Berry Global Group - Q2 2022

Transcript

Operator (participant)

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 speaker's presentation, there will be a question-and-answer session. To ask a question during that time, you will need to press star one on your telephone. If you require any further assistance, please press zero. I would now like to hand the conference over to your first speaker for today, Dustin Stilwell. Thank you. Please go ahead.

Dustin Stilwell (Head of Investor Relations)

Thank you, and good morning, everyone. Welcome to Berry's second fiscal quarter 2022 earnings call. Throughout this call, we will refer to the second fiscal quarter as 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 discussion this morning. After today's call, a replay will also be available on our website at berryglobal.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 and then fall back into the queue for any additional questions.

As referenced on slide two, during this call, we will be discussing some non-GAAP financial measures. The most directly comparable GAAP financial measures and the reconciliation of the differences between the GAAP and non-GAAP financial measures are available on our earnings release and investor presentation on our website. 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-K, 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.

Tom Salmon (CEO)

Thank you, Dustin. Welcome everyone, and thank you for being with us today. I'd like to refer everyone to slide four 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 $3.8 billion 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 million 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 million in fiscal 2022, and we've already achieved that threshold during the first 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 million remaining on our recent authorized $1 billion 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 to service our customer demand and continue to focus on growth while also recovering higher input costs at the same time. 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 is 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 five, 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 one 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, giving 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 to provide multiple lives to natural resources while having many initiatives with industry and external partners to improve circularity and our carbon footprint. 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?

Mark Miles (CFO)

Thank you, Tom. Before we move ahead into the details for the quarter, please note that consistent with last quarter, we will compare the current period quarter to that of two years ago, the March 2020 quarter, as COVID had yet to meaningfully impact our businesses, and we'll refer to this on a two-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 six now. For the quarter, we delivered record net sales of $3.8 billion, which is 12% higher than the prior year and up 31% on a two-year basis.

Organic volumes were 2% lower than last year, in line with our expectations as we recorded 5% organic volume growth a year ago. When compared to the pre-COVID levels on a two-year basis, organic volumes were up 3%. From an earnings perspective, operating EBITDA was down 6% from the prior year quarter, as expected, with the estimated $25 million product mix benefit realized a year ago. On a two-year basis, operating EBITDA increased 4% and adjusted earnings per share increased by 21%. These strong results over the past two 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 will 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 million higher than the prior year quarter and up a substantial $2.5 billion over the last four quarters. Now I'd like to turn to the quarterly performance by each of our four segments, starting on slide seven. For the quarter, our Consumer Packaging International division delivered a 7% increase in revenue over the prior year and a 17% improvement on a two-year basis, including organic volume growth of 4%.

Our food, beverage and healthcare markets recorded solid volume growth, while some industrial markets continued to experience modest headwinds. Operating EBITDA on a two-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 two-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 two-year basis was up 7%, driven by the strong organic volume growth. On slide eight, our Health, Hygiene & Specialties division delivered a 30% increase in revenue on a two-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 two-year basis, the segment benefited from organic customer-committed capital investment, supporting our customers in healthcare, hygiene and specialty products. Operating EBITDA on a two-year basis was up, primarily attributed to strong organic volume growth, partially offset by the timing lag of recovering higher costs. Lastly, our Engineered Materials division delivered a 17% increase in revenue over the prior year and a 36% increase on a two-year basis, with a modest volume decline over the same period. In the quarter, we saw selling prices increase by 24% from the pass-through of higher costs. Volumes were down modestly as the recovery in businesses negatively impacted by COVID, along with the onboarding of new business were 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, but modestly down on a two-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-$7.70. The range assumes lower EBITDA, primarily from divested businesses, foreign currency headwind from the strengthening US dollar, and the timing lag of recovering higher costs offset by a lower tax rate and the benefit from share repurchases.

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 startup of new business and capital investments. Further, as we communicated at the beginning of the year, we expect organic volume growth to 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 startups and continued supply chain challenges.

