Berry Global Group - Q2 2022
May 5, 2022
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to the Berry Global Earnings Call. At this time, all participants are in a listen only mode. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to your first speaker for today, Dustin Stowell.
Thank you. Please go ahead.
Speaker 1
Thank you, and good morning, everyone. Welcome to Berry's 2nd fiscal quarter 2022 earnings call. Throughout this call, We will refer to the 2nd fiscal quarter of the March 2022 quarter. Before we begin our call, I would like to mention that on our website, we have provided a slide presentation to help guide our 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, As referenced on Slide 2, 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 on 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 and other filings with the SEC. Therefore, the actual results of operations or financial condition of the company could differ materially from those expressed or implied in our forward looking statements. Now, I'd like to turn the call over to Berry's CEO, Tom Salmon.
Speaker 2
Thank you, Dustin. Welcome everyone and thank you for being with us today. I'd like to refer everyone to Slide 4 to the quarterly presentation materials. First, I'm pleased to report that we exceeded our adjusted earnings per share expectation for the quarter and delivered record net sales of $3,800,000,000 With organic volumes, EBITDA and free cash flow finishing in line with our expectations despite additional inflationary pressure and macroeconomic challenges, We are reaffirming both our adjusted earnings per share and free cash flow ranges for the full fiscal year. Additionally, we increased our cash return to shareholders as we repurchased $300,000,000 of shares or 4% of our outstanding Total shares in the quarter.
As we stated on our last call, we are committed to repurchasing at least $350,000,000 in fiscal 'twenty two And we've already achieved that threshold during the 1st two quarters. Given our top priority of driving shareholder value, we were fortunate To be able to repurchase our shares and take advantage of the attractive return opportunity at prevailing prices. If current valuations persist, We would expect to continue to repurchase shares at a similar pace in the back half of the fiscal year. We have approximately $700,000,000 remaining on our recent authorized $1,000,000,000 share repurchase program with the majority of our cash flow generated In our fiscal second half, next, we've seen continued inflation since our last earnings call. We are taking aggressive price action to offset these costs across our businesses.
While we continue to navigate through this dynamic operating environment, Our teams are executing exceptionally well. We continue to prioritize our customers and our scale and operational agility have enabled us service our customer demand and continue to focus on growth while also recovering higher input costs at the same time. And finally, our portfolio offering is unlike any other in our industry. Our ability to provide a one stop shop for our customers On a global basis, it's unique and differentiated. We are investing for the long term growth With a focus on faster growing product categories, growth oriented geographies and innovations that drive growth along with sustainability led opportunities For additional growth and value creation, we've made great strides towards our sustainability goals and we will continue to be ambitious with our commitments, which are being driven and led by the needs and demands of our extensive global customer base.
Next, Let me turn to our number one core value on Slide 5 and that is safety. Keeping all of our 47,000 teammates healthy and safe is our highest priority. We have an ongoing commitment to identifying, managing and minimizing safety risk. Our teams have continued to make great progress on safety despite A challenging environment. Our safety performance speaks for itself and as you can see has continued to improve.
We are very proud of our industry leadership delivering an OSHA incident rate below 1 for fiscal 2021, which is Significantly better than the industry average of 3.7. Our entire global team's emphasis on working safely and servicing our customers In a challenging environment, has made us a stronger and better company today, given us great optimism on the company's future success. As you can see on the slide, we have a strong commitment to ensuring that we are providing better opportunities and bringing innovation provide multiple lives to natural resources, while heading many initiatives with industry and external partners to improve circularity and our carbon footprint. And lastly, I'd be remiss not to mention how extremely proud I am of our company and employees who continue To generously assist refugees from Ukraine during this extremely volatile and challenging period, providing both shelter and financial support. Now, I'll turn the call to Mark, who will review Berry's financial results.
Mark?
Speaker 1
Thank you, Tom. Before we move ahead in the details for the quarter, please note that As with last quarter, we will compare the current period quarter to that of 2 years ago, the March 2020 quarter, as COVID had yet to meaningfully impact our businesses and we'll refer to this on a 2 year basis. We believe this comparison provides meaningful and useful information to investors About the longer term trends in our businesses and mitigates the impact of COVID, which has both benefited and negatively impacted portions of our business. I would like to refer everyone to Slide 6 now. For the quarter, we delivered record net sales of $3,800,000,000 Which is 12% higher than the prior year and up 31% on a 2 year basis.
