressure in engineered materials and HHS built into our guidance with respect to earnings in the first half of the year as we reach an inflection in the back half.
And volumes overall I would say you know as you know the business is relatively flat and so our typical assumption going into the year as flat volumes with again some pressure in the beginning part of the year Inflecting in the back half.
Okay and then just my second question, maybe for Tom on consumer packaging can you just give us a better sense of growth by the major sub categories for the segment where are we in the share gain phase specific to your new products and argued that kind of thinking about the next a next few quarters as we cycle into 2020. Thanks so much.
Thank God, we continue to believe the consumer packaging will continue to deliver a low single digit growth just that it demonstrated here the better than last year. So the division continues to focus on areas that way, which we can ultimately innovate clearly the polypropylene drink Cup. You know was a it was a great opportunity for us as well as led technology.
There's a tremendous amount of opportunity right now in replicating the success that we've had in foodservice onto our containers as well as our closures business the demand for child resistant packaging, especially around emerging markets like the candidates space both in terms of dry goods as well as liquid form.
Continues to create a great opportunity for us to piggyback on our know how and technology the demand for fresh food packaging continues to be real and visible.
Their efforts underway in terms of pod containers around child safety and resistance.
So yes, we feel very bullish and the focus is really around innovating and innovating on to create differentiation meeting an unmet customer need just as we've done in just as we've done in the foodservice space. So we feel really bullish about that I think clearly was on Mark's leadership, having ran consumer packaging North America now running consumer pack to international I think it allows us to take that exact same strategy to the teams at RPC on and.
Begin that momentum as quickly as possible on top of a business that has been a growth business.
In throughout Europe . So.
Bullish about consumer packaging and the opportunities in front of us.
Thanks, Tom.
Yes.
Your next question comes from the line of Anthony Pettinari. Your line is open.
Good morning.
Just just following up on Brian's question, you've owned RPC for a month now is it possible to say how organic volumes have been in that month versus maybe what they saw in the last 12 months I guess, specifically in Europe or other producers have seen some softness and then I guess just generally as Europe has gone from maybe 10% of the you know Barry to over 35% post RPC.
Have you incorporated some conservatism around the European economy over next 12 months in terms of the 2020 guidance.
Yes, let me first speak to the guidance in terms of the European economy, clearly in the late stages of.
Robust growth cycle, we have been conservative in terms of our forecasting inside the base, but I'll I'll remind everybody were heavily over weighted towards the consumer side of the business more than 65 plus percent of that portfolio is tied to the consumer so is typically less cyclical, but but clearly we've accounted for some potential headwinds in demand overall into 2020.
Okay, and so the performance of the business over the last month has been sort of in line with expectations.
Sorry, Brian what was the question is with respect and we were so.
As I mentioned volumes sales and earnings were up for the most recent reported period, we can't comment beyond March as they were on a six month reporting cycle.
And their processes or not.
Established to create.
Reporting.
Outside of that six month cycle, we're working on improving that obviously, one berry's quarterly reporting cycle.
Okay got it and then just separately over the past year, you've seen a lot of cost increases on the non resin side.
Category, such as freight I know that recovering those costs can take longer than the been the resin costs are there opportunities for non resin price increases and just as you look at the past year sort of how would you judge the effectiveness of recovering.
I guess, maybe 15, 20% of Cogs that outside of resin.
Including the free piece.
Anytime you have generally weaker markets it creates more competitive pressures inside your business and it definitely create.
Headwind, if you will towards offsetting inflation with price, we remain committed to find a way to extract and find value and in circumstances, where we are not meeting our expectation in terms of cost recovery, we will focus on variablize, our cost structure deploying resources around.
Innovation and cost reduction leveraging fixed segment throughout our throughout our business.
Okay. That's helpful I'll turn it over.
Your next question comes from the line of George Staphos. Your line is open.
Hi, everyone. Thanks for the details I want to go through a few questions here Weve talk directionally about.
You know as a guide for 2020 relative to.
Yes, what we should know from prior forecasts.
When we look at the gotten it wasn't guidance, but the analysis you provided last quarter, which was kind of a hybrid $2.178 billion of EBITDA for Berry and RPC on an LTM basis from September .
We know bear RPC has been growing you said that.
That figure the 2.178 did not have synergies in it presumably the 215, though that you are guiding for 20 has some synergies you lose a little bit with seal for life is there any way you can bridge a bit further for us the old if you will EBITDA to the guidance for 215 BOE, how much is pressure from M and H Ns.