On slide 10, we are reaffirming our free cash flow guidance of $900 million-$1 billion. This includes cash from operations of $1.65 billion-$1.75 billion, plus capital expenditures of $750 million as we continue to see a strong pipeline of growth and cost reduction projects with 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 nine years ago. We have a clear and flexible capital allocation strategy, which includes funding organic growth projects, opportunistic share repurchases, debt paydown, 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 three divestitures expected to deliver proceeds of around $150 million. 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 of our cash flow to buy back shares at prevailing market prices. This concludes my financial review, and I'll turn it back to Tom.

Tom Salmon (CEO)

Thank you, Mark. 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 rates 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 flexibility 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 invested in several areas that we expect to 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 a world-class, low-cost manufacturing base with an emphasis on key end markets which offer greater potential and differentiation and 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 expand our emerging market position in support of our commitment to global growth. We believe that by increasing our presence in faster-growing end markets, along with continuing to invest 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 mega trends, and we believe there will be a considerable demand for our protection products in regions with rapidly increasing populations.

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 a consistent pipeline of innovative new packaging solutions. 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, Wave2cc, part of our B Circular product range. Our plan is to invest over $100 million 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 U.K., the Wave product line is 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 impact 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 non-profit organization that runs global disclosure systems for investors, companies, cities, states and regions to manage their environmental impacts. Berry 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 sustainability initiatives, earlier in the year, we announced our most ambitious sustainability packaging goal to date, as you can see on slide 15. 30% circular content used across our fast-moving consumer goods packaging by 2030.

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 tough year-over-year comparisons. As Mark stated earlier, we are confident we will continue to recover inflation, continue to see supply chain improvements, 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.

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?

Operator (participant)

Thank you. Again, as a reminder, to ask a question, you will need to press star then the number one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Ghansham Panjabi from Robert W. Baird. Your line is open.

Ghansham Panjabi (Senior Research Analyst)

Thank you. Good morning, everybody. You know, 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 your customers in any significance? I guess I'm referring to resin constraints, labor, freight. If you could also touch on current operating conditions in Europe, just given the sequence of events there. Thank you.

Tom Salmon (CEO)

Good morning, Ghansham. Clearly, I think in general, you know, we are seeing some improvement in supply chains specific to EM. It was really tied to certain specialty chemicals and resin formats that help support extended shelf life. As a result, you know, during the quarter, you know, we had to prioritize, you know, 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, you know, 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.

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, though we expect that to continue to improve, you know, in the back half of 2022 and into calendar 2023 as well.

Ghansham Panjabi (Senior Research Analyst)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Mike Leithead from Barclays. Your line is now open.

Mike Leithead (Director of Equity Research)

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 4x leverage. So I guess, A, where would you expect net leverage to be by year-end? And then does that kind of impact your way at all in your pace of buybacks? Obviously, you picked it up a bit near term, but just how should we think about that balance between net leverage and buybacks this year?

Tom Salmon (CEO)

We continue to believe after the full year we'll be able to operate the company within our targeted range. It's reinforced by the fact that the majority of our cash flow generation, you know, typically occurs in the third and fourth quarter.

Mike Leithead (Director of Equity Research)

Got it. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Arun Viswanathan from RBC Capital Markets. Your line is now open.

Arun Viswanathan (Senior Equity Analyst)

Great. Sorry about that. Yeah, I just wanted to go back to the volume question. You know, it does appear that, you know, obviously, you have the tough comps, but when you look kind of structurally, you have some new product initiatives, you know, across the portfolio. Maybe if you could just help us understand how we get back to kind of low single digit growth in each of the segments. CPNA, is it, you know, a requirement that we have some new product wins? EM, I guess, that would probably be an industrial recovery. I guess, what would you cite in HHS and CPI, you know, if anything? Thanks.