Organic volumes were 2% lower than last You're in line with our expectations as we recorded 5% organic volume growth
Speaker 2
a year
Speaker 1
ago. When compared to the pre COVID levels on a 2 year basis, organic volumes were up 3%. From an earnings perspective, operating EBITDA was down 6% The prior year quarter as expected was the estimated $25,000,000 product mix benefit realized a year ago. On a 2 year basis, operating EBITDA increased 4% and adjusted earnings per share increased by 21%. These strong results over the past 2 years are driven by our focused strategy to invest organically in each of our businesses And strong execution in the face of significant cost increases in our primary raw material resin as well as inflation in other raw materials, Freight, Energy and Labor.
As we have demonstrated historically and while again throughout fiscal 2022, We remain committed to passing through these cost increases and believe we are well positioned given our scale along with our ability to service customers from our facilities in close proximity to their locations, which provides both cost and sustainability advantages. Our ability to efficiently pass through inflation was demonstrated again as our selling prices were nearly $600,000,000 higher than the prior year quarter And up a substantial $2,500,000,000 over the last four quarters. Now I'd like to turn to the quarterly performance by each of our 4 segments Starting on Slide 7. For the quarter, our Consumer Packaging International division delivered a 7% increase in revenue over the prior year And a 17% improvement on a 2 year basis, including organic volume growth of 4%. Our food, beverage and healthcare markets Recorded solid volume growth, while some industrial markets continue to experience modest headwinds.
Operating EBITDA on a 2 year basis was up 8%, Driven by the organic volume growth and cost productivity, partially offset by the timing lag of recovering higher costs. Next, our Consumer Packaging North America division delivered a 20% increase in revenue over the prior year and a 39% improvement on a 2 year basis, Including organic volume growth of 5%. Selling prices increased by over 21% versus the prior year from the pass through of higher costs. Flat volume in the quarter exceeded our expectation coming off the strong 5% organic volume growth delivered in the prior year. From a market perspective, we continue to see strong demand from food and beverage markets, including strong demand for our clear polypropylene fully recyclable drink cups Used by quick service restaurants and convenience stores.
Operating EBITDA on a year over year and 2 year basis Was up 7% driven by the strong organic volume growth. On Slide 8, our Health, Hygiene and Specialties division Delivered a 30% increase in revenue on a 2 year basis, including organic volume growth of 5% over the same period. In the quarter, similar to our other divisions, we saw selling prices increase significantly from the pass through of higher costs. As expected, volumes were lower than the prior year quarter as a result of strong year over year comparisons in our hygiene and healthcare markets from the pandemic. On a 2 year basis, the segment benefited from organic customer committed capital investment supporting our customers in healthcare, hygiene and specialty products.
Operating EBITDA on a 2 year basis was up primarily attributed to strong organic volume growth, partially offset by the timing lag of recovering higher costs. And lastly, our Engineered Materials division delivered a 17% increase in revenue over the prior year and a 36% increase on a 2 year basis With a modest volume decline over the same period. In the quarter, we saw selling prices increase by 24% from the past year of higher costs. Volumes were down modestly as the recovery in business was negatively impacted by COVID along with the onboarding of new business We're more than offset by supply chain challenges. Operating EBITDA was up 4% compared to the prior year from cost reduction, Projects and capital investments supporting productivity were modestly down on a 2 year basis related to the volume weakness from supply chain challenges.
Next, as you can see on Slide 9, we are reaffirming our adjusted earnings per share of $7.20 to $7.70 The range assumes lower EBITDA primarily from divested businesses, foreign currency headwind from the strengthening U. S. Dollar As referenced on our last call, we remain committed to recovering the significant inflation we have incurred starting in fiscal 2021. We continue to anticipate from both an earnings and volume perspective an improved second half of the year as we continue to recover inflation Along with the start up of new business and capital investments. Further, as we communicated at the beginning of the year, we expect organic volume growth sequentially improve as the year progresses and anticipate low single digit growth in the second half of the year.
For the full year, we expect volumes to be flat to up 1%, coming off 4% organic volume growth in fiscal 2021. This is modestly lower than our prior guidance because of the timing of new business start ups and continued supply chain challenges. On Slide 10, we are reaffirming our free cash flow guidance of $900,000,000 to $1,000,000,000 This includes cash from operations of 1.65 $1,750,000,000 plus capital expenditures of $750,000,000 as we continue to see a strong pipeline of growth And cost reduction projects, which returns well above our cost of capital. I'm extremely proud of our ability to deliver on our cash flow guidance every single year Since we started providing guidance 9 years ago, we have a clear and flexible capital allocation strategy, which includes funding organic growth projects, Opportunistic share repurchases, debt pay down and strategic portfolio management. We intend to use a portion of our strong, dependable and consistent free cash flow to fund customer supported investments that drive sustainable long term organic growth.
