Berry Global Group - Q3 2020
July 31, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to the Berry Global Earnings Call. At this time, all participant lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dustin Silwell.
Thank you. Please go ahead, sir.
Speaker 1
Thank you, and good morning, everyone. Welcome to Berry's 3rd fiscal quarter 2020 earnings call. Throughout this call, we will refer to the 3rd fiscal quarter as the June 2020 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 barryglobal.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 follow-up or additional questions. 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 in our earnings release and investor presentation on our website.
And finally, a reminder that certain statements made today may be forward looking statements. These statements are made based upon management's expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks, including, but not limited to, those described in our earnings release, annual report on Form 10 ks 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 would like to turn the call over to Berry's CEO, Tom Salmon.
Speaker 2
Thank you, Dustin. Good morning, everyone, and thank you for being with us today. Here we are, a quarter after much of the globe went into confinement, a situation that none of us have experienced before. For many companies, COVID-nineteen has created one of the most challenging and uncertain times from an operational and financial perspective that we can recall. Borders were closed, travel was limited and offices and schools were vacated.
It's been a lot of work for our teams across the globe, but I can proudly today say that we have shown that Berry stands strong just as it has in the past under various challenging economic conditions. Through our employees' relentless effort and dedication, along with our diverse, stable portfolio, we were able to deliver record EBITDA for any quarter in the company's history, while growing organic volumes 2% compared to the same quarter last year. This makes the 2nd consecutive quarter of volume growth for the company, further exhibiting our intense focus on investment towards consistent, profitable long term growth. I'd be remiss if I didn't give a special thank you to our entire Berry team across the globe, particularly our essential frontline team members for the amazing job they accomplished during the challenging environment in the Q3, for not only achieving our financial performance results, but helping keep each other safe while meeting the critical needs of our communities and customers. We fully understand that what we do here at Berry is a valuable part of the supply chain, making and supplying products that are protecting each other, our friends, our families and our neighbors and communities around the world.
We continue to take precautions in our facilities to keep our people safe by aggressively cleaning and disinfecting high touch areas, practicing physical distancing and good hygiene as we have now for many months. Our number one priority and core value is the health and safety of our team members. Everything we do at Berry starts with safety. As you can see on Slide 3, we have an ongoing commitment to identifying, managing and eliminating risk and we're very proud of our safety record with an over 20% improvement in the number of injuries in fiscal 2020 and an OSHA incident rate significantly better than the industry average. Turning to Slide 4, plastic packaging offers several environmental advantages versus other substrates.
Berry has a long history of providing sustainable solutions to our customers with a clear goal of improving our environmental footprint, supported by our culture of innovation and continuous improvement. As highlighted through various product launch initiatives and partnerships across the value chain, we're using the breadth of our portfolio, depth of our technologies and geographic presence to do our part in helping address not only climate change issues, but also focusing on eliminating plastic waste. Plastic packaging offers many advantages such as lighter weight, versatility, durability, convenience, barrier properties like keeping fresh food fresh longer and cost effectiveness. The bottom line is that plastics has become an indispensable and necessary part of our lives that protects us, helps prevent the spread of diseases and enhances our lives each and every day. And at Berry, we're very proud to be a leader in sustainability and providing protective packaging solutions to the market.
Next, as you can see on Slide 5, the safety and supply necessities such as food, medicine, sanitizing products and protective healthcare apparel, to name just a few, continue to be in high demand. We believe about 2 thirds of our portfolio are unaffected or advantaged in the end markets such as hygiene, stay at home, food, cleaning and healthcare. The remaining portion of our diverse portfolio serving industrial and away from home food and beverage markets in aggregate continue to see pandemic related headwinds. However, we are beginning to see improved demand trends across those more pressured end markets as areas around the world continue to reopen. In the short term, we view the headwinds related to COVID-nineteen as transitory.
While we believe the advantage areas benefited from the pandemic for products used for protection, safety and cleanliness will be a long term sustainable benefit to our global portfolio. Now let me highlight some of the key takeaways for today's call on Slide 6. We had an outstanding quarter with strong organic buying growth. Our portfolio diversity is unmatched and recession resistant as proven through past economic downturns and further evidenced by our last two quarters of solid financial results. We expect low single digit volume growth post COVID-nineteen in all four divisions.
The integration of RPC remains on track, while synergy realization is coming in ahead of schedule for fiscal 2020. Deleveraging is also pacing ahead of schedule as we ended the quarter at 4.5 times net debt to adjusted EBITDA, and we're now increasing our fiscal 2020 free cash flow guidance to $830,000,000 As Mark will discuss momentarily, our outlook incorporates the appropriate level of uncertainty and dynamism associated with the COVID-nineteen era. With that said, we remain confident in our ability to execute and deliver on our commitments during these uncertain times. Transition to some financial highlights for the quarter, we generated a June quarterly record for net sales of over $2,900,000,000 an increase of over 50% and an operating EBITDA record for any period of $581,000,000 an increase of 67% compared to the prior year quarter. Our adjusted earnings per share increased 69% to $1.52 and we reported significant improvement in free cash flow bringing our 4th quarter's total to $1,040,000,000 For the June quarter, organic volumes were up 2% led by our Health, Hygiene and Specialty segment, which recorded strong growth of 14%.
