Berry Global Group - Q2 2021
May 3, 2021
Transcript
Speaker 0
Good day and thank you for standing by. Welcome to the Berry Global Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Mr. Stilwell. Please go ahead.
Speaker 1
Thank you and good morning everyone. Welcome to Berry's 2nd fiscal quarter 2021 earnings call. Throughout this call, we will refer to the 2nd fiscal quarter as the March
Speaker 2
in the 2020 one quarters.
Speaker 1
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 atberryglobal.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. 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 With a brief follow-up and then fall back into a queue for any additional questions.
As referenced on Slide 2, during this call, 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 and financial measures are available in our earnings release and investor presentation on our website. 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 impacting the company and therefore involve a number of uncertainties and risks, including but not limited to those described in our earnings release, annual report on Form 10 ks
Speaker 2
and other filings with the
Speaker 1
SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward looking statements. Now, I'd like to turn
Speaker 2
the call over to Berry's CEO,
Speaker 3
Tom Salmon. Thank you, Dustin. Welcome, everyone, and thank you for being with us today. First, let me start with our number one core value on Slide 3, and that is safety. We believe safety doesn't happen by accident and everything we do at Berry starts with safety in mind.
As you can see on the slide, We have an ongoing commitment to identifying, managing and eliminating risk. We are proud of our industry leadership and safety by keeping are team members safe as evidenced by our OSHA incident rate of 1 at the end of 2020, significantly better than the industry average of just below 4. Our team's emphasis on working safely and servicing our customers has ensured an uninterrupted supply of the essential products we produce. This work has resulted in our very strong start to the first half of our fiscal year and the numbers speak for themselves. For us, Environmental, social and governance are not just words on a page, but are leading principles in everything we do.
These principles fuel our commitment to caring not only for the communities where we have operations, but to ensuring that we are providing better have a great opportunity in bringing innovations to provide multiple lives to natural resources. In alignment with this, we recently became the 1st North American headquartered plastics Packaging converter to have a 1.5 degree Celsius target validated by the science based target initiative. This is possible Because we have reduced our market based greenhouse gas emissions by 19% since our base period in 2016, Which means we are on our target to achieve our impact 2025 goal of 25% reduction in emissions intensity. Plastics in spaces where we participate provides an advantaged carbon footprint and our teams are working continuously to reduce the material used to help further our value chain partners to achieve their Scope 3 greenhouse gas reduction targets. More than 85% of the resin we produce or procure for our fast moving consumer goods packaging products are made for recycled or renewable materials or recyclable at the end of their use, Which is well on our way to our goal of 100 percent by 2025.
Just recently, we announced another partnership, this one with Borealis, providing us to now over £600,000,000 annually of post consumer recycled content. Moving on to Slide 4, are participating in the Q1 of 2019. Strong momentum that the team has driven over the past several years delivered record results for any quarter in the company's history for these respective metrics. The diversity of our portfolio across Various end markets and regions continue to provide the consistency and dependability we've demonstrated for decades. Our top strategic priorities remain the same, consistently growing organic volumes and improving our balance sheet.
In In the first half of fiscal twenty twenty one, we are off to an exceptional start in achieving these goals. Organic volume growth came in at 5% for the quarter and 6 percent for the first half with all four segments again delivering strong volumes. Stay at home food, health and wellness, along with the personal protective products continue to see solid growth in the quarter. Away from home and certain other markets, while still facing some softness, are seeing improvements. Additionally, our strong results on earnings and stable free cash flow allowed us to reduce our We are well on our way to meeting our objective of getting leverage below 4 times.
After we achieve this target, we anticipate operating our company while maintaining our leverage in a range of 3 times to 3.9 times on a go forward basis. We believe the continued execution of growing organic volumes and strength in our balance sheet will deliver significant shareholder value. And lastly, as most of you are aware, from the beginning of our fiscal year through February, we saw significant cost increases in our primary raw material That being read, additionally, we've experienced inflation in other raw materials and other costs such as corrugate and freight. With the strong volume growth momentum in the businesses, along with our efforts to improve the timing lag of pass through of inflation in our customer contracts, We've seen good progress towards this objective and continue to actively pass these costs through. Our updated guidance reflects This progress relative to our expectations on inflation recovery.
It includes a modest incremental impact from inflation over the next few quarters, which is offset with an increase in mix benefit primarily from our HH and S segment along with a positive impact from currency. As a result, we're increasing our organic volume growth assumption from 4% to now 5% and increasing our fiscal year operating EBITDA guidance $2,250,000,000 which is a $50,000,000 improvement from the midpoint of our previous range. We began fiscal 2021 with confidence in our ability to grow organically as we've demonstrated over the past year, And I believe we are well positioned to continue to see long term, predictable and sustainable growth with customer linked capital investments that target continued expansion into both faster growing segments and emerging markets. Now I'll turn the call over to Mark, who will review Berry's financial results in detail. Mark?
Speaker 4
Thank you, Tom. I would like
Speaker 2
to refer you to Slide 5 now. For the 2nd fiscal quarter, reported sales were up over are in the range of 13% to a record $3,400,000,000 The quarter revenue included organic volume growth of 5%, including all four segments showing positive organic volume growth. As Tom noted, demand for our products remains strong in certain markets, which had previously experienced pandemic headwinds have continued to improve. The quarter also included higher selling prices from the pass through of cost inflation have increased revenue by 6%, along with a 3% increase related to foreign currency translation. These increases were partially offset by the sale of the U.
S. Flexible packaging converting business that closed at the end of November. From an earnings perspective, our operating EBITDA increased by 9% to a quarterly record of $590,000,000 Driven by the 5% volume growth, product mix and realized cost synergies. Adjusted earnings per share increased by 34% Teams focus on organic growth opportunities and driving cost productivity, while managing the increased demand from our customers and the human resource challenges related to the pandemic. The results are yet another example, as you can see on slide 6, of our proven performance over many different economic As referenced on prior calls, we have consistently driven top tier results in key financial metrics, including 20% or more compounded annual growth rates for both free cash flow and adjusted earnings per share.