I know you said, you're not in a position on synergies, but a little bit more color would be helpful. Just to figure out what's going on beneath the surface and then I had a couple of follow ons.
Yes.
Great. Thank you very well.
Once again.
I had no numbers in there, though mark so that's what I'm, what kind on you guys for.
Yeah, let's see I think you've got the right I think you can look at the run rate that we're operating at.
Engineered materials in agent has and probably get pretty close to what our assumption is in 2020.
Because again, we've got some year over year headwinds to still laugh, but do expect to.
Bottomed and will improve sequentially going forward.
What I would look at that.
So those businesses.
Okay.
Do you think we've seen bottom.
I mean look we're not going hold you to this it's obviously hard running any business. We're just analyst, but do you think you've hit bottom and M&A generics as of the quarter that just passed or is the.
Fiscal fourth quarter going to be the bottom and then from there you are going to see sequential improvement towards the March and then June quarter inflection points in 2020.
Yes, I do believe that in that.
There is some modest seasonality I guess, you would have to consider with the December quarter, our fiscal Q1 being.
Our weakest quarter, it's not right Matt.
I would also consider seasonality when you think about that.
Okay. My last two real quickly.
It sounds like consumer is doing well for you Tom.
You're getting the volume growth you're talking about innovation, you're getting things qualified for next year. That's all good.
Depreciation was adjusted lower can you remind us why you are seeing that effect and consumer win fundamentally would seem like the values on assets would be higher because you are seeing good performance there.
And then.
Just quickly what is the incremental assumption agreement that you call out.
In the footnotes related to the financing that you probably mentioned in the past I missed but just wanted some clarification. Thanks guys. Good luck in the quarter.
The incremental assumption agreement must just be language there is nothing.
There is nothing different there must just be language in the I'm not sure where you pick that up.
Moving on you.
It is it's normal debt that we issued as senior term loans in the bank market as well as some bonds into the high yield market, but theres no nothing unusual there George So we can we can talk offline maybe about the wording that was okay.
You're looking at it was the first for your question sorry.
Depreciation.
Consumer is doing great, but depreciation is coming down so what's the disconnect. There. Thank you.
Yes, no look we continue to work to become more efficient with our capital deployment.
Trying to purchase more flexible assets.
As things.
As there is product turned things that occurred to so that we can utilize assets to make other products I think the business continues to find opportunities and ways to improve that I'm confident that with the acquisition and combination from RPC, we will find additional opportunities in fact.
Just one month than we've already identified a couple of opportunities where independently.
The companies would have had capital deployment that had been of weighted as a result of the combination. So I would say continued improvements relative to deployment of capital.
Within the business as we've been able to achieve the growth rates and actually spend less than our depreciation. So I think it's just a function of depreciation catching up with that more efficient capital deployment and in general relative to the converting technology that we used throughout the company now this global platform has given us unique opportunity to.
Share best practices, and ultimately partner with vendors and converting company that ultimately it will bring the greatest value for Barry as Mark said.
We continue to be focused on on aligning the businesses versus the loan asset mix as possible.
Even given us the opportunity to from business to business be seamlessly with these and need for incremental capital and.
Feel very good about that opportunity is going to play out in the coming.
Quarters and years.
Understood. Thank you very much guys.
Your next question comes from the line of Andrew Lane Rodriguez. Your line is open.
Thank you. Good morning, guys. Just one quick one on health and hygiene, if I'm looking on slide number eight <unk> and I'm trying to figure out like the volume impact on EBITDA may last quarter. It was.
<unk> million.
And this quarter, it's 11 million and volume is down almost the same amount for both quarters like 6% like why such a drastic swing in the volume impact on EBITDA.
Yeah, So last quarter, we still had.
To lap the acquisition that we made of CLO Pat a there was a year ago. When we lap that this quarter so last quarter the volume impact was.
Hi, or when you exclude the acquisition impact.
Oh, the full pay transaction.
So apples to apples it would have been similar.
Okay. Thanks for the clarification and <unk> on price declines that we've seen in E M and.
Health and hygiene those place jaws.
Low to have lower cost ways or something.
Depo going on in terms of trying to be more competitive to recoup our lost market share.
Indicates a h. analysis.
It's definitely predominantly pass through of lower resin.
In engineered materials is a combination of pass through of resin as well as there's more transactional business.