We anticipated volume growth related to our recent investments and our targeted market approach, while also benefiting from COVID-nineteen related products in our healthcare portfolio. Excluding COVID-nineteen, we believe the HHS business delivered high single digit growth in the quarter and we're very proud of the teams in achieving their objectives of delivering profitable and sustainable growth on time versus our commitments. And lastly, our Consumer Packaging International segment comprised primarily of legacy RPC business performed well in the quarter and has been able to drive earlier than anticipated synergy realization as we now are targeting $85,000,000 to be realized in fiscal 2020, dollars 10,000,000 higher than our previous outlook. Additionally, RPC continues to provide many benefits from advancing our sustainability capabilities and initiatives to landing multiyear business wins in excess of $50,000,000 of the term of the agreements through our combined consumer packaging global platforms. We remain committed to maintaining a strong balance sheet and are consistently increasing, dependable and improving cash flow provides us the opportunity to as we've historically demonstrated.
Now I'll turn the call over to Mark, who will review Berry's financial results in more detail. Mark?
Speaker 3
Thanks, Tom. First, I would like to wish good health to everyone and their families, and I would like to refer you to Slide 7 now. As Tom referenced, 3rd quarter sales were up 50 percent to over $2,900,000,000 The increase included revenue from the acquisition of RPC along with organic volume growth of 2%, including an impressive 14% volume growth in Health, Hygiene and Specialties. These positives were partially offset by lower sales dollars from the pass through of lower resin prices to our customers and the sale of our Seal for Life business. From an earnings perspective, the June quarter operating EBITDA increased over 65% to company quarterly record of $581,000,000 The increase included contributions from the RPC acquisition, including synergy realization, cost productivity and the benefit from organic volume growth.
Now looking at the results of each operating segment with the prior year results restated to match the current structure sales of just over $1,000,000,000 and operating EBITDA of $184,000,000 This division primarily consists of business acquired as part of the RPC transaction and therefore not included in our historical results. So for comparison purposes, we are utilizing results prior to our ownership. As we just completed our 1st year of ownership of the RPC business on July 1st, this will be the last quarter that the year over year comparison will be impacted. In the quarter, volumes were down 7% compared to the prior year due to the transitory impact of COVID-nineteen in end markets such as automotive, industrial and building and construction, partially offset by growth in grocery, healthcare and hygiene markets. Excluding the impact of the pandemic on the quarter, we believe volumes would have been flat on a year over year basis.
We saw improving trends within the segment as the quarter progressed and anticipate sequential improvements over the next several quarters as the transitory pandemic related headwinds abate and we would expect the business to return to low single digit volume growth. In spite of the pressure on volumes related to COVID-nineteen, the legacy RPC business generated an impressive 35% increase in operating EBITDA from cost synergy realization, favorable product mix and productivity. Next, sales in our Consumer Packaging North America division were $718,000,000 in the quarter, which was 10% higher than the June 2019 quarter as a result of the addition of the North America Rigid business from the RPC acquisition, partially offset by lower sales dollars from the pass through of lower resin prices to our customers. Organic volumes were flat in the quarter, slightly ahead of our expectations provided on our last earnings call. Operating EBITDA was $159,000,000 compared to $126,000,000 in the prior year quarter.
This 26% increase was primarily driven by the contributions and synergies from the RPC acquisition. Our Health, Hygiene and Specialties division delivered sales of $608,000,000 compared to $603,000,000 in the prior year quarter. The increase was primarily attributed to organic volume growth of 14%, including growth in all four regions globally, partially offset by the pass through of lower resin prices to our customers, the sale of the Seal for Life business and an unfavorable impact from foreign currency changes. Segment volumes were up high single digits related to organic growth investments with the balance benefiting from the additional COVID demand for products such as materials for masks, wipes and medical gowns. Operating EBITDA increased by $38,000,000 from the prior year quarter when adjusted for the sale of the Steel For Life business.
This improvement was primarily driven by the organic volume growth just referenced, favorable product mix and cost productivity. As forecasted, the HHS segment inflected positive in price versus cost in the quarter which was enhanced by the better than expected volumes. And lastly, sales for our Engineered Materials division were 5 $64,000,000 compared to $630,000,000 in the prior year quarter. The decrease included an 8 saw more unfavorable impacts from COVID-nineteen compared to the other divisions. Many of our products in this business are sold through distribution to schools, offices and restaurants to name a few which saw more contracted demand than our more consumer facing businesses.
Excluding the impact from COVID-nineteen, we believe volumes were up low single digits driven by continued growth in our differentiated products around barrier films for the growing snack trend and films for e commerce. We saw improving trends within the segment as the quarter progressed and anticipate sequential improvements over the next several quarters as the business returns to growth post COVID productivity offsetting the COVID related volume headwinds. Slide 9 provides a summary of our income statement for our fiscal Q3. Overall, operating income increased $132,000,000 over the prior year quarter, primarily attributed to the improved operating EBITDA just discussed, partially offset by incremental depreciation and amortization from the RPC acquisition. Our net income increased to $191,000,000 and adjusted earnings per share improved by 69% to a quarterly record for any period of $1.52 per share.
As a reminder, we do not add back amortization of intangibles from acquisitions to our adjusted earnings per share. If we were to add back this amortization, it would increase our annual adjusted EPS by more than 30% and believe this should be considered when comparing to other companies that make this adjustment. Next on Slide 10, the company generated $446,000,000 of cash flow from operations compared to $240,000,000 in the June 2019 quarter, increasing 86%, primarily from incremental cash flow resulting from the RPC acquisition. Net capital expenditures in the quarter were $156,000,000 $419,000,000 through the 1st three quarters as we incurred spending on cost reduction initiatives as well as customer linked growth related projects. Our free cash flow was $290,000,000 an improvement of $154,000,000 compared to prior year quarter primarily attributed to our growth in EBITDA.