Now looking at the quarterly performance of each of our 4 operating segments on Slide 7. For the quarter, our Consumer Packaging International division delivered 9% improvement in revenue, including a 7% increase related to foreign currency and a 4% increase in organic volumes. Regionally, we had 2% volume growth in developed markets such as Western Europe with stronger growth in emerging markets such as China and India. From a market perspective, our products serving at home food continue to generate strong performance, while our foodservice business will continue to improve As countries reopen, industrial and automotive markets, which were negatively impacted at the start of the pandemic, continue to improve and generated strong year over year growth. The CPI team produced an impressive 12% improvement in EBITDA, primarily driven by the have a strong build and momentum in the business.
Net sales in our Consumer Packaging North America division were up 15% $731,000,000 primarily as a result of higher selling prices of 9% from the pass through inflation And a 5% increase in organic volumes. The organic volume growth in the quarter was primarily attributed to continued strength in our core consumer businesses from products such as closures, bottles and containers. Division primarily driven by their long term strategy of focusing on advantaged products and targeted markets with strong customer linkage. We are very pleased with this achievement and are also encouraged by their continued strong momentum in pipeline. EBITDA was $133,000,000 the prior year quarter as strong volumes and cost synergies were offset by the timing lag of pass through inflation.
Our Health, Hygiene and Specialties division delivered sales of $781,000,000 The 21% increase included higher selling prices of 13% from the past year of inflation and organic volume growth of 8%, including growth in all four regions globally. The organic volume growth in the quarter was primarily attributed to organic growth investments Along with continued demand for healthcare apparel, premium hygiene and specialty products such as disinfecting wipes, fabric care, Water and air filtration as well as a recovery in the building and construction market. EBITDA increased by $44,000,000,000 or 39%, 25,000,000 in EBITDA from favorable product mix associated with pending our assets to produce products related to COVID-nineteen protection. Sales for our Engineering and Sales division were 15% higher on a comparable basis at $798,000,000 The increase was primarily attributed to higher selling prices of 9% from the pass through of inflation along with organic volume growth of 3%. Volume growth was primarily driven by our consumer facing products and some of our industrial businesses along with the modest recovery of In certain markets that were negatively impacted by the pandemic, such as our can liner business that serves away from home waste disposal.
EBITDA was $114,000,000 in the quarter, which was $7,000,000 below the prior year on a comparable basis. This decrease is primarily a result of a lag in passing through cost inflation and the deep freeze in the southern part of the United States That impacted some of our facilities in this division. Next on Slide 8, free cash flow for the last four quarters ended March 21 totaled $951,000,000 Our free cash flow continues to be utilized to reduce our outstanding debt And we have paid down over $1,300,000,000 over the past 6 quarters, which has lowered our annual interest expense and reduced our debt leverage to now 4 times. We remain committed to maintaining a strong balance sheet and we believe our consistently increasing and dependable cash flow will provide us the opportunity to further improve our strong balance sheet as we have demonstrated historically. We also continue to evaluate opportunities to reduce our financing costs and extend our maturity profile.
During the quarter, we issued Additional sets of investment grade rated first priority senior secured notes, dollars 800,000,000 with a fixed rate of 0.95 percent And an additional $775,000,000 with a fixed rate of 1.57%. We also refinanced our Term loans lowering their spread by 25 basis points. We used the proceeds of the issuance and refinancing to placed existing variable rate term loans, which will reduce our interest expense by $15,000,000 annually. The combination of debt pay down, earnings growth, interest rate reductions and refinancing activity has improved our interest coverage ratio over the last year and a half From 4.7 times to now 6.5 times. Next, our updated fiscal 2021 operating EBITDA and free cash flow guidance is shown on slide 9.
Given our continued strength through the first half of the year and stable demand outlook across our business, We are increasing our organic volume growth assumption for fiscal 2021 to now 5%, including low single digit growth in the back half of this fiscal year, are building on last year's strong performance, all supported by our robust and growing pipeline, increased level of capital expenditures And the positive trends and momentum we are seeing in each of our businesses. Given the continued strength in our pipeline, we are raising our capital expenditure spending expectation by $50,000,000 to support incremental growth projects. Additionally, we are increasing our operating EBITDA by $50,000,000 From the midpoint of our previous guidance provided in February to $2,250,000,000 We have included a negative impact from inflation and the associated timing lag in passing through inflationary costs. We expect the majority of the impact from the recent unprecedented increases in resin prices in the United States to impact our results in the June 2021 quarter. We expect the slag will be largely offset in the June quarter from continued favorable product mix.
The guidance assumes that both of these factors dissipate in the September quarter. And as a result, we expect operating EBITDA in the back half of the year to We split relatively evenly between the June September quarters and will be similar with the second half prior year results When adjusted for our recent divestitures and the COVID-nineteen related mix benefits. We are proud of the continued strong execution by our team As the unprecedented resin inflation we have experienced has been more than offset by volume growth and productivity. Our fiscal 2021 free cash flow guidance remains in the range of $875,000,000 to $975,000,000 The range of free cash flow includes $1,575,000,000 to $1,675,000,000 of cash from operations, are partially offset by capital expenditures of $700,000,000 We also continue to anticipate further strengthening our balance sheet and expect to be in our targeted range are by the end of fiscal 2021. This concludes my financial review, and I'll turn it back to Tom.
Speaker 3
Thank you, Mark. Before we close our prepared remarks today, I want to touch on what we've been focused on and what's driving our strong results. We continue to invest in each of our businesses to build and maintain our world class low cost manufacturing base with an emphasis on key growth markets and regions. Overall, the diversity of our end markets and product offerings as well as the essential nature and demand consistency of our products have been core to the underlying performance of the business. I'm very confident in our team's ability to meet our near and long term expectations and commitments to provide sustainable, profitable growth.