And that particular division and so you're competing it at market prices on a daily basis and that transactional portion of the business, but in both cases the majority of it still remains the pass through of lower plastic resin costs, which is about half of our cost structure with those two businesses.
Actually having a slightly higher component of RASM of the of the total.
Okay, and and also in E.M., when you've talked about like we're getting some of the market share that you lost some of the business. How exactly are you doing that to get that business back well those are customers that we had previously again demonstrated our ability to deliver on time every time with high quality product historically, they were used to our ability to innovate with those accounts and we're competing at the at market prices and leveraging our scale to drive incremental productivity improvements to help offset some of those headwinds, but we have clearly made a commitment inside that space to grow our business, we will bring to bear the leverage the size the scale of Berry to deliver on that as we committed.
Okay. Thank you very much.
Your next question comes from the line of Aravind Viswanathan. Your line is open.
Great. Thanks morning.
I was just curious.
If there are efforts to continue to broaden into other products and HHS outside of baby care looks like there are some structural weakness has been a persistent for a little while.
Maybe just update us on your efforts there. Thanks.
Hi.
The last several quarters, we've been we've been talking about first and foremost that yes, we're a leader in baby and enjoy the weakness that we're seeing is specifically in North America and that we've been making.
Efforts towards transitioning geographies with faster growth rate as well as markets that have faster growth rate higher growth rates, specifically adult incontinence feminine care.
We've had success in biopharmaceutical as well as higher end specialty application. So it continues to be ongoing.
There is making very good progress and as I said I'm very pleased that you know as we've committed as we get to the back half.
2020.
HHS turns positive supported by Apple investments.
That we've made in Asia that we've committed to previously as well as.
The portfolio of portfolio pivot around incontinence, as well as fem care and as I said, you know real happy that we are well underway with the pre qualifications and pre selling our new asset in China.
Collaboratively with our end customers and we feel comfortable that the value that asset, bringing us will allow us to be sold out.
By the end of 20.
Year end, so it's it's on track.
And and doing what we thought it was going to do and bringing the kind of value to our customers that they expect and that we expected. So really pleased with that pace again second half of 2020, we get positive.
Great. Thanks, and then when you think about the the quarterly performance and your and your future free cash flow guidance for 2020.
If you were to characterize this quarter's performance I guess would you would you would you indicate that you kind of feel that you're at a bottom.
On on EBITDA and free cash on an on an annualized basis.
And if thats the case.
What gives you that that view thanks.
Yes listen we are we're similarly disappointed with results. So we're pleased with the progress we're making against some key deliverables, specifically share recovery specifically activity in our portfolio. The company has a long track record and history.
Delivering free cash flow improvement year on year, we've got a tremendous number of levers that we can pull.
As a company and an organization.
And we will continue to pivot and and deliver on whatever one's grown to expect certainly around free cash generation the organization as a whole.
Top to bottom is continue to be laser focused around demonstrate in the marketplace, our ability to grow and the acquisition of RPC gives us an incredibly unique platform.
To draw from.
To deliver global value delivery in the markets that we serve as well as now.
An entirely new region World in addition to emerging markets that.
We will be transformational for the corporation.
Your next question comes from the line of.
Tyler Langton your line is open.
Hi, good morning, Telemark. Thanks.
I had a question on on cost recovery knows her previously you mentioned that in fiscal 2018, you sort of had 100 million of cost that you couldn't pass through and thought you could sort of get roughly half of that back in 19 and the other half 20.
My guess is that still hold and <unk>, you know sort of in relation to that I guess could you talk a little bit more about what's driving.
The negative price cost spread you know that we're seeing this quarter.
It's generally weaker markets generally weaker markets creates a more competitive pressures in those businesses, which puts pressure on pricing. So as I said to run counter to that you know when you have weaker demand overall makes it more difficult to to push price for that that's the primary driver. We continue to focus on ways to cost reduce across the company as a whole and leverage the the capital we deployed not only all round growth innovation, but also automation and cost reduction or to support our level of competitiveness as a as a low cost producer.
Okay. Thanks, and then just Mark I guess I think you guided to cash taxes of I think 160 million for 20.
I think previously it was a $150 million to stand alone for Berry pre RPC. So just does that 160 million is how sustainable is that as a as a cash tax rate.
Yes, there's no unusual items in the 2020 guidance so that is viewed as a.
Normalized effective rate in the mid mid 20 for Barry on a combined basis, including RPC.