For the 4 quarters ended, free cash flow was an all time record of $1,040,000,000 We remain committed to maintaining a strong balance sheet consistently increasing and dependable cash flow provides us the opportunity to further improve our strong balance sheet as we have demonstrated historically. The company maintains a strong liquidity position with over $900,000,000 of cash at the end of the quarter as well as an undrawn $850,000,000 asset
Speaker 2
based line of
Speaker 3
credit representing almost $1,800,000,000 of liquidity. Also, we have no financial maintenance covenants or near term debt maturities. We are progressing ahead of plan on all three of our primary financial objectives including strengthening our balance sheet as we have repaid over $600,000,000 on our outstanding debt the first three quarters, lowered our annual interest expense by over $100,000,000 and reduced our leverage from 4.9 times to 4.5 times. Our fiscal year 2020 free cash flow guidance and assumptions are shown on Slide 11. We are increasing our guidance to $830,000,000 which includes $1,450,000,000 of cash flow from operations, partially offset by capital expenditures of $620,000,000 to support our increasing growth pipeline.
Our fiscal year 2020 free cash flow represents a free cash flow yield of over 14% using our quarter end market capitalization. Cash taxes are expected to be $170,000,000 and cash interest costs are projected at $430,000,000 Additionally, we expect restructuring costs, working capital and other costs to be $50,000,000 Overall for volumes, our trajectory and outlook heading into fiscal Q4 is improved from our last earnings call. Specifically on volumes by segment, we anticipate our Health, Hygiene and Specialty segments to produce low double digit growth. Our Consumer Packaging North America business we believe will deliver low single digit volume growth as the foodservice space recovers along with continued solid demand in hygiene and grocery markets. Both our Consumer Packaging International and Engineered Materials businesses we believe will experience low single digit and mid single digit volume declines respectively related to the weakness from the impact of COVID-nineteen.
As COVID-nineteen headwinds subside, we would expect the businesses to get back to low single digit volume growth. From an earnings perspective, we are increasing our operating EBITDA guidance by $70,000,000 to now $2,100,000,000 This assumes that fiscal Q4 would have a sequential decline from the June quarterly result of $581,000,000 due to the traditionally seasonally weaker September quarter along with some incremental inflation. This concludes my financial review and now I will turn it back to Tom. Thank
Speaker 2
you, Mark. As I've stated before, our economic resiliency and durability has proven true as it has in the past, challenged economic periods. COVID-nineteen, as anticipated, has modestly impacted our global businesses. However, due to our diverse and stable portfolio, we've grown volumes in the face of these headwinds, while cost productivity has provided a modest tailwind to our earnings. For those reasons, I'm very confident in our team's ability to meet our near term and long term expectations and commitment to provide sustainable, profitable growth for all our stakeholders.
We continue to work diligently across all our businesses to grow organically and have been able to demonstrate organic volume growth by providing advantage products in targeted markets as evidenced in our recent results. Our HHS division is performing very well as we continue to benefit from the pivot to higher growth markets and from capital investments in nonwoven and fill lines for premium hygiene, healthcare, disinfectant wipes and high end air filtration products. We are also seeing additional demand for products like disinfectant wipes, masks and gowns needed to combat coronavirus pandemic, some of which we think are going to continue post COVID. Next, with the acquisition of RPC, we are able to provide differentiated and sustainable solutions using our material science know how and operational progress that our global customers have come accustomed to at Berry over the years. RPC has given us world class product innovation engine, where we enjoy leading positions in higher value added closures, dispensing systems, medical devices and healthcare packaging.
With close to 300 facilities around the world and a wide mix of technologies, we're working on translating solutions for our customers in different parts of the world to meet the changing needs of the customers of the consumers. Lastly, in a period that the world almost came to a complete standstill for over 2 months, we've recorded positive organic volume growth of 2%, strong earnings while increasing our free cash flow guidance in what has been some of the most difficult conditions we witnessed in our history. We are pleased with the progression and perseverance of our teams and remain focused on driving positive growth throughout all businesses in the post COVID environment. Additionally, on our other key strategic targets, we're pleased to be outpacing our plan on cost synergies for the RPC acquisition. Our teams will continue to leverage our combined know how in material science, supply chain, product development, manufacturing technology and sustainable solutions, which will benefit us for many years to come.
I'm pleased with the discipline demonstrated by our teams on cash management, which is a core competency for Berry. As such, we've been able to overdrive our free cash flow target, use that cash to reduce our interest costs and delever quicker than we anticipated, yielding the leverage of 4.5 times at the end of the quarter. We are well on our way to get below our targeted leverage ratio of 4 times. And finally, we will continue to take the steps necessary to remain a leader in the markets where we participate through a relentless focus on building and strengthening our competitive advantages to ultimately maximize shareholder value. Our key priorities are to safeguard the health of our employees and communities, ensure the reliability of our supply chain and provide accurate and timely service to our retail customers and consumers.
Additionally, we continue to be laser focused on finding ways to attract more value for our shareholders by reinvesting in our leading low cost position, leveraging our resources around the business with the greatest opportunity to grow and create value for our customers, all while doing our part to protect our environment. I'm confident that the people of Berry will continue to drive positive results and achieve our goals and mission of always advancing to protect what's important. Thank you for your continued interest in Berry. And at this time, Mark and I will be glad to answer any of your questions.
Speaker 0
Your first question comes from Anthony Pettinari with Citi.
Speaker 4
Hi. This is actually Brian Bergmeier sitting in for Anthony. You discussed sequential volume improvement for Consumer Packaging International in the Q4. What have you seen in July so far? And what indicators are you looking at that give you confidence and improvement throughout the quarter?