We have multiple drivers of organic volume growth shown on slide 11 and 12. Are focused on both faster growth end markets and emerging markets along with sustainability led packaging. As we highlighted on our last earnings call regarding are going forward, will regularly showcase targeted products or markets we are focused on. We expect emerging markets to grow faster than advanced economies with increasing populations and the need for our protection products, And we will focus on megatrends previously discussed. This has allowed us to increase revenue in emerging markets from $100,000,000 in 2013 are now over $1,500,000,000 Furthermore, as you can see on Slide 12, we are continuing our support of circularity through our ability to manufacture Recyclable films and incorporate sustainable materials.
We recently announced a $70,000,000 investment to support our growth which will enhance our manufacturing capabilities for more use of recycled content and PHA resins supporting bioresin use. Berry along with many of our customers have dedicated sustainability goals, many of which specify the increased use of recycled materials. This investment will further enhance Berry's portfolio of fully recyclable, biodegradable or compostable film to support its customer needs. Berry is committed to remaining at the forefront of the innovation necessary to meet customer sustainability goals through these investments in the latest equipment, technologies, Advantage Field Development and Design for Circularity. As a global leader, we are driven to innovate, as you can see on Slide 13.
We've highlighted just a few of the amazing products we've designed and manufactured with sustainability in mind. On the top right, you can see our tethered closure offerings. Our CPI Group unveiled a range of closure designs that meet the European Union legislation requirements. These closures remain attached to the container throughout its use For ease of recycling, on the top left of the slide, we manufacture the J Cloth Plus wipe, the 1st and only contact clearance are currently certified biodegradable and compostable wipe. This wipe is produced with 100% biodegradable fibers and can be disposed of at any green recycling bin after use.
We remain steadfast in our commitment to lead and collaborate to drive innovation and acceptance of products targeted towards improving recyclability, Reuse and reduction of virgin plastics, all with the goal to promote a more circular economy. In summary, on slide 14, Building on our strong Q1, we delivered outstanding results across all of our operating segments. We again have delivered on our strategic goals of drive organic growth and improving our balance sheet, all while setting financial records for any quarterly period for EBITDA, revenue and earnings per share. For the fiscal year to date, adjusted earnings per share has impressively increased 55% compared to the prior year to date, while operating Along with sustainable capacity to invest in long term steady growth, we are confident in our ability to consistently grow
Speaker 5
are in the low
Speaker 4
single digits through our customer linked capital
Speaker 3
investments that target continued expansion into both faster growing end markets and regions. Thank you for your continued interest in Berry. And at this time, Mark and I will be glad to answer any questions you may have.
Speaker 0
And your first question comes from Ghansham Panjabi with Baird.
Speaker 6
Yes. Hey, guys. Good morning. Congrats on the progress. Good morning.
So at the onset of COVID, you pointed towards a sort of a 60 five-thirty five led to the portfolio, advantage versus disadvantage, specific to COVID. What are we in the recovery curve specific to the 35% Relative to the pre COVID baseline, and are you starting to see any signs of the 65% moderating in context of many CPG companies pointing towards Slowing demand and I guess I'm referring to what you're specifically seeing for that 65% in 3Q as well?
Speaker 3
Thanks Ghansham. Yes, we in our guidance, we're basically assuming that the benefits of COVID basically over as of the June quarter. And I think if you look at this quarter, you can see the benefits of the diversity of our portfolio. All four businesses delivering positive growth, strong pipelines, enabling that growth coupled with the capital investments that we've been making Around the megatrends that we believe will sustain us well beyond the end of the pandemic, that being C. Butler:] Health and wellness, food safety, e commerce and sustainability trends.
So, all the continued investment we've been making, the pipeline is all tied around those D. Moriarty:] And I would say, in spite of what's going to be a difficult comp in the back half of the fiscal twenty For some of our businesses that had benefits relative to COVID, we still anticipate paid low single digit growth, driven by the overall diversification of the portfolio that we have, With strong expectations around Engineered Materials and CPI. So, feel real good about the outlook. We feel we've invested Accordingly to build this business around low single digit growth over the long haul and we feel very good about the outlook going forward.
Speaker 6
Great. And for my follow-up question on resin and your embedded outlook for the December or I guess for your 4Q, Can you just take us through what you're assuming from a resin trend line perspective? Are you assuming that resin plateaus and then you catch up on price cost by the Q4? Or are you actually assuming The resin moderates from current levels. And if so, can you baseline that against which sort of month we should think about, maybe February levels or March or Whatever else you're thinking at this point.
Thanks so much.
Speaker 3
Difficult to predict it on a by month basis, but we certainly believe we'll begin to see moderation. We're We're still going to have a headwind for the full year from a lag perspective. But I'd remind you, this was probably one of the most significant Impacts to the resin facilities in the Gulf Coast that we've seen in 35 plus years, The ability and the diversity of the portfolio to ultimately prevail given the strong growth that we had and the good work that our commercial organizations have have been done in terms of improving lag and pass through mechanisms, are strong advantages for the company going forward. We do expect moderation, and I would say that it's a speculation here, but The resin companies will probably need through May, June timeframe before we start seeing more normality going into the back half of the calendar year. Awesome.
Thanks so much.
Speaker 2
In terms of our guidance, Ghansham, it's Mark. Good morning. We haven't assumed that relative to our guidance. While Tom said that's Probably our best estimate at this point based on the information we have today, we've assumed resin being flat at current pricing for the balance of the year with With respect to our guidance.
Speaker 6
Okay. Very clear. Thank you.
Speaker 0
Your next question comes from Anthony Pettinari with Citi.
Speaker 7
Good morning.