Tom Salmon (CEO)

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, that will provide a lift for us in the back half of the fiscal year for CPNA. You know, I'll also remind you that this will be the fifth consecutive year of organic volume growth in that business, and I clearly believe that the following year will be the sixth year of growth. That business continues to be strong. We continue to provide innovative, sustainable solutions that are winning. The portfolio is comprised as well of products that people consume every day. You know, very similar to what we have in our CPI business as well.

Things like food service, you know, beverage, the success, you know, that we've had in innovation-driven areas will carry the day for those two specific businesses. In HHS, no doubt about it, in the back half of the year, the fourth fiscal quarter, the comparable in the prior year, you know, mathematically, you know, creates a nice windfall of opportunity inside HHS. You know, 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 a elevated level versus 2019, which, you know, is encouraging for us. That business continues to see strong fem care, and baby business, you know, for that portfolio.

Lastly, inside Engineered Materials, no doubt that business was impacted by really three things in the quarter that we believe, you know, will moderate. One, you know, was tied to the fact that, you know, we had some softening of demand given by destocking that was done, given that the primary channel to market for Engineered Materials is distribution. So it's very typical to increase and decrease stock based on anticipated inflation. Secondly, many of the converted 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.

Thirdly, in that business, you know, really there were some supply chain challenges, specifically around EVOH as a product that caused us to have to prioritize, you know, that precious commodity, you know, in the prior quarters that, you know, we're working with our suppliers to increase that supply and demand. That's what gives us the confidence in the back half of the year.

Arun Viswanathan (Senior Equity Analyst)

Great. Thanks for that comprehensive answer, Tom. Yeah, I guess just also wanted to ask about capital allocation. You know, you've indicated potentially an increase for share purchase activity. I guess how you're thinking about that, you know, longer term. You know, I know, maybe if you could just kinda reiterate if you'd like to keep leverage below, you know, in the low threes, say, and what you're seeing in the M&A market, is there anything piquing your interest that would potentially cause you to rise above those levels? Thanks.

Tom Salmon (CEO)

You know, the plan is to continue to operate the company in our targeted range between 3x and 3.9x. Given the current dislocation we saw in the share price, it was unique opportunity. I think as you mentioned, you know, M&A, we have a long history of creating shareholder value through mergers and acquisitions. As such, when we look at the value of repurchasing our shares in the period, it was an extraordinary value for us. We were happy to take advantage of that dislocation. As we committed, should we continue to see that going forward, you know, 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.

Arun Viswanathan (Senior Equity Analyst)

Thanks.

Operator (participant)

Thank you. Our next question comes from the line of Anojja Shah from BMO Capital Markets. Your line is now open.

Anojja Shah (Senior Associate)

Hi, everyone. Good morning. You talked about your plans to expand in emerging markets, which you've been talking about for many quarters now. I just wanna know how you balance that with what seems like more geopolitical issues in many parts of the world and the strengthening of the US dollar and upheaval in international supply chains. Just how do you balance both of those?

Tom Salmon (CEO)

Yeah. 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, you know, is where we would prioritize our time. We've been thrilled, you know, 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. We're partnering with global brands serving that local market. 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.

You know, similarly, the investments that we make alongside our customers, you know, like the Wave dispensing investment in our CPI business can have global application. Again, any investment opportunity that's done alongside in conjunction with our end customers de-risks some of that volatility that you noted. We continue to believe it's a tremendous opportunity to complement the significant base of business we have in the two most developed regions of the world.

Anojja Shah (Senior Associate)

Great, thank you.

Operator (participant)

Thank you. Our next question comes from the line of George Staphos from BAML. Your line is open.

George Staphos (Managing Director)

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. 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 four segments, and similarly, how that allocated, if you will, the decrement across the segments from an EBITDA standpoint. Especially I'd be interested in HH since you've been putting so much investment there. Thanks, guys.