Speaker 2
I'll comment really on how we exited Q3. We saw probably the tougher parts of the quarter occur in April May with a strong rebound in June, and that gives us confidence that we our outlook is for sequential improvement in Q4, which we're confident of. It's really driven by that. I'm not going to give any current quarter commentary on the call, but I will say we exited Q3 in a very strong way and the outlook is positive for sequential improvement.
Speaker 1
And I would just add that that's
Speaker 3
Brian, this is Mark, consistent with economic indicators you're seeing in Europe, which is obviously where the predominant portion of that business is, UK, Germany, France being the 3 primary countries.
Speaker 2
Great.
Speaker 0
Go ahead.
Speaker 4
Your LTM free cash flow is well above the normalized level that you called out after the RPC acquisition. Do you still feel that the $900,000,000 is representative of Berry's longer term earnings power or is there possibly some upside to that number based on what you've seen?
Speaker 3
Yes, the $830,000,000 guidance would still reflect a normalized level above $900,000,000 when you exclude the transition costs that we've incurred in the year resulting from the integration of the combination, as well as annualizing the synergies that we're realizing this year. So that when you factor in those two additional points, that would take you over $900,000,000 for fiscal 2020.
Speaker 2
Brian, I'd add, we take a great deal of pride at Berry in the consistent, dependable free cash flow as well, frankly, as earnings year in, year out, irrespective of the external environment. It's something that we focus on throughout the organization, and it's a strong value attribute we feel for the company. Great. Thank you.
Speaker 0
Your next question comes from Phil Ng with Jefferies.
Speaker 5
Hey, guys. Congrats on a very strong quarter. I guess, good to see the free cash flow coming in really strong. If you have line of sight to that 4 times leverage, would you be open to kind of returning cash to shareholders maybe a little sooner? And what are some of your bigger capital deployment priorities going forward?
Speaker 2
Well, I'll start with the capital priorities. Our strategy has been across all four of our business is to continue to invest in specific targeted markets with advantaged products and always try to link those investments to an anchor customer. We continue to believe areas around protective solutions, health and wellness continue to be strong categories. If you look inside many of our spaces, we're seeing it now in HHS as well as CPI, a lot of focus on areas like health care, dispensing systems, sustainable solutions, and we feel really good about it. It's a model that we deployed inside our Consumer Packaging North American business, which has consistently delivered organic growth last couple of years.
And all of our businesses, frankly, pivoted as we had projected pre COVID from a growth perspective as we had highlighted. So more of the same in that regard. But again, those bigger trends around health and wellness, food safety and protection, barrier properties continue to be areas of high interest for us. What was the second part of that question? I apologize.
Speaker 3
If you have line
Speaker 5
of sight to your 4 times leverage, would you be open to returning cash back to shareholders sooner?
Speaker 2
Well, we review that every quarter as a Board of Directors. And the first priority is achieve our objective of getting back below 4 times. And we were really thrilled in the quarter here to take it down to 4.5 times. So we're well on our way to meeting that objective, and we'll be updating that guidance in the next couple of quarters. Got it.
And Tom, sorry
Speaker 5
to sneak one in. Just you were talking about some of these growth opportunities on health and hygiene. I mean, obviously, we can appreciate a bump from COVID. How are you thinking about the medium term growth just because there seems to be a lot of momentum in that business? [SPEAKER HENRY A.
Speaker 4
FERNANDEZ MSCI, INC.:] Fernandez MSCI, Inc.:]
Speaker 2
Well, we were really pleased. If you look really across all of our businesses, we were able to highlight and upgrade from our last call, our guidance in terms of 4Q outlook. CP North America is improving from what we had forecast. It was down low single digits to up low single digits. CPI is going to be down low single digits in the upcoming quarter.
Our HHS business, up low double digits. And Engineered Materials down low to mid single digits as COVID continues to abate. So, feel good about the growth trajectory. Certainly both in Engineered Materials and CPI, both businesses we anticipate sequential improvement. And the teams continue really outside of COVID to work on all those things absolutely under our control: people, safety, the processes that we're using inside the businesses, operational conversion costs, the pace by which we continue to automate the business supply chain efficiency, which continues to be a key attribute for our global portfolio
Speaker 4
in terms of how we deliver value, has continued to shine Okay.
Speaker 5
Thanks a lot
Speaker 3
guys. Thanks Phil.
Speaker 0
Your next question comes from Ghansham Panjabi with Baird.
Speaker 6
Guys. Good morning. I hope everybody is doing well. I just want to go back to CP International. Mark, I think in your prepared comments, you called out weakness in autos, industrial and building and construction.
As the regions open up in Europe, will there be some level of pent up demand that benefits future quarters in your view and not just 3Q as the cyclicality sort of works in your favor? And just asking because auto production is ramping up meaningfully and so is construction in Europe and so how are you kind of netting out these dynamics?
Speaker 2
I'll answer that question for Mark. Yes, the target position in that pipeline for CPI is very strong. So it's coupled not only with expected new business closes, but also sequential improvement just based on the pace of reopening. There's a bigger expectation, I think, in Europe right now that the calendar Q3 is going to be stronger than Q2 just based on the way they ultimately shut their country down relative to COVID. I think there's a higher expectation that there'll be a stronger recovery.