Speaker 8
Regarding the increases you're seeing in non resin costs, I'm wondering if you could talk about Any pricing actions taken in the quarter to recover those? And to the extent that you're able if it's possible to give a sense of how much Progress you've made in shortening the lags for non resin based draws and other costs, maybe how long it historically took to pass those through and how much you've been able to shave off that time?
Speaker 2
Yes. I'd say It's ongoing, Anthony. So we continue to work with customers to pass through inflationary costs of all kinds, including Certainly, our primary raw material resin and shortening that lag, difficult to quantify per se, but it's an ongoing effort that Our commercial teams are working with customers to shorten the timing lag on pass through resin as well as put in other Index clauses, whether or not it's corrugate or freight, it's going to vary depending on the product and how significant of a cost component that is for that respective product, but I would characterize it as an ongoing effort. As we stated in our prepared comments, team's done a great job of continuing to work with customers to make sure they have product and pass on inflation as appropriate.
Speaker 3
I think, Mark, highlighting the most important part, we've really I made certain that we prioritized service and supply above all things else. And in areas that certain components of Where we've seen inflation weren't tied to the aspirator, deescalators. We began very early in showcasing those incremental costs And looking to have offsets. So the team really has done a very good job. I'm pleased with the sense of urgency that we've shown in terms of passing that through.
Speaker 8
Okay. That's helpful. And just following up on that, I mean, you indicated the timing lag is baked into the guidance. Is there an amount of cost that you won't get back in fiscal 2021 that you would expect to recover in fiscal 2022 or the beginning of fiscal 2022
Speaker 2
An amount of, I'll call it, under recovered inflation, both on resin and other raw materials. We have a variety. We're very diversified from a customer perspective. So it's, as I said, an ongoing initiative and there will certainly be a Ongoing effort to recover that inflation, but I apologize for being redundant. Again, our top priority is making sure customers are getting product And we're taking all the necessary actions, including incremental costs to get product to customers on time.
Speaker 8
Got it. That's helpful. I'll turn it over.
Speaker 0
Your next question comes from Mark Wilde with Bank of Montreal.
Speaker 9
Thanks. Good morning and congratulations on a good quarter.
Speaker 3
Thanks Mark.
Speaker 9
Tom, I wondered when we think about the volume growth this year, The 5%,
Speaker 3
how
Speaker 9
would you kind of parse that out between the portion you think is kind of COVID benefit related and then just kind of other organic growth? [SPEAKER THOMAS E.
Speaker 3
SALMON BERRY GLOBAL GROUP, INC.:] Salmon Berry Global Earnings Call.:] It's important to start with, We began this journey around investing around large megatrends early in 2018. We had targeted capital investment and looking for customer linkage along the way. That has proven beneficial And in each of our businesses, and as we stated at the beginning of the pandemic, each of the business had different nuances relative to portions of the portfolio may be Positively or negatively impacted. In aggregate for the company as a whole, it was neutral to slightly positive That's why we feel so good about the longer term prospects for us to continue to deliver that low single digit growth because this is a journey that We began all the way back in 2018. We showcased that we would begin the growth in 2020, which we did early, And then ultimately the pandemic hit.
So it ultimately just benefited some of those strategic investments that we made then. And we've continued to make throughout the pandemic. I think that's helping set Berry aside long term Because we've been able to continue to maintain that capital investment tied to specific customers, to increase our position geographically as well as around these bigger
Speaker 9
Yes, it's been quite a remarkable turnaround, Tom. If there were 2 or 3 Key things that you would point to as kind of the drivers to the better organic growth, what would they be?
Speaker 3
Targeted focus around specific organic growth where we have advantages and tie that growth and that investment to specific customers, Increase your geographic presence and geographies that ultimately are delivering higher growth rates, which we've done a very good job increasing That exposure to over $1,500,000,000 And ultimately, we were able to capitalize on a transformative acquisition That gave us truly global value delivery capability that is fully integrated and delivering exceptional promise for us
Speaker 9
Okay. That's good. I'll turn it over. Thanks, Tom.
Speaker 0
Your next question comes from Joshua Spector with UBS.
Speaker 4
Hi, guys. This is Lucas Beaumont on for Josh. I just wanted to touch on your Free cash flow bridge, if we could. Could you please walk us through your updated assumptions for working capital interest and the other line items Between EBITDA and free cash flow. Also just I was a little bit surprised that there wasn't more of a headwind from the higher ROAS On working capital for the outlook.
So if you can maybe just talk about the factors impacting your expectations there versus 3 months ago as well, That would be great. Thanks.
Speaker 2
Sure. Yeah, this is Mark. Good morning. Relative to free cash as we, I I think had in the release, our EBITDA outlook for the year is $2,250,000,000 CapEx, dollars 700,000,000 Our interest number is going to be in the $3.10 to $3.20 range depending on how the back half shakes out from a And then as you pointed out, we've got a use of working capital of about 100,000,000 And the outlook and the tax, our outlook there remains the same at about 25%. And those Get you down to that $875,000,000 to $975,000,000 of cash.
And with respect to the second part of your question, The team has done a great job on working capital. Quite honestly, part of it is just strong demand has driven our inventory down. We continue to find new ways to service customers with lower inventory levels. So, while none of us wanted to see The unfortunate weather events in the southern part of the United States, the reality is post that event, we're going to be a better company With respect to working capital management and service
Speaker 3
to our customers, so
Speaker 2
we haven't as a result of that, We haven't seen that negative impact because inventory levels are at lower levels.
Speaker 4
Great. Thanks. I just wanted to touch on bioplastics for 1, if we can. Our recent conversations with bioplastics Producers have indicated that, converters really only need minimal changes at the packaging level to use their products. So So I was just wondering, could you help explain to us, is that right?
And I guess, what part of your operations would need to change, if If changes are needed and what kind of an investment do you see is needed there to be able to apply those products?