We have also historically generated significant value through active portfolio management, including both strategic acquisitions and divestitures. As we continue executing our portfolio management strategy, we believe we are well positioned for continued value creation this year, Having already executed 3 divestitures, expected to deliver proceeds of around $150,000,000 And as Tom noted, if the market continues to present us the opportunity to drive attractive shareholder returns through share buybacks, we will continue to use a portion This concludes my financial review. I'll turn it back to Tom. Thank you, Mark.
Speaker 2
As you can see on slide 11, we have consistently driven top tier results in nearly all key financial metrics, generating strong compound annual growth rate for revenue, Earnings and free cash flow and grown our adjusted earnings per share every year as a publicly traded company. Our business model is extremely resilient Through any economic cycle and includes the broadest portfolio of packaging solutions with strong, dependable and stable free cash flow to allow us the ability to drive the greatest returns. We are well positioned to continue to deliver significant value for our customers and shareholders. The strategic choices we've made guide how we prioritize our investments in our business, which is why we're investing in several areas that we expect drive long term organic growth, including the initiatives highlighted on slide 12. We continue to invest in each of our businesses to build and maintain Our world class, low cost manufacturing base with an emphasis on key end markets, which offer greater potential and differentiation in growth Like e commerce, healthcare and pharmaceutical.
I'm very confident in our team's ability to meet our near term and long term expectations and execute on our commitments to provide sustainable, profitable growth. Additionally, we will continue to invest and And our emerging market position in support of our commitment to global growth. We believe that by increasing our presence in faster growing end markets Along with continuing to invest into emerging market regions, we will further enhance our ability to provide consistent, Dependable and sustainable long term growth. We will continue to focus on global megatrends and we believe there will be a considerable demand for our protection products in regions With rapidly increasing populations. And lastly, innovation and sustainability are increasingly embedded in Everything we do and we continue to believe this represents a great opportunity for growth and differentiation.
We remain uniquely positioned to provide We also continue to believe responsible packaging is the answer to addressing consumer concerns Around packaging waste and by responsible packaging, we mean the combination of packaging design, recycling infrastructure And consumer participation. We continue to invest in global innovation capabilities and centers of excellence to capitalize On what we believe is one of our strongest opportunities, that being the overwhelming demand for sustainable packaging solutions. For example, as you can see on slide 13, we recently introduced an environmentally friendly dispensing solution for retail and e commerce applications. We've become one of the first packaging manufacturers to develop a fully recyclable dispenser, Wave 2CC, Part of our B Circular product range, our plan is to invest over $100,000,000 globally over the next several years In our new Wave product line, with the goal of reinforcing our presence across the dispensing market by focusing on solutions that deliver a strong, Sustainable benefit to our customers. Enabled by our internal post consumer recycling capabilities in the UK, The WAVE product line is the FDA approved made of 100% plastic and can utilize 70% PCR content.
Additionally, as you can see on the right hand side of the slide, in order to help some of our non food customers increase the sustainability of their packaging, We are now able to offer 50% post consumer recycled material as a standard in several of our existing and most popular industrial packaging products. Importantly, these containers also offer a mono material solution as they are made solely of polypropylene. These solutions are space saving, user friendly packaging solutions for non food products for business to business use as well as for consumer applications. In line with these initiatives, as you can see on Slide 14, we have committed to minimizing product impacts by enabling 100% of our fast moving consumer packaging products to be reusable, recyclable or compostable by 2025. Furthermore, Berry has received an A- rating for our leadership action on climate change from the Carbon Disclosure Project, Which is a not for profit organization that runs global disclosure systems for investors, companies, cities, states and regions to manage their environmental impacts.
Barry is among over 12% of companies in the plastic product manufacturing group who have reached this leadership position. We are continuously innovating and investing to work toward the global goal of a net zero economy. Through our Impact 2025 strategy, We are dedicated to delivering sustainable innovations for our customers and within our own operations. In conjunction with a multitude of Earlier in the year, we announced our most ambitious sustainability packaging golden date, as you can see on slide 15. 30% circular content used across our fast moving consumer goods packaging by 2,030.
Our new 30 by 30 goal Aims to give natural resources multiple lives and introduce alternative renewable options as the industry continues to pivot towards recycled and renewable resources. We look forward to continuing to lead the way in driving innovation and sustainability based growth and announcing many more opportunities over the next several years. In summary, we are very pleased with the hard work of our 47,000 employees delivering solid quarterly results in the face of persistently higher costs And see new business and capital investments ramp up in the back half of this year. Additionally, if current valuations persist, We expect to continue to opportunistically repurchase shares in the back half of the year, just as we did in the first half. And furthermore, we will continue to focus on driving organic growth supplemented by inorganic opportunities, if available, While providing more consistent return of capital to create maximum value for shareholders, I thank you for your continued interest in Berry.
At this time, Mark and I will be glad to take any of your questions. Operator?