We're certainly we're trying to be as agile as possible in that regard, Gunsham, just given that each country, each region is different. Germany is going to be different than the UK, which is going to be different from Italy. But we feel very good. We feel very confident that we'll see sequential improvement in the quarter. And to your point, most industries have not been holding on and carrying a tremendous amount of inventory Difficult to articulate what it is, but we're really focused on given our customers' challenges in terms of forecasting demand, our agility and our supply chain strength has really, as I said previously, rang through.
I have to share with you and I'll give you an example and we talk a lot about global value delivery capability. And as Mark's comments, he noted a recent close that we secured of a $50 plus 1,000,000 opportunity with a major brand, a worldwide brand. And the way that team is actually managing supply chain, managing execution in this environment is incredibly impressive. 4 months ago, we were identified of the opportunity, we identified and negotiated in India, we built the tool in China and we're manufacturing in 4 months in Mexico. So when you think about how that team and how this organization is executing in a COVID environment and being able to support our customers' growth objectives, what can it be post COVID?
And that's what I'm so proud of. This team has worked so incredibly hard during this time, not only to execute around growth objectives and make that progress, delight our customers and fully integrate that business. So I'm really bullish about what we've done in CPI and the prospects of that business going forward.
Speaker 6
Very clear. And then for the EM segment, just comment on your strategy to offset the volume weakness given that many of the venues you cited, schools, office buildings, etcetera, will likely remain impaired from a usage standpoint for a while? What are you doing in that segment in the interim? Thanks so much.
Speaker 2
We've got over $70,000,000 of new CapEx commissioned over the next year, including new lines, upgrades, all around multiple advantage products in that space to support e commerce, to support snack packaging, the retail trash bag business. And it's interesting, if you look at that business, it's by design, it's historically been an industrially driven business to a large extent. And we have also been under indexed, if you will, for at home consumption. But that is coincidentally where we've been making the majority of our capital investments over the last 12 18 months to give that business better balance. So Engineered Materials has been a strong business for a long time.
We continue to focus on ways that we can innovate, differentiate and again support those faster growing components of that business, specifically e commerce and snack packaging.
Speaker 6
Perfect. Thanks so much, Tom.
Speaker 0
Your next question comes from Arun Viswanathan with RBC Capital Markets.
Speaker 7
Good morning. Thanks. Just wanted to delve into the free cash flow guidance, I guess, for the rest of this year and then potentially into next year. I guess, do you see any upside to that, I guess, given that you're increasing EBITDA guidance a little bit more, I guess what is the offset on free cash flow that leads to a slightly lower, I guess increase there?
Speaker 8
Yes, sure. Good morning, Arun.
Speaker 4
So a
Speaker 3
couple of things. One is you probably noted we've increased our capital plan by $20,000,000 for the fiscal year. We continue to see a strong pipeline of growth opportunities that we are investing behind our customers. And then there's some timing elements where our cash flow is while it's still heavily weighted towards the June September quarter, it's a little more balanced than it has been in the past. And we've got some incremental inflation as well built into our cash flow guidance as there is some chatter as you probably know in the market about some potential increases in our primary raw material inputs around polymers.
So, those are really the three factors that we've got considered when we provide the guidance of 8.30. But we're certainly proud of our track record of exceeding our cash flow every single year as a publicly traded company. I want to make sure we maintain that. Okay.
Speaker 7
Thanks. And I guess looking into next year, I guess, are there any large items discrete or otherwise that would help us kind of understand where you think capital will be for next year, CapEx for next year. And you guys have made a lot of investments in HH and S recently and redirected some capacity towards PP and E. I guess is that going to continue or would we see that reverse? Thanks.
Speaker 2
I won't comment specifically on what the amount of investment will be on a by business basis, but I take you back to what we think are some trends that will be more sustainable in the future and specifically relative to HHS. As you recall, a couple of years ago, we invested in new technology in faster growing regions of the world, specifically China, to support premium hygiene as well as in Mooresville, North Carolina for hard surface disinfectant wipes. That we not only got the benefit of the pivot to the faster growing regions of the world, but also things like hard surface disinfectant wipes, we believe will be a longer term trend that will benefit Barry and specifically our HHS business, not only in the most developed region of the world, which is the U. S. And Canada, but also it's going to begin to proliferate outside of the United States and Canada.
And as that happens, Berry with its ability to have over 290 manufacturing sites around the world, it gives us the opportunity to consider investment and get some support. As you've seen on multiple press announcements and communications of collaborations that we've done with local governments, municipalities and such to support investment all around the spirit of nationalizing certain supply chains and certain items. So we believe some of those dynamics are going to have much longer legs. We're a recognized leader in terms of hard surface disinfectant wipe know how. And certainly, when people consider global expansion, Barry is obviously one of the companies that has to be part of that conversation.
So but again, the bigger megatrends, health and wellness, food safety, and sustainability for us continue to be real primary along with barrier in general. It's just a strong attribute for the global barrier portfolio.
Speaker 7
Great. Thanks for that. And if I may squeeze in one more. Given what you just said, I guess, how are you looking at the long term growth in HH and S, if you could? Is it higher post COVID, maybe by a point or 2 and maybe you get into kind of mid single digit growth or how should we think about the kind of mid to long term growth on a normalized basis in HH and S now?
Speaker 2
Well, I'd start with the portfolio. All our businesses, we believe, will be low single digit growers. And obviously, the dynamics that you've seen in terms of HHS, similarly we believe will show towards the higher end of that range for sure. And again, the continued investments that we're making around the world, the globalization of this business and the sustainability of some of these platforms are very exciting for us, not just in 2021, but for the longer term. So, no more to come.