Speaker 3
Yes. We've been fortunate to close new applications and bio based materials. We're trying to educate our end customers on Literally, the range of possibilities, whether it's mechanically recycled, whether it's bio based, whether it's molecular recycled materials. Each material, whether it's virgin or otherwise, they all have different melt viscosities and such requiring various degrees of tweaking. But to Large extent, there's not a significant amount of change required to run those materials.
And it's really all about presenting the future benefits to our end customers, so they can make an informed decision for their end customer. Some investments that we may choose to make in the future allows us to use a wider spectrum of materials To give us an opportunity to have a broader selection of materials at different cost and price points To create optimum blends and mixes. So, but all in all, yes, it's correct that it doesn't require significant amount of modification.
Speaker 4
Great. Thank you.
Speaker 0
Your next question comes from Neel Kumar with Morgan Stanley.
Speaker 10
Great. Thank you. In Consumer Packaging International, can you just break down the 4% volume improvement by end market? How did the trends look in the industrial business versus the grocery and more consumer oriented markets? And can you just also give us a sense of how that looks geographically?
Speaker 3
I'd say the following on CPI, I saw similar growth Growth positives in terms of food, household, healthcare being the primary drivers in CPI. Emerging market growth is very strong for us As well, they're further along in the recovery. No doubt about it. Much of Europe remains in the throes of the pandemic, and we've continued to see the strong in house and in home consumption Coupled with improving trends on the industrial side. So it's an improving position.
That team has done a really solid job and continue to innovate, continue to close new business, dispensing systems, trigger pumps, airless pumps and the likes have all been strong areas of for us coupled with the success that we've had around our sustainability leadership. That continues to be an area that with the investments that we've made For mechanically recycled material as well as the molecular recycled access that we have, we've made really strong progress in introducing specifically the Advanced Recycling material to our food based customers. We have over 27%, 2 7% of our overall food based customers Working on a specific project or already having committed to advanced recycling material As it continues to become more readily available. So really pleased with that progress inside that space. But as we wholly expect that we continue to see improvements.
At the opening, you'll see further industrial strength. But the trends that we've seen in our home consumption, we believe are going to be Very pleased with how that team has operated in a difficult environment. And again, the linkage to our global key accounts that, that Business has enabled us will provide growth opportunities for years to come.
Speaker 10
Great. That's helpful. And then in terms of just volumes, can you just give us a sense of how quarter to date trends are looking across the segments? And then, you talked about longer term volume expectations of low single digit growth. In H and S in particular, I was just wondering if you could just touch on your degree of confidence And volume growth can still be positive in 2022 despite lapping a couple of very strong growth and just potentially shifting to a more normalized environment.
Speaker 3
We've invested in each of our businesses to deliver low single digit growth. We remain That's actually committed in our ability to deliver that growth for the franchise. As you'll recall in our HH business, we made a Targeted pivot, to increase our position around heart service disinfectant wipes. We pivoted more premium hygiene, premium fem care and adult incontinence to give more balance to that portfolio coupled with better geographic presence In terms of developing regions of the world and we delivered on all of those. We're not going to we really can't comment on a current inter quarter type performance, but suffice to say, we took that into consideration when we gave our guidance, increasing the full year outlook to 5%.
Speaker 0
Your next question comes from Arun Viswanathan with RBC Capital.
Speaker 11
Great. Thanks for taking my question. I'm just curious, you've brought leverage down to a pretty Favorable level here and it sounds like you're continuing to focus on that and maybe get into 3 to 3.9 range over the next year or so. Maybe you can just kind of reiterate your priorities for cash use at this point. Would you consider is the Board considering a dividend?
And then maybe you could also comment on potential for share buyback? Thanks.
Speaker 3
Yes. The primary strategic objectives for the business continue to be around investing and generating profit organic growth, Continuing the improvement of our balance sheet, as we said, we intend to stay within that targeted leverage range between 33 are in line with the company and we'll continue to use this cash flow that we're able to consistently generate on Further debt reduction, we will consider accretive bolt on acquisitions that allow us to stay inside that range as well as Returning cash to shareholders in the form of share repurchases and dividends. So we are in a very strong position, really driven by That cash flow generation that is, has been really become a cornerstone for the company.
Speaker 11
And where are you finding the most organic opportunities? I know you've made some investments in HH and S and in China as well. You've discussed dispensing systems, but I guess going forward, where are you finding the most opportunities and if By segment, maybe if you could help us out. Thanks.
Speaker 3
Well, I'd say really across the business, health and wellness continues to be Key category for us in each of our businesses and globally, the ability to ultimately support The growing e commerce trends, with noted investments we recently made inside our materials business, Food safety barrier properties that we can ultimately support inside of our food category continue to be areas of opportunity, both domestically and internationally. And sustainability, we clearly believe sustainability is A growth platform for us, and the level of investment that we've made both in terms of mechanical recycling as well as the access that we've enabled for the Molecular Recycled Materials is something we're really excited about and is soon becoming a really significant growth driver, we We believe for the company's organic growth goals.
Speaker 0
Your next question comes from Kyle White with Deutsche Bank.
Speaker 7
Hey, good morning. Thanks for taking the question. I apologize if I missed this. What What was the impact on the lag in the past year of resin during the quarter? And what does your guidance assume from this impact for the June quarter as well?
Speaker 2
Thanks, Kalia. We do continue to have a negative lag that we've experienced year to
Speaker 3
date and I expect that for the full year just due
Speaker 2
to the increases in resin prices. Our average remains about the We have about a net 1 month lag across the business. Each customer is different, but that's a general average For our business, about net 1 month lag on pass through.
Speaker 7
Yes. Are you putting a finer point in terms of the dollar amount impact You had in the quarter and then what you're expecting for fiscal 3Q on this?
Speaker 2
No. I mean, all those assumptions are embedded in our guidance, but we're not Specifically calling out how much of that relates to the timing lag on resin.