Speaker 0
Thank you. Please stand by while we compile the Q and A roster. Our First question comes from the line of Ghansham Panjabi from R. W. Baird.
Your line is open.
Speaker 3
Thank you. Good morning, everybody. I know you called out supply chain challenges for the EM segments, but as you think about the rest of the portfolio, are there any major constraints that are impacting your service levels for Customers in any significance. I guess I'm referring to resin constraints, labor freight. And if you could also touch on current operating conditions in Europe, just given the sequence of Thank you.
Speaker 2
Good morning, Ghansham. Clearly, I think in general, we are seeing some improvement in supply chains. Specific to EM, it was really tied around certain specialty chemicals and resin formats that help support Extended shelf life. As a result, during the quarter, we had to prioritize the allocation of that You know, to some of our higher margin business in the space, freight in general continues to get better. And I think we'll continue to see that improvement into the back half of the fiscal year.
No doubt in Europe, the war in Ukraine has created Energy instability causing the cost of those inputs to rise dramatically. They are actively being passed through from an inflationary perspective. And in general, I would say The industrial complex in Europe has recovered at a slower rate than what we've seen in the United States, So we expect that to continue to improve in the back half of twenty twenty two and into calendar twenty twenty three as well.
Speaker 3
Thank you.
Speaker 0
Thank you. Our next question comes from the line of Mike Leithead from Barclays. Your line is now open.
Speaker 4
Great. Thanks. Good morning, guys. Just one on my end on the capital deployment side of things. I think as of quarter end, you're maybe a little bit above 4 times levered.
So I guess, A, where would you expect net leverage to be by year end? And does that kind of impact your way at all on your pace of buybacks? Obviously, [SPEAKER THOMAS E. SALMON BERRY GLOBAL GROUP, INC.:] Salmon Berry Global Group, Inc.:] You picked it up a bit near term, but just how should we think about that balance between net leverage and buybacks this year? [SPEAKER THOMAS E.
Speaker 5
SALMON BERRY GLOBAL GROUP,
Speaker 1
INC.:] Salmon Berry
Speaker 2
Global Group, Inc.:] We continue to believe after the full year, we'll be able to operate the [SPEAKER J. PATRICK GALLAGHER, JR.:] Patrick Gallagher, Jr.:] And it's reinforced by the fact that the majority of our cash flow generation typically occurs In the Q4, 3rd, Q4. Got it. Thank you.
Speaker 0
Thank you. Our next question comes from the line of Arun Viswanathan from RBC Capital Markets. Your line is now open.
Speaker 6
Great. Sorry about that.
Speaker 7
Yes, I just wanted to go
Speaker 6
back to the volume question. So it does appear that, obviously, you have the tough comps. But when you look kind of structurally, You have some new product initiatives across the portfolio. Maybe if you could just help us How we get back to kind of low single digit growth in each of the segments? CP and A, is it a requirement that we have some new product wins?
EM, I guess that would probably be an industrial recovery. And I guess what would you cite in HH and S and CP International,
Speaker 5
[SPEAKER THOMAS E. SALMON BERRY GLOBAL GROUP, INC.:]
Speaker 2
Salmon Berry Global Group, Inc.:] Sure. I'll kind of take them in order. We actually believe that given the success Of the Wendy's program and the strong interest on our all clear fully recyclable drink cup program But that will provide a lift for us in the back half of the fiscal year for CP and A. I'll also remind you that this will be the 5th consecutive year of organic volume growth in that business. And I clearly believe that The following year will be the 6th year of growth.
So that business continues to be strong. We continue to provide innovative sustainable solutions that are winning And the portfolio is comprised as well of products that people consume every day, and very similar to what we have in our CPI business as well. So things like foodservice, beverage, the success that we've had in investor owned areas will carry the day for those 2 specific businesses. In HHS, no doubt about it, in the back half of the year, the 4th fiscal quarter, The comparable in the prior year mathematically creates a nice windfall of opportunity inside HHS. [SPEAKER THOMAS E.
SALMON BERRY GLOBAL GROUP, INC.:] Salmon Berry Global Group, Inc.:] I'll also remind you that even though that business has components of the portfolio that were benefited from the pandemic, They continue, even though they might be negative on a year over year basis, they continue to trade at an elevated level versus 2019, which is encouraging for us and that business continues to see strong fem care And baby business for that portfolio. And then lastly, inside Engineered Materials, No doubt that business was impacted by really three things in the quarter that we believe will moderate. It was tied to the fact that we had some softening of demand given by destocking that was done given that the primary channel to market Engineered Materials is distribution. So it's very typical to increase and decrease stock based on anticipated inflation. Secondly, many of the convergent customers that we were working on new business, they too had Supply chain issues that we believe will moderate supporting the closure of new business in the back half of the year.