And obviously, we're not getting guidance yet on 2021 and beyond, but nonetheless, it's a very healthy franchise for us, globally deployed. And what I'm proud of is the team and their focus strategically on making these investments some 2 years ago. So, this is part of our strategy as a company to make certain we have local value delivery capability and advantaged products. And every one of these investments we ultimately match up to targeted customers that can help pull that demand through again thus reducing risk.
Speaker 8
Thanks.
Speaker 0
Your next question comes from Brian Maguire with Goldman Sachs.
Speaker 8
Hey, good morning. I had my congrats on solid results here. Just a question on the Q4 guidance and the Q3 results. I think last quarter you talked about likely that 4th quarter EBITDA would be flat with 3Q, but now you're sort of guiding for it to be $50,000,000 lower. So just wondering if there were any unique items in 3Q you're not expecting to repeat and kind of associated with that, wonder if you could kind of quantify what sort of resin benefit, if any, you got in the quarter and any kind of headwind you might be expecting in 4Q?
Speaker 3
Yes. Our normal seasonality, Brian, would be that June is typically a little stronger than September quarter. So, I wouldn't say there's anything unusual. We do have, as I mentioned in the cash flow question, we do have some incremental inflation coming that we're expecting in Q4. Obviously, to the extent that doesn't happen, that would be upside with respect to our guidance.
But I wouldn't say anything unusual, again, other than normal seasonality. Things
Speaker 4
are
Speaker 3
a little slower in September as well as the inflation. That may or may not happen in the September quarter. We've assumed it does for the purpose of the guidance.
Speaker 8
Okay. So just to be clear, it's not inflation that you're seeing today. This would be kind of inflation above and beyond where we sit today that you're just putting in there for some conservatism in case we get it?
Speaker 3
Yes. July hasn't settled yet for our primary raw material. Again, I think there's indications that there will likely be some increases. The magnitude of that is still undetermined, but we feel comfortable with the outlook that we've provided.
Speaker 8
Okay, great. And then just one more on Consumer International. I think you noted in the release that COVID seems like it hurt the volumes there by roughly 7%. But in North America, the impact was more muted, only kind a low single digit impact from COVID. Just wondered if you could talk about why COVID and the lockdowns would be having a bigger impact on your international business than what you're seeing in the North America business?
Speaker 2
Yes. It's a great question. We have the driver is we've got a larger foodservice business in North America that showed ramped improvement from the prior quarter. That's probably the biggest distinction and also the makeup of the industrial business inside of CPI specifically around automotive industrial is heavy again. It didn't have that offset of a ramping improving foodservice business that we saw in North America.
Speaker 8
All right. I'll turn it over. Thanks very much.
Speaker 0
Your next question comes from George Staphos with Bank of America.
Speaker 9
Hi, everyone. Good morning. How are you doing?
Speaker 2
Hi, George. How are you doing?
Speaker 9
On the progress, doing well. Hey, I want to take a step back and some of the earlier questions have touched on this to some degree. But Tom, you mentioned early in the call, I think you mentioned in your slide deck, the company's current free cash yield of 14% or 15%, which implies perhaps that you think that yield in the market should be lower. When you look at other companies, when you model best in class, companies that perhaps trade at lower free cash yields, what do you think the takeaways are for Berry, again, recognizing all the progress that you've seen in terms of how you will manage the balance sheet and allocate capital there and value return and also product areas for investment. How do you think about those three things and capital allocation aiming for best in class performance and over time, not next quarter necessarily or next week, valuation metrics?
How should we think about that?
Speaker 2
Well, I'd start and I'll let Mark weigh in as well. But remember, the top three primary strategic objectives for the company that we felt that were essential for us to address was to deliver predictable, sustained organic growth, which we've been investing in and around and executing against quite well. The second piece was we just completed just 1 year ago, transforming the largest acquisition that we had done in our company's history. And our objective was, 1st and foremost, make certain that we execute against the synergy that we've outlined on time while integrating that business and getting it harmonized around our growth objectives. And then the 3rd piece was simply making certain that we take advantage to delever the company as quickly as possible because clearly, there was a dislocation of our net debt to adjusted EBITDA versus the rest of the market.
Strong improvement made this quarter at 4.5. We'll be on track to get to 4 times by the end of 2021. And certainly, we feel comfortable that beyond that, we can now begin to broach more dialogue with our Board of Directors around what the appropriate model is in terms of allocation of spend towards that number one objective of consistent predictable reliable growth, coupled with other opportunities to advance the company on a capital allocation basis.
Speaker 8
No, I
Speaker 1
would say those are the exact things.
Speaker 3
I would reiterate what Tom said and just say we have a very high level of confidence in our team's ability to successfully execute on those initiatives that we've got as a company.
Speaker 9
And guys, perhaps you're not in a position to comment on it now and I recognize that, but could you give us perhaps a bit more in terms of how you are deliberating thinking about it in terms of whether 4 times is in fact the right leverage point. You said you're making progress towards being below that target, which suggests that maybe the target really should be below 4 times. Companies frequently in packaging do have some form of recurring value return. Can you remind us what you said before and maybe about some of the things that are on the horizon there in terms of Berry and your move towards advancing your reputation and valuation in the market over time? And then kind of a quick unrelated follow on.
Can you talk to us a bit about how COVID is affecting your dispensing business and health care trends more broadly, forgetting about the impact it's obviously having on HH and S? Thank you guys. Good luck in the quarter.
Speaker 2
Thanks, George. And I'd start with this. The fact that Berry has industry leading growth rates on revenue, EBITDA, free cash flow, not just near term, but for a long period of time, gives us an amazing amount of flexibility. We've articulated that our first objective is to get at or below 4 times. And then we'll ultimately restate that objective, to the broader market as we come to that conclusion with our Board of Directors, not only on the net leverage, but just more details relative to capital allocation in general.