Speaker 7
Yes, fair enough. I wanted to go back to the bio based resin question. Are you truly agnostic to alternative resins in terms of being able to convert them? Or are there some limitations by grade? And do you have any competitive advantage when it comes to using alternative resins beyond your scale relative to some of the other packaging converters?
Or is it just a matter of being able to qualify that raw material? Thanks.
Speaker 3
Look, Berry has we've made strategic investments to make Certainly, we're well positioned to have our own internal capability on post consumer materials, coupled with the Access that we have to the molecular recycled materials is unique to Berry. I think clearly, we have made it a point To set ourselves apart with our end customers to give them both access to educate them on design With these materials in mind, coupled with the trade offs that they can consider, again, so they can make an informed decision, we believe one of our primary roles is to be demand creators. And with the fact that we've now secured 27% of our food customers in Europe adopting some advanced recycled or molecular recycled solutions It's really good progress given the infancy of that technology. So, we'll the markets play out as they will. I have a lot of confidence in our global sourcing organization, our material science know how, I believe it's unique, and we believe it will be
Speaker 7
Thank you. I'll turn it over. Good luck in the quarter. Thanks.
Speaker 0
Your next question comes from Adam Josephson with KeyBanc.
Speaker 12
Tom and Mark, good morning and congrats on a really good quarter again. Mark, forgive me if I missed this, But in terms of your second half volume expectation, can you give us a sense of what you're expecting out of the 4 segments? I'm asking Particularly about HH and Ash, just given how exceptionally difficult the comparisons are, obviously, over the last four quarters, the growth has been tremendous.
Speaker 2
Yes, yes. No worries, Adam. So we didn't give it by segment, but I would say, again, overall, we're expecting
Speaker 3
positive volumes, certainly.
Speaker 2
And as we said a And as we said a year ago, when we reported earnings, we had some businesses that I think Ghansham mentioned it earlier in the call, but we had some businesses that were disadvantaged related to the pandemic when it started and some were neutral to advantaged. And as we start lapping those comps, those things are going to reverse. So specifically, our Engineered Materials business had some headwinds early on in the pandemic. So we would expect them to be more favorable than the average Over the back half, same thing with CPI, with China and Europe, being some of our businesses there being really negatively impacted as they shut down almost a year ago now today. And the opposite is true with HHS specifically having a Brown:] Strong period during the pandemic.
So, in total, those things are going to net out just like they netted out a year ago, The opposite. It's just going to we're going to have some reversals, but we don't give specific numbers by segment. But in general, that's the way we see it playing out Over the
Speaker 3
rest of this year. I think, Adam, if you also consider during this time, the pace and consistency of the investments that we've continued to make in Businesses to support these long term growth objectives have been very clear.
Speaker 12
I appreciate that, Tom. And just back to the slide on the sustainable solutions in terms of PCR Okay. And compostable or biobased. Tom, can you just give us a sense of what percentage of your portfolio those represent and what your Goal is I just I asked just given the supply chain constraints and the price constraints really of PCR And then just some of the disadvantages of compostable and bio based versus just virgin resin. So just wondering how far you see the company going in those directions, just given whatever constraints there are, etcetera.
Speaker 3
Yes. That's I think, Ed, you brought up some interesting points. There's a lot of solutions out there that our end customers can choose from and around. Our goal and our objective is to educate them on the range of possibilities both in terms of performance, As well as feature benefits that can meet their needs, that's why we've been very holistic in our view, Clearly making large investments both in the Advanced Recycling as well as the mechanical recycling materials. But it's about 5% of our overall portfolio right now.
And we think that advanced recycling, the molecular recycling It's ultimately a virgin alternative. And that's why we're so excited about and believe that it has such hope To help address the plastic waste goals and objective of the industry and of our end users, the ability to take those materials that were Less easy to recycle, break them down to the original composition, repolymerize them and have virgin quality like material, Is why we've made such a huge foray into those materials. We believe on a large scale basis, it is one of those Solutions to address this worldwide problem. And there's not a resin company we do business with that in some form or the other is not making an Investment or R and D around this technology know how. We're really excited about it.
And that's it provides that Alternative that doesn't require a significant trade off, if you will. And that's why, we've made the proactive steps to give ourselves the Broadly known commercialization successes that we've noted in previous calls.
Speaker 12
Thanks a lot, Tom.
Speaker 0
Your next question comes from Gabe Hajde with Wells Fargo Securities.
Speaker 13
Good morning, Tom, Mark. I was curious, thinking about, I guess, looking at 2022s and I appreciate that we're not done with 2021 yet. But Just to make sure, I guess, directionally and if you can make any qualitative comments, do you have an $80,000,000 headwind kind of called out in your guide from Inflation and other, and I think you've talked about directionally a $20,000,000 to $25,000,000 Mix benefit primarily in HH and S kind of per quarter. So really kind of offsetting one another if I were to roll forward to 2022. Is there anything else that you would point us to whether it's under or over absorbed fixed overhead?
I appreciate we got to make our own assumption about volumes, but just anything out there that's kind of one time in nature that would make this year look Different than kind of going forward.
Speaker 2
So, I think, Gabe, that it's Mark. Good morning. That was well said. I think we're obviously continued to focus on driving organic volume growth and earnings growth across all our businesses. There's a number of things We're working on driving that.
But in terms of just really large numbers, I think those are The 2 largest numbers, recovery on inflation and then how much of this mix benefit dissipates and how long will it take if it ever dissipates.