And thirdly, in that business, Really, there were some supply chain challenges specifically around EVOH as a product That caused us to have to prioritize that precious commodity in the prior quarters that we're working with our suppliers to Increase that supply demand. So that's what gives us the confidence in the back half of the year.
Speaker 6
Great. Thanks for that comprehensive answer, Tom. And then, yes, I guess just also wanted to ask about capital allocation. So you've indicated potentially an increase for share repurchase activity. And I guess how you're thinking about that longer term?
I know maybe if you could just kind of reiterate, if If you'd like to keep leverage below in the low 3s, say, and what you're seeing in the M and A market, is there anything piquing your interest that would
Speaker 2
The plan is to continue to operate the company in our targeted range between 3 times and 3.9 times. Given the current dislocation we saw in the share price, it was unique opportunity. And I think, as you mentioned, M and A, we are we have a long history of trading shareholder value through Mergers and Acquisitions. And as such, when we look at the value of repurchasing our shares in the period, It was an extraordinary value for us. So we were happy to take advantage of that dislocation.
And as we committed, should we continue to see that going forward, We'll continue to act similarly as we did in the front half of the year in the back half of the year. Time will tell on that though.
Speaker 6
Thanks.
Speaker 0
Thank you. Our next question comes from the line of Anojja Shah from BMO Capital Markets. Your line is now open.
Speaker 8
Hi, everyone. Good morning. You talked about your plans to expand in emerging markets, which you've been talking about for many quarters now. But I just want to know how you balance that with, what seems like bigger more geopolitical issues in many parts of the world and the strengthening of the U. S.
Dollar and upheaval in international supply chains, just how do you balance both of those?
Speaker 2
Yes. The majority of our business Today continues to be in the developing geographies of the world, specifically the United States, and Europe. Our ability to complement that In faster growing geographies where we have stable customer bases, stable management teams is where we would prioritize our time. [SPEAKER THOMAS E. SALMON BERRY
Speaker 5
GLOBAL GROUP, INC.:] Salmon Berry
Speaker 2
Global Group, Inc.:] We've been thrilled with the most recent announcement that we've had with our healthcare market expansion in Bangalore, Which in spite of the pandemic, in spite of the disruption in the global economy, continues to be on track. And we're partnering with global brands serving that local market. So that in and of itself helps de risk it Because we're serving local markets, we're not exporting those goods in most instances outside. Similarly, the investments that we make Alongside our customers, like the Wave dispensing investment in our CPI business Can have global application. So again, any investment opportunity that's done alongside in conjunction with our end customers derisks some of that volatility that you noted, and we continue to believe it's a tremendous opportunity to complement The significant base of business we have in the 2 most developed regions of the world.
Speaker 8
Great. Thank you.
Speaker 0
Thank you. Our next question comes from the line of George Staphos from BAML, your line is open.
Speaker 9
Thanks very much. Hi, everybody. Good morning. Thanks for all the details. Tom, Mark, I was hoping you could give us a bit more color in terms of how the volume and EBITDA projections changed across the segment.
So if you could talk about where you saw the decrement to volume across the businesses And how the new low single digit growth applies across the 4 segments? And similarly, how that Allocated, if you will, the decrement across the segments from an EBITDA standpoint, especially I'd be interested in HHNS since you've been putting so much Thanks guys.
Speaker 1
Yes, sure, George. It's Mark. Good morning. Yes, I would say in terms of your the volume portion of your And relative to our update on from last quarter, I'd say mostly Europe, China. So we've taken a more conservative view with respect to volumes in those regions.
With respect to earnings, I think the Timing lag and recovering inflation is mostly occurring in our HHS business. So our volume outlook continues to be Robust, I would say, in the other businesses outside of CPI and perhaps a little bit of EM with The supply chain challenges that Tom mentioned lingering here in the back half of the year. As you recall, last quarter when we gave our outlook, We had expected improvement in that area. And while we have seen improvement, it continues to be choppy.
Speaker 9
Yes. Mark, I just if I could ask just more clarity. So what are you looking for if it's low single digit for the whole portfolio? How does that sort of stack rank or in terms of rough percentages break out by the segments? Thanks again.
Speaker 1
Yes. We typically don't provide, George, as you know, guidance by segment. I would say, in terms of what we which businesses we Back to overdrive, the low single digit growth, I think HHS continues to have strong demand in spite of, Again, some of the COVID benefit waning. So, I'd say HHS stronger, CP and A stronger. And again, back to my last answer, CPM, EM maybe lagging a little bit in terms of the company average for the back half.
Speaker 2
Thank you very much.
Speaker 0
Thank you. Our next question comes from the line of Mike Roxanne from Truist Securities, your line is open.