Mark Miles (CFO)

Yeah, sure, George. It's Mark. Good morning. Yeah, I would say in terms of the volume portion of your question, you know, relative to our update on from last quarter, I'd say, you know, mostly Europe, China. We've taken a more conservative view with respect to volumes in those regions. With respect to earnings, I think the timing lag in recovering inflation is mostly occurring in our HHS business. 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. You know, as you recall, last quarter when we gave our outlook, you know, we had expected improvement in that area. While we have seen improvement, it continues to be choppy.

George Staphos (Managing Director)

Yeah. Mark, I just, if I could ask, just more clarity. 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.

Mark Miles (CFO)

Yeah. I mean, we typically don't provide, George, as you know, guidance by segment. I would say, you know, in terms of which businesses we expect 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, CPNA stronger. Again, you know, back to my last answer, you know, CPI, EM may be lagging a little bit in terms of the company average for the back half.

George Staphos (Managing Director)

Thank you very much.

Mark Miles (CFO)

Mm-hmm.

Operator (participant)

Thank you. Our next question comes from the line of Michael Roxland from Truist Securities. Your line is open.

Michael Roxland (Managing Director of Equity Research)

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, Tom, the current dislocation providing you with a unique opportunity, yet you only repurchased 300 million shares during the quarter, and the stock was down about 20% year to date. Why not be more aggressive? You know, 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. Why not be more aggressive, buy more shares this quarter and maybe tone it down a little bit in the back half?

Tom Salmon (CEO)

A lot of it has to do with just the, you know, 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. We wanna expose ourselves to as much opportunity, you know, throughout the course of the year should the circumstance present itself to take advantage of the repurchase. Frankly, a $300 million purchase, you know, met the full year commitment that we made at the beginning of the year. As we've committed, should we continue to see that dislocation in the back half, we'll act similarly in the back half of the year as well. The company's cash flow performance allows us to do that.

We believe it's a unique opportunity for us and one of the best investments that we can make in our company right now.

Michael Roxland (Managing Director of Equity Research)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Christopher Parkinson from Mizuho. Your line is open.

Kieran De Brun (Director of Equity Research)

Good morning. This is Kieran on for Chris. I was just wondering, within Health, Hygiene & 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, you know, the price cost spread trending in the back half of the year, and then any opportunities you see in terms of, you know, I guess, improving the product mix over time with some of these new introductions. I appreciate it.

Tom Salmon (CEO)

Yeah. We've got a host of investments, you know, that have been outlined in HHS, supporting healthcare, supporting the expansion of compostable white substrates in Europe, you know, an untapped market for us. Along with investments that bolster our existing base of hygiene and adult incontinence products and film-based substrates. There have been price actions that have been put in place. Frankly, there's just a longer lag associated with our HHS business that you'll continue to see improvement over the next several quarters as an offset. 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 outlined clearly is that, you know, there's a lot of different inputs that go into the cost of our products and to provide those products. We'll continue to be working in conjunction with our end customers to have as comprehensive pass-through mechanisms, shortening those lags as much as possible, just as we've done in our other businesses. We've made tremendous progress, you know, over the years in shortening that lag as you saw with the success we had in CPNA and Engineered Materials and CPI.

Kieran De Brun (Director of Equity Research)

Very helpful. Thank you.

Operator (participant)

Thank you. Next question comes from the line of Philip Ng from Jefferies. Your line is open.

Philip Ng (Managing Director)

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 what kind of progress you're making on passing through non-resin inflation and just given the amount of energy prices you're seeing move up, particularly in places like Europe, have you been able to kind of pass that through a little more real time? Are you looking to implement freight surcharges if you haven't yet?

Tom Salmon (CEO)

All the above, we've got different mechanisms. I won't speak, you know, 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, you know, globally now that have changed that are simply too significant to ignore. 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, you know, to do it responsibly for both parties.