Okay and then just final question on the Capex as sort of the 600 million I think you sort of had done sort of 300 million sorry, 350 million. Historically I think ARPC was closer to 300 million is that 600 million.
A decent number to use going forward or could there be sort of a potential upside or downside to that.
[noise], Yeah, we view that as a normalized number certainly to the extent.
Demand.
Creates opportunities to deploy more capital to create value, we'll look at that and the converse is also true to the extent the man.
Weaker Oh, that's certainly a lever that we would pull and reduce that capital spend so that number I would say as normal and we think we can achieve low single digit growth.
On both topline and bottom line with that capital, but also gives us plus there's there's also flex in that number to the extent that market.
Factors change.
Got it great. Thanks, so much.
Your next question comes from the line of Neel Kumar.
Right is open.
Hi in EM you now that you have largely completed the material qualification activities can you talk about what type of benefit we should expect to see from this in terms of your lightweighting ability and resin flexibility.
Well, it's a it's just part of our ongoing portfolio that kind of flexibility that we're trying to embed in the company gives us opportunities during periods of raw material inflation to qualify Austin and raw materials to minimize the impact in terms of cost gives us the opportunity to bring value delivery on customers were often really interested in lightweighting and product just to tie in with their sustainability efforts and that will continue to play out as part of an overall a portfolio upgrade for us that we would do as part of an ongoing component of our business, but we're pleased with that because again when we can deliver 2% weight reduction in some instances are tied to formulation changes. It's a it's clearly advantageous to our end customers and provide them an opportunity to address their sustainability goals and objectives and that ultimately should lead to a greater market and market penetration and share gain for us for our company, which were which we are committed to maintaining and growing our share.
And then just another follow up on the Capex I'm, just seems to be some embedded capex synergies.
In the guidance of 600 million versus it seems to be about $650 million and combined LTM Capex can you just talk about where the synergies are coming from and do you expect those reductions to have any impact on some of the growth projects in the pipeline for RPC.
No I I do not expect it to have any impact on the growth prospects for our PC, where we remain completely committed towards applying our capital resources towards a stable markets as we can find with the greatest opportunities to create innovation generate organic growth and we remain committed to doing that.
Clearly any type of synergies in terms of capex between the two companies simply comes from scale and frankly, the elimination of need for certain investments because we may already have that capability inside the system. We were very excited I think week, one to identify a couple opportunities where capex was going to be deployed a and it was ultimately no longer needed because we identified that capacity inside the system lot of work going on right now relative to that.
And we'll continue that but it's a it's a great source for us for synergy realization that we're very comfortable with.
Thanks.
Your next question comes from the line of Adam Josephson. Your line is open.
Thanks, Good morning, everyone.
Mark just one last question on your EBITDA the implied EBITDA EBITDA guidance for next year. So based on the last 8-K, I think Rpcs TTM EBITDA was about 785, assuming the synergies are call. It 50 ish you split them across the next three years and that assuming you're divesting $25 million or so of EBITDA.
From seal for life that implies about legacy Berry EBITDA next year, and the low one threes, which seems to fit with what you were saying about run rating.
When asked and and engineered from this past quarter, Mark does that sound about right to you the low one threes for legacy Berry next year.
I mean, there were some we're not we're not going to breakout specifics.
That level of detail I'd say there were some differences in some of your numbers again Directionally I think they are the right way.
But we're not going to we're not prepared to go into though will detail. This one on the call.
Okay and just.
Just a bigger picture picture question, Tom So the last seven quarters. Your organic EBITDA has declined I know last year was primarily cost inflation, but it was also volume weakness. This year has been volume weakness and I just I just wonder if there is something structural going on because your organic EBITDA was up pretty nicely in 16, and 17, and it's been down ever sense and again, it's been owing to a variety of factors, but is there something that's changed in the last couple of years relative to where the company was before that.
We over our history of made numerous decisions around price volume trade offs throughout our history on the company is laser focused and 100% committed on being able to generate organic growth, we're going to leverage our scale. Our manufacturing know how material science application development to deliver on that expectation that we have internally to deliver on our ability to grow the company, we're going to compete at market prices, we're going to compete at market prices and low cost producer, we're going to maintain and grow our share.
Thank you Tom.
There are no further questions at the moment you may continue.
I want to thank everybody for your time today on the call. We look forward to from the follow ups take care.
This concludes today's conference call you may now disconnect.