Speaker 9
Thanks very much. Hi, Tom, Mark, Dustin, congrats on the quarter. Just wanted to follow along with the question on capital return. Can you just help me understand the approach during the quarter? You mentioned the current dislocation and provided you with a unique opportunity.
You only repurchased 300,000,000 shares during the quarter and the stock was down 20% year to date. Why not be more aggressive? You've already you're relatively within your targeted range or maybe slightly higher this quarter. You still expect to generate Impressive free cash flow, despite EBITDA being a little more challenged than you originally expected. So why not be more aggressive, buy more shares this quarter and maybe tone it down
Speaker 1
a little bit in the back
Speaker 2
A lot of it has to do with just the cash generation for the company. The majority of our cash is generated in the back half of the year. We realize this is a dynamic marketplace right now with all the variables that play into These valuations and we want to expose ourselves to as much opportunity throughout the course of the year should the circumstance present itself To take advantage of the repurchase, frankly, a $300,000,000 purchase met The full year commitment that we made at the beginning of the year and as we've committed, should we continue to see that dislocation in the back half, we'll act similarly in the back half And the company's cash flow performance allows us to do that, and we believe it's a unique
Speaker 0
Thank you. Our next question comes from the line of Christopher Parkinson from Mizuho. Your line is open.
Speaker 9
Good morning. This is Kieran on for Chris. I was just wondering within Health, Hygiene and Specialties, can you talk a little bit about what you're seeing in terms of price mix? It seems Like you're ahead of the curve in the other segments, but there you're still seeing a little bit of an impact. If you can just parse out how you think about The price cost spread trending in the back half of the year and then any opportunities you see in terms of, I guess improving the product mix over time with some of these new introductions, I appreciate it.
[SPEAKER THOMAS E. SALMON BERRY
Speaker 5
GLOBAL GROUP, INC.:] Salmon Berry
Speaker 2
Global Group, Inc.:] Yes. We've got a host of investments that have been outlined in HHS, Supporting healthcare, supporting the expansion of compostable white substrates In Europe, an untapped market for us and along with investments that bolster our existing base of hygiene and adult incontinence products and film based substrates. And there have been price actions that are and have been put in place. And frankly, there is just a longer lag associated with our HHS business that you'll continue to see improvement Over the next several quarters as an offset. And clearly, the rate of inflation in that business was Much more significant than we had budgeted for and the appropriate actions are being taken with our end users.
What the current environment has Clearly is that there's a lot of different inputs that go into the cost of our products and to provide those products and we'll continue to be Working in conjunction with our end customers to have as comprehensive pass through mechanisms, shorten those lags as much as possible, just as we've done In our other businesses, we've made tremendous progress over the years in shortening that lag as you saw with the success we had in CP and A and Engineered Materials
Speaker 9
Very helpful. Thank you.
Speaker 0
Thank you. Next question comes from the line of Phil Ng from Jefferies. Your line is open.
Speaker 10
Hey, guys. Tom, I guess you addressed some of this already, but Your full year guidance, you're assuming EBITDA comes down. Part of that is a lag on cost pass through. I'm just curious how what kind of progress you're making I'm passing through non resin inflation. And just given the amount of energy prices you're seeing move up, particularly in places like Europe, [SPEAKER THOMAS E.
SALMON BERRY GLOBAL GROUP, INC.:] Salmon Berry Global Group, Inc.:] Have you
Speaker 5
been able to kind of
Speaker 10
pass it through a little more real time? And are you looking to implement freight surcharges if you haven't yet?
Speaker 2
[SPEAKER DOUG MURPHY CHUTORIAN:] All the above, we've got different mechanisms. I won't speak on a general basis for competitive reasons what we're doing, but we're addressing Every aspect that you noted there, whether it's energy, whether it's freight, whether It's labor. There's a variety of inputs and dynamics globally now that have changed that are simply too significant to ignore. So the teams are taking aggressive steps in collaboration with our customers to do it in a thoughtful way that ultimately allows us Over the long term, to do it responsibly for both parties. Yes.
The only thing I
Speaker 1
would add, Phil, it's Mark, is If you look back at the history of the company, we've made tremendous progress in passing through inflation On a more timely manner, so while we still have a lag in some of our businesses, we've made dramatic improvements in I think you can see that in the numbers, right, with the order of magnitude of the inflation we've seen in the last few quarters and the Resilience of the company's profits through that kind of unprecedented inflationary cycle we've been in now for Several quarters. So really proud of the team's ability to execute more timely price increases. We're going to continue to work on that going forward. It's an ongoing effort of the company to shorten that lag.