Mark Miles (CFO)

Yeah. The one thing I would add, Phil, it's Mark, is, like if you look back at, you know, the history of the company, we've made tremendous progress in passing through inflation on a more timely manner. While we still have a lag in some of our businesses, you know, we've made dramatic improvements in accelerating that. 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, you know, kind of unprecedented inflationary cycle we've been in now for several quarters. Really proud of the team's ability to, you know, execute more timely price increases, and we're gonna continue to work on that going forward. It's an ongoing effort of the company to shorten that lag.

Philip Ng (Managing Director)

Mark, I guess within your guidance, if I understand it correctly, you're assuming resin prices don't move from here. You know, how confident are you in hitting your, I think, $50 million headwind price cost? You know, certainly the non-resin piece, curious what kind of inflation assumptions are you baking in? That's, it's a pretty dynamic environment certainly.

Mark Miles (CFO)

Yeah, no, that's well said. I think, you know, we've obviously only got a couple quarters left, and we're, you know, part of the way into the third quarter, so those variables become less meaningful, I guess, with respect to the outlook for this year, you know, given the flow-through of inventory as well. You're right, Phil. I mean, we did assume polymer prices, current polymer prices. To the extent those change, you know, it would have an impact in Q4. You know, again, could go either direction obviously. You're right, that would be both a, I guess, a risk and an opportunity depending on the direction they go.

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.

Tom Salmon (CEO)

You know, I have to piggyback on Mark's comment there, because one thing that, you know, we should note is that, you know, over the last several years, we've continued to invest heavily in automation, and other investments to improve our efficiency. That, coupled with the fact that we're fully committed to offsetting, you know, the inflation, creates some tailwind opportunities for us, as we see that benefit of the price recovery, and from a margin perspective.

Philip Ng (Managing Director)

Okay. Thank you. Appreciate the color, guys.

Operator (participant)

Thank you. Next question comes from the line of Joshua Spector from UBS. Your line is open.

Lucas Beaumont (Director and Equity Research Analyst)

Good morning. This is Lucas Beaumont on for 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. 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?

Mark Miles (CFO)

Yeah. We have some modest deterioration. I mean, it's about, call it a third of our businesses in Western Europe. You know, as we've discussed earlier, you know, that's dragging on the plus low single digit outlook for the back half of the year. We do have some deceleration. We're fortunate in that, you know, the majority of our products are everyday consumer products, but we do have, you know, some exposure in Europe to industrial categories, you know, like chemicals, paints, automotive, et cetera, some more industrial type businesses. We do have some deceleration built in for the back half of the year in those categories.

Lucas Beaumont (Director and Equity Research Analyst)

Great, thanks. Then, in terms of HHS and the sort of demand declines there, I was just wondering if you could talk about wipes material specifically. Is that seeing a headwind year on year? Just given that's an area where you've added some capacity over the past two 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.

Mark Miles (CFO)

Yeah, sure. Our wipes business, you know, is mostly focused in, you know, disinfecting categories, you know, whether or not it's consumer or food service as an example. We have both, you know, 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, you know, in the mid-single digit category. I think that's pretty much what all industry outlets would suggest and what our customers anticipate growth in that category to be long term. You know, 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.

There was, you know, some inventory buildup in the chain where we did see some destocking last quarter, but we do expect that to reverse over the next several quarters.

Tom Salmon (CEO)

I think, you know, that it's notable that, you know, for in that product line, when you contrast that versus 2019 levels, it continues to be a growth category for us. Given what was exceptional performance from that business in its totality, to be up 5% on a two-year basis, much of which is 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, you know, division for the long term.

Lucas Beaumont (Director and Equity Research Analyst)

Great. Thank you.

Operator (participant)

Thank you. Next question comes from the line of Kyle White from Deutsche Bank. Your line is open.

Kyle White (Director)

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 for more pruning of non-core assets? And should we expect any incremental proceeds to be used towards share repurchases?

Tom Salmon (CEO)

I, 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 as a management team as well as with the board of directors. It will continue to be an area of opportunity for us to take advantage of. As soon as we have information that we can share, you know, we'll do so. We're gonna make certain that whatever we consider, we do it thoughtfully, where it makes sense for us, makes sense for the portfolio, and it certainly gives us more flexibility, you know, in the capital allocation program that we've outlined in the presentation.