Speaker 13
Okay. And then, I guess in the spirit of sustainability, the reduce, reuse, recycle, You didn't really used to have kind of larger format packaging and I'm thinking about the bigger containers that you acquired as part of RPC. Have you guys kind of explored increased usage of these larger format reusable containers, to the extent there's either a closed loop Nature to your manufacturing process and or dialogue with customers to implement more, like I said, some of these larger format
Speaker 3
Yes. It's a good question, Damon. We've announced previously some successes and some closed loop programs, specifically with Georgia Pacific. We're taking the best practices those initiatives and applying them to a broader part of our business. And it's growing in interest for sure, And the ability ultimately that it helps provide an identifiable recognizable source of those materials Even in instances where they may be reprocessed or repelletized is a real advantage for us.
So it is a growing component of the overall Sustainability strategy for our end users.
Speaker 6
Thank you. Good luck.
Speaker 10
Thanks, Gabe.
Speaker 0
Your next question comes from George Staphos with Bank of America Securities.
Speaker 5
Hi, everyone. This is Kashan Keeler sitting on behalf of George Staphos. Congrats on the quarter. I guess returning to these segments, what is the biggest source of volume and EBITDA increase in guidance from segment level?
Speaker 2
I would say broadly, it's been a recovery of the We flag as the industrial related businesses. So, the things that had headwinds at the start of the pandemic, the recovery in those businesses Rodney McMullen:] Stronger than we anticipated as the year started.
Speaker 5
Got it. That's helpful. And then I guess just turning to HHS, what's your utilization there? And then for what period of time would you be able to grow without having to spend more capital I'm in that business.
Speaker 1
Yes, we've got a as you
Speaker 2
can imagine, we have a lot of different products and assets. And so utilization Broadly, it's going to vary depending on the region and the asset. I would say we're generally pretty full In that business, in HH and S, we're adding capacity every quarter incremental machines are going in. We've got Several new meltblown lines going in across the world now. We've got some other film assets that are also being added as As well as non woven non melt blown, I mentioned those earlier, being added across the world each quarter.
Speaker 3
And what I would take from that is we're fortunate we're in a growing substrate with growing demand dynamics and we're supporting that as a leader, Not only domestically, but around the world. So, we're pleased that throughout the pandemic, again, we were able to continue to maintain that level of investment support our larger customers, with these customer linked solutions and why we feel very good strategically about Our ability to deliver over the long term that low single digit growth consistently and profitably.
Speaker 7
Thanks. Good luck in the quarter.
Speaker 3
Thank you.
Speaker 0
Your next question comes from Arthur Almeida with Goldman Sachs.
Speaker 14
Hi, good morning, Tom. Good morning, Mark.
Speaker 3
Good morning.
Speaker 14
I was hoping you could talk to us a little bit about how you achieved a positive price I imagine outside of the faster pass throughs on pricing And the mix component that you mentioned during your prepared remarks, you likely had some benefits from maybe lower cost inventory slowing through the P and L. But looking ahead, do you expect that to continue? It sounded like, Mark, in your prepared remarks, you would expect the favorable product mix To offset the majority of the impact from higher resin costs and what would that look like from a price cost perspective for the balance of the year?
Speaker 2
Yes. No, your comments are spot on. We do have a negative lag and so a negative price cost In 2 of our businesses, EM and CP and A, year over year, CPI was relatively neutral are benefited from some year over year cost synergies there. And really, the favorability has been driven in our HH and S business. We have pretty efficient pass throughs there and then the mix, as you pointed out and we had in our prepared comments, continues to benefit that segment.
And as we roll the year forward, we continue to see that lag in pass through of inflation. And as we mentioned, we've got that mix benefit for the June quarter. And then both those things kind of flip in the September quarter. We would expect that inflation recovery to improve in the September quarter as pass throughs start to kick in on our contracts And our assumption relative to our guidance is that those mix benefits start to back off in the September quarter. Obviously, we don't have a lot of great transparency to that as
Speaker 3
we sit here today, but that's a conservative outlook relative to our guidance.
Speaker 14
Right. And as you said, that would assume resin prices stay flat. So if they come down like a few Forecasters are predicting that would just be an added tailwind to earnings. And then I guess Final question is if you could add a little bit more color into what's driving the $25,000,000 mix benefit that's Incorporated in this guide, but wasn't included in the previous guide. Is that purely HH and S?
Was there a structural change there between Now and when we last spoke in February?
Speaker 2
Yes, just stronger healthcare, personal protection equipment products, Those lines that make those assets were making lower selling price items like furniture backing And other more industrial applications that generate a lower profitability. And our assumption prior had assumed that those mix benefits go away at the end of the March quarter. Obviously, as we sit here today, we've got better transparency to the current quarter. And so we view that mix benefit continuing in the current quarter. We'll continue to revisit that as I said earlier.
Speaker 3
Don't know how long that will last and how it will if at
Speaker 2
all, it will go away in the future.
Speaker 14
Perfect. Thank
Speaker 0
you. Your next question comes from Phil Ng with Jefferies.
Speaker 15
Hey, guys. Congrats on a strong quarter and thanks for squeezing me in. So cost aside on the non virgin alternatives, Is it technology where it needs to be to scale up? And from a performance standpoint, Tom, what are some of the limitations? And if we kind of look out the next, call it, 3 years, That's 5% of your portfolio where you're using non resin product.
Where do you see that going? And how does that kind of impact your profitability as well?
Speaker 3
There is not significant trade offs in the molecular recycled material. And they're most of the resin companies are in are looking to prove out the technology. We're partnering with them ultimately to Obviously, supply feedback as well as, educate our end customers about it, but I would expect to see a much larger percentage of our portfolio made up Of this substrate, as you said, it's probably in that next 2 to 3 year type timeframe before that happens. But the prospects For large scale use to be a cornerstone of our supply chain is very high in my view at this stage. I have no reason to believe otherwise.
And we're going to continue to push the demand and the education, which again, we believe is one of our primary roles.
Speaker 15
And Tom, you don't see that having a negative impact on your margin, maybe even actually a positive? Is that how we should think about it?