Speaker 10
And Mark, I guess within your guidance, if I understand it correctly, you're assuming resin prices don't move from here. How confident are you in hitting your, I think, $50,000,000 headwind price cost? Certainly, the non resin piece, curious what kind of inflation assumptions are you baking in? It's a pretty dynamic environment certainly. [SPEAKER DOUG
Speaker 1
MURPHY CHUTORIAN:] Yes. No, that's well said. I think we've obviously only got a couple of quarters left and we're part of the way into the 3rd quarter, so those variables become less meaningful, I guess, with respect to the outlook for this year given the flow through of inventory as well. So You're right, Phil. I mean, we did assume polymer prices, current polymer prices.
To the extent those change, it would have an impact In Q4, again, it could go either direction, obviously. But you're right, that would be both, I guess a risk and an opportunity depending on the direction they go. But again, I would highlight that I think we've done a nice job in Reducing that lag, but we would still have some impact to the extent they move between now and the end of the fiscal year.
Speaker 2
I had to piggyback on Mark's comment there because one thing that We should note is that over the last several years, we've continued to invest heavily in automation And other investments to improve our efficiency. And that, coupled with the fact that we're fully committed to offsetting The inflation creates some tailwind opportunities for us as we see that benefit of the price recovery From a margin perspective.
Speaker 10
Okay. Thank you. Appreciate the color, guys.
Speaker 0
Thank you. Next question comes from the line of Josh Rospectol from UBS. Your line is open.
Speaker 9
Good morning. This is Lucas Bonn on Josh, in a similar vein, I just wanted to go back to the volume weakness sort of in Europe and China. So you kind of discussed sort of the factors of what's going on there. I mean, it's obviously Very volatile as well. But I mean, what are you guys assuming in your guide in that sense?
Are you assuming Things get better from here or they stay the same or are you assuming any deterioration? [SPEAKER HENRY A. FERNANDEZ MSCI, INC.:]
Speaker 1
Fernandez MSCI, Inc.:] Yes. We have some modest Deterioration, I mean, it's about, call it, a third of our business is in Western Europe. And As we've discussed earlier, that's a dragging on the plus low single digit outlook for the back half of the year. So We do have some deceleration. We're fortunate in that the majority of our products are everyday consumer products, but we do have Some exposure in Europe to industrial categories like chemicals, paints, automotive, etcetera, some more Industrial type businesses.
And we do have some deceleration built in for the back half of the year in those categories.
Speaker 9
Great. Thanks. And then in terms of HH and S and the sort of demand declines there, I Just wondering if you could talk about Wipes material specifically. Is that seeing a headwind year on year? And just given that's an area where you've added capacity over the past 2 years.
Just wondering how capacity utilization is going there on those assets. Are they Sort of above or below sort of where they were a year ago. Thanks.
Speaker 1
Yes, sure. Our wipes business is mostly focused Disinfecting categories, whether or not it's consumer or foodservice as an example. So we have Both retail presence with our customers as well as a more again industrial type applications. I'd say that business we expect to continue to grow in the long term in the mid single digit category. I think that's pretty much what all industry Outlooks would suggest and what our customers anticipate growth in that category to be long term.
In the very near term, like last quarter as an example, We did have some destocking in that category. As you can imagine, demand was way outpacing supply for a period of time through the pandemic. And so there was some inventory buildup in the chain
Speaker 2
where we
Speaker 1
did see some destocking last quarter, but we do expect that to reverse Over the next several quarters?
Speaker 2
I think that it's notable that for in that product line when you contrast that versus 2019 levels, it continues to be a growth category for us. And given what was exceptional performance from that business In totality, to be up 5% on a 2 year basis, much of which driven by Strength in fem care, in baby, adult incontinence, those are areas that we strategically Chose to pivot to and toward. We're partnered with the right end users that are winning the marketplace and it gives us great confidence in that No division for
Speaker 9
the long term. Great.
Speaker 5
Thank you.
Speaker 0
Thank you. Next question comes from the line of Kyle White from Deutsche Bank. Your line is open.
Speaker 7
Hey, good morning. Thanks for taking the question. Good to see some of the divestitures that you made more recently. I guess I'm just curious how much more opportunity Do you believe there is more pruning of non core assets? And should we expect any incremental proceeds to be used towards share repurchases?
Speaker 2
Unfortunately, I'd love to be able to give you specific details, but it continues to be something we review on a regular basis. We review it both internally to the management team as well as with our Board of Directors. It will continue to be an area of opportunity for us to take advantage of. And as soon as we have information that we can share, we'll do so. We're going to make certain that whatever we consider, we do it thoughtfully.
Where it makes sense for us, it makes sense for the portfolio and it certainly gives us more flexibility in the capital allocation program that we've outlined in the presentation.
Speaker 9
Sounds good. I'll leave it
Speaker 7
to one question. Thank you.