And before we prognosticate on what it might be or what we may have as an objective, we want to deliver on that commitment before we ultimately start speculating on what the next hurdle could be. Just as we did on growth, and George, I have to mention, this business and this leadership team and the teams inside of Berry, they said when they would pivot to growth in Engineered Materials, and they did. They said when they pivot to growth in HHS, and they did early. And I'm incredibly proud of this team and their ability to execute, make commitments and honor commitments. And that's what the cornerstone of this company is going to be built around, coupled with this global value delivery capability that has been enabled by this global pure play on packaging between legacy RPC and the various CP North America business and the already international HHS business.
So, we've got a tremendous amount of flexibility as organization and, I couldn't be more proud of how this team is executing. In terms of the pandemic, let me say the first thing. The first thing the pandemic has done has increased the level of morale, believe it or not, inside our company to heights that it hasn't been in a long time. By the way, these teams are caring for one another, caring for their communities and caring for their customers. And I think ultimately, what we've seen in terms of our integration efforts, even in a difficult growth environment CPI was able to maximize earnings, They were able to as well as free cash flow and continue to execute against synergy realization ahead of schedule.
Dispensing solutions, it is a cornerstone of where we're investing. We believe that's an advantage area for us. We believe health and wellness, healthcare dispensing systems, metered dose inhalers are all key components both in terms of maintenance of good health as well as, in some instances, potential opportunities for vaccine through inhalation as options that can be created. So the portfolio continues to morph and continues to be centered around those larger megatrends that we think are going to continue to sustain for many years to come and we think we're really well positioned as a result.
Speaker 3
Thank you.
Speaker 0
Your next question comes from Anadja Shah with BMA Capital Markets.
Speaker 10
Hi, good morning. Good morning. I wanted to ask about the M and A markets, particularly, as we're seeing deal activity picking up around the space right now. If you could talk about what kind of valuations you're seeing, that would be great. And also similarly, how are you feeling about divestitures now?
Do you think the
Speaker 2
happening from an M and A perspective. Clearly, our primary objective, as we've stated strategically, is to fully integrate and take advantage of the synergy realization of the RPC transaction, just 1 year old. But clearly, yes, as the economy improves, as people get comfortable in a relative new dynamic in terms of how different geographies open, it's going to increase the level of activity. So nothing specific I'd comment relative to Berry or relative to multiples. And we always are continuing to look at our diverse portfolio.
And if there is opportunities for us to reconsider portions of it that might be ultimately better suited for other individuals, we could certainly and would consider those for divestiture, but nothing we comment specifically on this call.
Speaker 10
Okay. Thank you for that. And then my next question is we saw recent news reports about an EU proposal for a new tax on plastic packaging, I believe on non recyclable plastic packaging. I think it's about €0.8 per
Speaker 4
kilogram to be introduced on January 1. Can you talk
Speaker 10
about if this will
Speaker 2
affect everybody in the space ultimately. And it's really driven to support larger percentages of post consumer materials put into the product line. Actually, given our presence in terms of a post consumer consumer user, I should say, in our products already, It's actually an opportunity for us because of the access that we have to some of those feed streams. But nonetheless, it would be a tax that's sport to create additional larger infrastructure in the geographies, which certainly relative to plastics waste continues to be a great opportunity for the industry to address waste and also take advantage of the valuable raw material that can continue to be reused multiple times. So nothing negative that we would outlook or forecast in that regard.
We look at sustainability for our business. It's actually been improved and bolstered given the acquisition of RPC. And not only in terms of PCR materials, but also some of the chemically recycled materials. And we talked previously about what was a exciting collaboration with Mondelez in their Philadelphia cream cheese using recycled materials from an advanced recycling technology that's currently in the market today. We recently introduced a new product in CPI today called Sustain, another high performance sustainable polymer using recycled content.
So it's really driven more innovation in our business. And we believe our background in terms of material science as well as recyclability and understand the post consumer as well as advanced recycling processes give us a great opportunity to provide that to our end customers where the need exists.
Speaker 10
Great. Thank you very much.
Speaker 0
Your next question comes from Neel Kumar with Morgan Stanley.
Speaker 11
Hi, good morning. In consumer packaging North America, I know that your polypropylene drink pups in the foodservice channel was a key driver of growth historically. Are you seeing evidence of your foodservice customers wanting to pursue conversion opportunities to plastic or your Versa Lite drink cup product from paper? Can you just give us a sense of the conversations you're having with your customers?
Speaker 2
Absolutely. The CP and A had really strong success not only in the foodservice space, but also personal care, health care bottles, closures, food. On the foodservice side, the attributes of a fully recyclable polypropylene clear substrate has continued to grow in its popularity in the foodservice space. So we're excited about that. But as you mentioned relative to Versa Lite, that's a product line that continues to operate at a very high level right now inside the CP North America division.
There's clearly a number of targeted niches that we're deploying that against in opportunities to keep cold food, cold drinks cold in very warm climates without a lot of the condensation buildup, etcetera, as well as premium incentive properties on hot drinks as well. So, continues to be a nice component, a profitable component inside CP North America and continues to be introduced to
Speaker 3
more customers literally every quarter.
Speaker 11
Thanks. That's helpful. I just had also a question on HH and S. You've had several announcements relating to adding new non molding capacity for PPE production. But are all these capacity announcements based on specific minimum volume commitments from customers?