Kyle White (Director)

Sounds good. I'll leave it to one question. Thank you.

Mark Miles (CFO)

Thanks, Kyle.

Operator (participant)

Thank you. Next question comes from the line of Anthony Pettinari from Citi. Your line is open.

Bryan Bergmeier (Equity Research Analyst)

Hi, this is actually Bryan Bergmeier sitting in for Anthony Pettinari. 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. Why is it different this time? Have you seen an impact to your manufacturing capacity due to absenteeism?

Tom Salmon (CEO)

In China, anybody producing over there, that is for China market for us today. Yeah, 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 continue to navigate through it. We continue to be bullish on our opportunities there, targeting you know 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 you know 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. We're bullish that both from a you know premium hygiene perspective as well as our newest investment, which will be to serve healthcare for China and Southeast Asia, that it will be a growth vehicle for the company going forward.

Bryan Bergmeier (Equity Research Analyst)

Great. Thanks. I'll turn it over.

Operator (participant)

Thank you. Next question is from Angel Garcia from Morgan Stanley. Your line is open.

Sebastian Rivera (Analyst)

Hi, this is actually Sebastian Rivera speaking on behalf of Angel here. A lot of ground covered. Just wanted to quickly circle back on price cost assumptions and make sure I'm thinking of this correctly. Holding polymer prices constant in April, you currently are expecting a $50 million headwind for the year. Is that the right way to think about it?

Mark Miles (CFO)

The second half is up about $50 million positive overall price cost, which would include the polymer portion.

Sebastian Rivera (Analyst)

Understood. Okay, that's helpful. 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?

Mark Miles (CFO)

Yeah, I would characterize it as just timing. Right? Timing of payments and projects. As you can imagine, you know, the challenges you've heard in the macro environment have affected our suppliers, not only on raw materials but also capital expenditures. You know, that has resulted in some delays. I would characterize it as just timing at this point.

Sebastian Rivera (Analyst)

Thank you. I'll turn it over.

Operator (participant)

Thank you. Next, our next question comes from the line of George Staphos from BAML. Your line is open.

George Staphos (Managing Director)

Hi guys. Thanks for taking the follow on. That last question sort of piggybacked or segued well into this one. 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? Relatedly, how do you think, if at all, Tom and Mark, on dividend relative to buyback? It would seem like, you know, given where valuations are, buyback seems to be more the priority. CapEx, any ability to trim it back to buy back more stock without damaging growth and dividends? Thanks, guys.

Tom Salmon (CEO)

On any capital expenditures, you know, we are focused on being as prudent, making certain we're finding the lowest cost assets for, you know, the opportunities that we have in front of us that not only can serve us short term, but long term. That'll 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. I have to tell you, I'm actually thrilled that, you know, we have the pipeline of opportunity, especially in areas like sustainability, in areas like healthcare and pharmaceutical.

You know, today we just put out a press release with a collaboration with Yum! Brands and Taco Bell with their 30-ounce drink cup, which, you know, I think just reinforces that, you know, Berry has been. We're not just talking about sustainability, we're demonstrating how sustainability is a competitive advantage for our company, how it's a growth vehicle for our company, and we'll continue to invest in those kind of opportunities. Relative to capital allocation, clearly, George, you know, we have a long storied history of identifying acquisitions and opportunities and seeking great valuations. Right now there's no better valuation than Berry Global. It's a great opportunity for us, just as we took advantage of in the first half. If we continue to see the dislocation in the back half, we'll do the same.

George Staphos (Managing Director)

Thanks. Good thoughts, Tom. Good luck in the quarter.

Tom Salmon (CEO)

Listen, I wanna thank everybody for your time today. Continue to stay safe. We'll talk to you next quarter. Thanks, everybody.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.