Speaker 0
Thank you. Next question comes from the line of Anthony Pettinari from Citi. Your line is open.
Speaker 2
Hi. This is actually Brian Bergmeier sitting in for Anthony. Can you discuss the impact from China that you mentioned in the press release? In the past, we've seen a step up in demand around a COVID outbreak, especially in health and hygiene markets. So why is it different this time?
And have you seen an impact to your manufacturing capacity due to absenteeism? In China, like Anybody producing over there, that is a for China market for us today. And yes, certain geographies had In plant, confinements, upwards of 370 individuals at our Shanghai site, as an example. Amazingly proud of how the team navigated through that scenario and continues to navigate through it. We continue to be bullish on our opportunities there, targeting local demand both inside of China as well as Southeast Asia.
I can't speak to the nuance difference in terms of the heart of the pandemic versus now. Suffice to say, the projects continue to be being developed on time, which I'm really pleased with because of the Availability of labor and such, very impressed with the team's ability to execute in that regard. And we're bullish that both from a premium [SPEAKER
Speaker 1
A EDWARD K.
Speaker 2
ALDAG, INC.:] Aldag, Inc.:] Hygiene perspective as well as our Novus investment, which will be to serve healthcare for China and Southeast Asia that it will be a growth vehicle For the company going forward. Great. Thanks. I'll turn it over.
Speaker 0
Thank you. Next question is from Angel Garcia from Morgan Stanley. Your line is open.
Speaker 4
Hi. This is actually Sebastian Rivera speaking on behalf of Angel here. A lot of ground cover. Just wanted to quickly circle back on price cost Assumptions, make sure I'm thinking of this correctly. So holding polymer prices constant in April, you currently are expecting A $50,000,000 headwind for the year, is that the right way to think about it?
Speaker 1
Sorry, the second half is about a $50,000,000 positive overall price cost, which would include the polymer portion.
Speaker 4
Understood. Okay, that's helpful. And apologies if this was covered already, but just Talking about the reduction in CapEx on the guide, is that kind of just more kind of a near term being more prudent Situation given the backdrop? Or is that kind of an appropriate benchmark to model off of long term?
Speaker 1
Yes. I would characterize it as just timing, sorry, timing of payments and projects, as you can imagine. The Challenges you've heard in the macro environment have affected our suppliers, not only on raw materials, but also capital expenditures. And so that has resulted in some delays. And so I would characterize it as just timing at this point.
Speaker 4
Thank you. I'll turn it over.
Speaker 0
Thank you. Our next question comes from the line of George Staffas from BAML, your line is open.
Speaker 9
Hi, guys. Thanks for taking the follow on. And that last question sort of piggybacked or segued well into this one. So what opportunity do you have to maybe further reduce CapEx Without damaging your intermediate term volume and longer term volume projections and growth plans, Again, given the opportunity you have, both for buyback and relatedly, how do you think, if at all, Tom, on and Mark, On dividend relative buyback, it would seem like given more valuations or buyback seems to be more of the priority. So [SPEAKER THOMAS E.
SALMON BERRY GLOBAL GROUP, INC.:] Salmon Berry Global Group, Inc.:] CapEx and the ability to trim it back to buy back more stock without damaging growth and dividends. Thanks guys. [SPEAKER THOMAS E. SALMON BERRY GLOBAL
Speaker 5
GROUP, INC.:] Salmon Berry Global
Speaker 2
Group, Inc.:] On any capital expenditures, we are Focused on being as prudent, making certain refining the lowest cost assets for the We have in front of us that not only can serve a
Speaker 1
short term, but long term. That will
Speaker 2
be an ongoing process, continues to be an opportunity. Obviously, working like we do on Terms and conditions of any purchases will continue to be an opportunity in terms of CapEx. But I have to tell you, I'm actually thrilled that we have the pipeline of opportunity, especially In areas like sustainability, in areas like healthcare and pharmaceutical, and today we just put out a press release with our collaboration with Yum! Brands and Taco Bell with their 30 ounce drink cup, which I think just reinforces that Berry has been Not just we're not talking about sustainability. We're demonstrating how sustainability is a competitive advantage for our company, how it's a growth vehicle for our company.
We'll continue to invest in those kind of opportunities. Relative to capital allocation, clearly, and George, we have a long story history of identifying acquisitions and opportunities and seeking Great valuations. And right now, there's no better valuation than Berry Global. So it's a great opportunity for us just as we took advantage of it in the first half. If we continue to see the dislocation in the back half, we'll do the same.
Speaker 9
Thanks. Good thoughts, Tom. Good luck in the quarter.
Speaker 2
Listen, I want to thank everybody for your time today. Continue to stay safe. We'll talk to you next quarter. Thanks everybody.
Speaker 0
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.