Speaker 3
Well, I'd say that's Part of the any kind of emerging technology as the demand increases, the level of cost competitiveness will continue to improve. So That's why we're trying to get out in front of this early. That's why we secured a significant A portion of the material that is that will become available between now 2025 so that we can get it introduced to the market as As quickly as possible. And we've had, as you see as you saw, just really good success with our food customers in Europe to this point. So, We'll continue to focus on that as an area of concentration.
Speaker 15
That's super exciting. And just one on the EM segment. I don't know if you guys call this out. How much of a hit was the winter storms? And with that headwind reversing, do you see EBITDA actually growing In fiscal 3Q and the full year on a year over year basis?
Thanks a lot guys.
Speaker 3
Yes. Listen, there's probably maybe less than a dozen plants, I guess, that were impacted by the polar vortex, but nonetheless, it had some impact on I could buy the polar vortex, but nonetheless, it had some impact on those plants and equipment. We were fortunate with the diversification of Facilities that we have, we can move that business from one site to the next, but they're back up and running, delivering the goods as we expect them to. We do anticipate again continued consistent growth inside our Engineered Materials business as Mark outlined Earlier, as you see an improvement in the economy, it had a it was one of the most negatively impacted, Given its industrial mix that will have some positive trends in the coming quarters.
Speaker 0
Your next question comes from Salvator Tiano with KeyBanc Global.
Speaker 4
Yes. Hi, guys. Thanks for taking my questions.
Speaker 16
The first one actually I want to understand a little bit on pricing, especially since as you mentioned HH and S was Actually delivered positive spread during the quarter, which was very exceptional. To what degree do you think some of Pricing may be coming, I guess, from strong demand and you can potentially hold to it and actually see some margin expansion in HH and S or Potentially in Engineered Materials and elsewhere versus what is purely pass through of higher costs.
Speaker 1
Yes. I mean, The team continues to do
Speaker 2
a good job again trying to optimize the assets that we have and sell our products where they provide the most value to the market. Again, the pandemic obviously has put increased focus on safety. People within sites certainly in the healthcare industry with both healthcare workers as well as patients and visitors. And we how long that trend towards nonwoven based products versus reusable, I think it's
Speaker 3
still TBD,
Speaker 2
but historically people have not reverted back. Once they make that transition to the SAFR product, they generally stay in it. But obviously, we're in an unusual time with the pandemic and we recognize that.
Speaker 16
Yes. Okay. Makes sense. The other thing I wanted to get an update is just on the HHMS. If you can provide A breakdown of revenues by the key end markets.
How does it look now when we look at diapers, wipes, masks and gowns versus how it looked For COVID and for the key markets, especially diapers, what are you seeing in terms of demand now and what's the outlook?
Speaker 2
Yes. I don't have the exact percentages in front of me, it's out there, but certainly the business has pivoted. Tom You know, called it out, I think, a couple of years ago, that we continue to invest in the faster growing areas, for nonwovens, adult incontinence, Healthcare, as we've mentioned, hygiene is still a very important category to us, baby care. We continue to try We don't compete in the most value added products in that space, the premium care product category. We continue to bring innovation to our customers are in that category across the world.
And so we're going to that's going to continue to be an important category for us going
Speaker 3
I think it's a much different business than it was when we first took it on. The teams made, I think, Really great forays into the growth component niches, specifically premium hygiene, premium fem care, Dalton Continence and then giving ourselves that same access in the fastest growing region in the world that being China, And we are now complementing that with a further healthcare investment to support healthcare are in that geography as well. So, not to mention the good work the teams have done with hard surface disinfectant wipes, Supporting our leadership position in North America and entering now, Europe with this innovative technology and it's really A new emerging market for us that we're excited about. All of these again are supported with Customer linkage, so we feel really good that the pivot of the portfolio is working as we desired. And as Mark said, The pandemic has, I think, given us good exposure to the benefit of disposable drapes and gowns.
And With the change in terms of elective surgeries coming post pandemic, that will be good news for HHS. But strategically, that business is well positioned Deliver those single digit growth.
Speaker 4
Okay. That's perfect. Thank you very much.
Speaker 0
Your next question is a follow-up question from George Staphos with Bank of America.
Speaker 17
Hi, everyone. Good morning. Joining late, just very quickly, I know we're late in the call. Tom, have you talked at all about dispensing, what the growth rate was in the quarter or what the annualized revenue is At the present time within the business. And then more broadly, if we think about how Berry looks post Reopening post COVID, obviously, you've gotten some very strong trends within HH and S to your credit and to your investment strategy over the last 4 to 6 quarters.
Is there any segment in your business right now where you'd expect volume trends to be negative once we're past COVID and we're back into the reopening. Why or why not? Thank you and good luck in the quarter.
Speaker 3
Yes. Closures Dispensing Solutions continues to be a targeted area For growth globally, it's close to a $2,000,000,000 business for us across the entire franchise. We continue to innovate in that category and continue to believe that we're going to be in an advantageous position given our global footprint and our ability to serve our customers Locally. And George, as you've noted, we have made targeted investments. We've been making those consistently over the last Several years all around the megatrends that we think will deliver consistent, predictable low single digit growth over the long term of all of our businesses.
They're all wired for growth in that regard, whether it's EM, CPI, CP and A or HHS. And really proud of the team, how they've executed, How they've maintained their focus, how they've been able to ultimately deploy these capital investments and execute innovation and new product closes During a difficult time when you didn't have the traditional means to close those types of businesses. So we feel really bullish about the outlook to deliver growth, delever the company, to use sustainability as a growth platform for our company and to take advantage of this global That's been able by the most recent largest strategic acquisition that we've done in our history to really provide At local value delivery capability to the major brands around the world.
Speaker 17
Tom, did you mention how quickly dispensing grew in the quarter?
Speaker 3
Listen, we appreciate very much everyone's interest in our results for the quarter and look forward to our next call. Thanks everybody.