And as we think about the CapEx outlook in 2021, should we expect to step up from the $620,000,000 levels this year given all these new capacity additions?
Speaker 2
I'll start with the investments. All the investments that we're making relative to PPE are tied to either a municipality or anchor customer that's pulling through percentages of that demand. So we feel really good. We really we deployed the exact same model that we've talked about for the company as a whole, making sure that we have anchor customers with letters of intent, strategic commitments on the consumption that ultimately reduces risk. But what's most exciting as well about that business is the flexibility of the asset because it not only can produce products for things like surgical 1, 2, 3 face mask, N95, but it also can support air filtration opportunities, which as many of you know, continue to be a growing niche for air cabin filtration, home filtration, office filtration and the like.
Speaker 8
With respect to
Speaker 3
the capital dollars, we believe $600,000,000 our $600,000,000 capital plan is about half maintenance. The balance is combination of cost reduction and growth. We believe the $600,000,000 can accomplish our objective of growing both our top line and bottom line. And to the extent we have incremental opportunities that meet our thresholds, we'll certainly update the market and
Speaker 6
hope that's the case
Speaker 3
as it is this year where we see some incremental opportunities to grow our top line and bottom line even higher than our expectation. [SPEAKER THOMAS E. SALMON BERRY GLOBAL GROUP, INC.:]
Speaker 2
Salmon Berry Global Group, Inc.:] It's a terrific problem to have, as Mark said, and it's not one we would apologize for. The teams are doing an amazing job making certain that we continue to vertically penetrate a lot of the larger accounts we do business with. As an example, our CP North America business, our pilot line is close to full capacity right now, meaning that's the lab and that's the strong correlative indices for us going forward. And I strong correlative indices for us going forward. And I think what I publicly need to say is thank you to my team and the teams around the world for them to develop and actually implement, execute the capital that we have around the globe on time to allow this local value delivery capability regardless of the geography that we're in has been really impressive.
The team has done an amazing job and really given us a tremendous amount of confidence in their ability to not only manage the course of the day to day business, but also implement what is very technical and complex projects in terms of some of this new capacity, whether it's on the premium hygiene products, non woven applications. There's been a lot of great examples of really strong execution by the group, really proud of them.
Speaker 11
Great, thanks.
Speaker 0
Your next question comes from Kyle White with Deutsche Bank.
Speaker 12
Hi, good morning. Thanks for taking the question. I'll leave it to just one question here late in the call. Focusing on price cost, expectations for fiscal 2021, any early thoughts there on kind of underlying price cost when we take out the impact of the RPC synergies there? Do you foresee price cost being a headwind, tailwind or just kind of a neutral for next year?
Speaker 3
Excluding the synergies, I wouldn't expect a big delta there on a year over year basis, pretty modest.
Speaker 12
Great. Actually, if I could sneak another one, I wanted to actually go back to the foodservice business and just follow-up on that. How were volumes in that business throughout the quarter? How was June relative to April, May? And what does the recovery there look like?
Speaker 2
Steady as she goes. June was a stronger month than April May and continues to be the outlook going forward. That business is continuing to ramp. And it's interesting what you're seeing is ultimately people are kind of learning how to deal with this new norm of complete shutdown to modified shutdown. It's really been a learning for the foodservice company.
So we've been really pleased that the teams have been able to manage that successfully. But yes, we exited our fiscal Q3 with June being a strong month.
Speaker 12
Thank you. Good luck for
Speaker 1
the balance of the year.
Speaker 3
Thank you.
Speaker 0
And your final question comes from Laurence Kjellberg with Credit Suisse.
Speaker 13
Thank you. I'll stick to one question. RPC, clearly, it's been a good transaction for you. What is interesting, I think, I don't want to comment on this, you're delivering ahead of your expectations while there's been not great economics in Europe and clearly now a COVID impact of scale in the calendar Q2, why don't we see an up synergy benefit there? Would there not be an opportunity in your view?
Speaker 2
We are a continuous improvement culture, and we also tend to be conservative in terms of making certain that we're providing guidance on numbers that we have line of sight to and that we can hit. I can assure you that the team is focused on maximizing delivery of synergies, not only on time, but the degree to which we can exceed our outlook. But at this time, we've maintained the 2 year look on that at $150,000,000 but we were really pleased that the team in this COVID environment were able to execute so well that we were able to increase by $10,000,000 the outlook for attainment in 2020.
Speaker 13
And just to Marpris, just a follow-up. 1 year into this acquisition, is there anything that surprised you to the upside and potentially anything on the downside versus your expectations a year ago?
Speaker 2
Not a lot on the downside. Obviously, a difficult growth environment throughout Europe right now, but blown away by the quality of the people, the speed by which they pull together as a team and part of our One Berry family, and the fact that there is a 100% laser focus on not only executing in terms of earnings and free cash flow, but wiring that business for growth. And as we said, we're very confident that we'll see sequential improvement in our fiscal Q4 and there is a strong alignment in that organization to return as quickly as possible post COVID or even before to low single digit growth of that business. We're pleased with it. And as I said, I think that example of how we're able to close a $50 plus 1,000,000 opportunity in 4 months is some of the best execution I've seen in my history in this industry.
Speaker 13
Very good. Thank you.
Speaker 2
Thank you.
Speaker 0
I'd now like to turn the call back over to the presenters for any closing remarks.
Speaker 2
Well, thank you everybody. Continue to stay safe. We look forward to updating you on our progress after for our next call. Thanks very much.
Speaker 0
Ladies and gentlemen, thank you again for joining us today. This concludes today's conference call. You may now disconnect.